Carver Bancorp Inc.
Carver Bancorp Inc. details
Carver Bancorp, Inc. is the holding company for Carver Federal Savings Bank, a federally chartered stock savings bank. Headquartered in Harlem, NY, Carver was founded in 1948 to serve African-American communities whose residents, businesses, and institutions had limited access to mainstream financial services. The U.S. Treasury Department has designated Carver as a Community Development Financial Institution ('CDFI') because of its community-focused banking services and dedication to its local community's economic viability and revitalization. Carver is one of the largest African- and Caribbean-American managed banks in the United States. The Bank recently expanded its online presence to include consumer checking and savings accounts across nine states, from Massachusetts to Virginia, and Washington, D.C.
Ticker:CARV
Employees: 107
Filing
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-13007
CARVER BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3904174
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
75 West 125th Street New York New York 10027
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (718) 230-2900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.01 per share CARV The NASDAQ Stock Market, LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☐ Large Accelerated Filer ☐ Accelerated Filer ☒ Non-accelerated Filer ☒ Smaller Reporting Company ☐ Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class Outstanding at November 10, 2022
Common Stock, par value $0.01 4,226,419
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 2022 and March 31, 2022 1
Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2022 and 2021 2
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended September 30, 2022 and 2021 3
Consolidated Statement of Changes in Equity for the Three and Six Months Ended September 30, 2022 and 2021 4
Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2022 and 2021 5
Notes to Consolidated Financial Statements 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 44
Item 4. Controls and Procedures 44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 45
Item 1A. Risk Factors 45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45
Item 3. Defaults Upon Senior Securities 45
Item 4. Mine Safety Disclosures 45
Item 5. Other Information 45
Item 6. Exhibits 46
SIGNATURES 47
PART I. FINANCIAL INFORMATION
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
$ in thousands except per share data September 30, 2022 March 31, 2022
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 95,291 $ 60,764
Money market investments 254 254
Total cash and cash equivalents 95,545 61,018
Investment securities:
Available-for-sale, at fair value 55,041 67,596
Held-to-maturity, at amortized cost (fair value of $ 2,361 and $ 5,276 at September 30, 2022 and March 31, 2022, respectively) 2,511 5,254
Total investment securities 57,552 72,850
Loans receivable:
Real estate mortgage loans 413,674 407,835
Commercial business loans 159,312 170,031
Consumer loans 1,423 1,638
Loans, gross 574,409 579,504
Allowance for loan and lease losses ( 5,509 ) ( 5,624 )
Total loans receivable, net 568,900 573,880
Premises and equipment, net 3,484 3,775
Federal Home Loan Bank of New York (“FHLB-NY”) stock, at cost 2,491 584
Accrued interest receivable 1,844 2,414
Right-of-use assets 13,524 13,637
Other assets 12,383 7,156
Total assets $ 755,723 $ 735,314
LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Non-interest bearing checking $ 103,741 $ 107,472
Interest-bearing deposits:
Interest-bearing checking 56,641 57,985
Savings 109,754 112,305
Money market 208,950 208,122
Certificates of deposit 144,191 139,255
Escrow 3,093 2,978
Total interest-bearing deposits 522,629 520,645
Total deposits 626,370 628,117
Advances from the FHLB-NY and other borrowed money 56,018 15,949
Operating lease liability 14,346 14,393
Other liabilities 12,752 21,768
Total liabilities 709,486 680,227
EQUITY
Preferred stock, (par value $ 0.01 per share: 13,201 and 13,751 Series D shares, with a liquidation preference of $ 1,000 per share, issued and outstanding at September 30, 2022 and March 31, 2022, respectively) 13,201 13,751
Preferred stock (par value $ 0.01 per share: 3,177 Series E shares, with a liquidation preference of $ 1,000 per share, issued and outstanding at September 30, 2022 and March 31, 2022) 3,177 3,177
Preferred stock (par value $ 0.01 per share: 9,000 Series F shares, with a liquidation preference of $ 1,000 per share, issued and outstanding at September 30, 2022 and March 31, 2022, respectively) 9,000 9,000
Common stock (par value 0.01 per share: 10,000,000 shares authorized; 6,797,612 and 6,720,618 shares issued; 4,293,809 and 4,216,815 shares outstanding at September 30, 2022 and March 31, 2022, respectively) 68 67
Additional paid-in capital 82,734 82,165
Accumulated deficit ( 45,315 ) ( 43,503 )
Treasury stock, at cost ( 2,503,803 shares at September 30, 2022 and March 31, 2022) ( 2,908 ) ( 2,908 )
Accumulated other comprehensive loss ( 13,720 ) ( 6,662 )
Total equity 46,237 55,087
Total liabilities and equity $ 755,723 $ 735,314
See accompanying notes to consolidated financial statements
1
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
Three Months Ended September 30, September 30,
$ in thousands, except per share data 2022 2021 2022 2021
Interest income:
Loans $ 6,005 $ 5,323 $ 11,982 $ 10,162
Mortgage-backed securities 156 158 315 402
Investment securities 201 209 366 434
Money market investments 363 28 435 49
Total interest income 6,725 5,718 13,098 11,047
Interest expense:
Deposits 827 434 1,238 959
Advances and other borrowed money 395 120 543 272
Total interest expense 1,222 554 1,781 1,231
Net interest income 5,503 5,164 11,317 9,816
(Recovery of) provision for loan losses ( 189 ) 204 ( 216 ) 276
Net interest income after (recovery of) provision for loan losses 5,692 4,960 11,533 9,540
Non-interest income:
Depository fees and charges 553 592 1,108 1,195
Loan fees and service charges 138 43 257 145
Grant income 162 1,886 162 1,886
Other 246 643 281 1,579
Total non-interest income 1,099 3,164 1,808 4,805
Non-interest expense:
Employee compensation and benefits 3,302 2,994 6,486 5,802
Net occupancy expense 1,175 1,151 2,259 2,238
Equipment, net 526 417 1,040 891
Data processing 648 475 1,264 1,312
Consulting fees 164 206 314 226
Federal deposit insurance premiums 89 83 190 174
Other 1,842 1,714 3,600 5,374
Total non-interest expense 7,746 7,040 15,153 16,017
(Loss) income before income taxes ( 955 ) 1,084 ( 1,812 ) ( 1,672 )
Income tax expense — — — —
Net (loss) income $ ( 955 ) $ 1,084 $ ( 1,812 ) $ ( 1,672 )
(Loss) income per common share:
Basic $ ( 0.22 ) $ 0.20 $ ( 0.43 ) $ ( 0.49 )
Diluted ( 0.22 ) 0.19 ( 0.43 ) ( 0.49 )
See accompanying notes to consolidated financial statements
2
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended September 30, Six Months Ended September 30,
$ in thousands 2022 2021 2022 2021
Net (loss) income $ ( 955 ) $ 1,084 $ ( 1,812 ) $ ( 1,672 )
Other comprehensive (loss) income, net of tax:
Unrealized (loss) gain of securities available-for-sale, net of income tax expense of $0 (due to full valuation allowance) ( 3,444 ) ( 628 ) ( 7,058 ) 1,491
Total other comprehensive (loss) income, net of tax ( 3,444 ) ( 628 ) ( 7,058 ) 1,491
Total comprehensive (loss) income, net of tax $ ( 4,399 ) $ 456 $ ( 8,870 ) $ ( 181 )
See accompanying notes to consolidated financial statements
3
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the Three and Six Months Ended September 30, 2022 and 2021
(Unaudited)
$ in thousands Preferred Stock Common Stock Additional Paid-In Capital Accumulated Deficit Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Equity
Three Months Ended September 30, 2022
Balance — June 30, 2022 $ 25,378 $ 68 $ 82,734 $ ( 44,360 ) $ ( 2,908 ) $ ( 10,276 ) $ 50,636
Net loss — — — ( 955 ) — — ( 955 )
Other comprehensive loss, net of taxes — — — — — ( 3,444 ) ( 3,444 )
Balance — September 30, 2022 $ 25,378 $ 68 $ 82,734 $ ( 45,315 ) $ ( 2,908 ) $ ( 13,720 ) $ 46,237
Six Months Ended September 30, 2022
Balance — March 31, 2022 $ 25,928 $ 67 $ 82,165 $ ( 43,503 ) $ ( 2,908 ) $ ( 6,662 ) $ 55,087
Net loss — — — ( 1,812 ) — — ( 1,812 )
Other comprehensive loss, net of taxes — — — — — ( 7,058 ) ( 7,058 )
Conversion of Series D preferred stock to common stock ( 550 ) 1 549 — — — —
Stock based compensation expense — — 20 — — — 20
Balance — September 30, 2022 $ 25,378 $ 68 $ 82,734 $ ( 45,315 ) $ ( 2,908 ) $ ( 13,720 ) $ 46,237
Three Months Ended September 30, 2021
Balance — June 30, 2021 $ 24,678 $ 60 $ 76,328 $ ( 45,412 ) $ ( 2,908 ) $ ( 1,056 ) $ 51,690
Net income — — — 1,084 — — 1,084
Other comprehensive loss, net of taxes — — — — — ( 628 ) ( 628 )
Conversion of Series D preferred stock to common stock ( 550 ) 1 549 — — — —
Issuance of preferred stock (Series F) 4,000 — — 4,000
Stock based compensation expense — — 72 — — — 72
Balance — September 30, 2021 $ 28,128 $ 61 $ 76,949 $ ( 44,328 ) $ ( 2,908 ) $ ( 1,684 ) $ 56,218
Six Months Ended September 30, 2021
Balance — March 31, 2021 $ 25,778 $ 58 $ 75,204 $ ( 42,656 ) $ ( 2,908 ) $ ( 3,175 ) $ 52,301
Net loss — — — ( 1,672 ) — — ( 1,672 )
Other comprehensive income, net of taxes — — — — — 1,491 1,491
Conversion of Series D preferred stock to common stock ( 1,650 ) 2 1,648 — — — —
Issuance of preferred stock (Series F) 4,000 — — — — — 4,000
Stock based compensation expense — 1 97 — — — 98
Balance — September 30, 2021 $ 28,128 $ 61 $ 76,949 $ ( 44,328 ) $ ( 2,908 ) $ ( 1,684 ) $ 56,218
See accompanying notes to consolidated financial statements
4
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended September 30,
$ in thousands 2022 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ ( 1,812 ) $ ( 1,672 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
(Recovery of) provision for loan losses ( 216 ) 276
Stock based compensation expense 20 98
Depreciation and amortization expense 521 513
Amortization and accretion of loan premiums and discounts and deferred charges, net ( 88 ) ( 59 )
Amortization and accretion of premiums and discounts — securities 242 246
Decrease in accrued interest receivable 570 41
(Increase) decrease in other assets ( 105 ) 342
Decrease in other liabilities ( 8,990 ) ( 4,487 )
Net cash used in operating activities ( 9,858 ) ( 4,702 )
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from principal payments, maturities and calls of investments: Available-for-sale 5,259 7,849
Proceeds from principal payments, maturities and calls of investments: Held-to-maturity 2,738 2,165
Purchase of bank-owned life insurance ( 5,000 ) —
Loans held-for investment, net of repayments/payoffs and (originations) 14,069 ( 15,684 )
Loans purchased from third parties ( 8,901 ) ( 24,910 )
Proceeds from participation loans sold — 3,926
Purchase of FHLB-NY stock, net ( 1,907 ) ( 122 )
Purchase of premises and equipment ( 123 ) ( 134 )
Net cash provided by (used in) investing activities 6,135 ( 26,910 )
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits ( 1,747 ) 46,806
Increase (decrease) in FHLB-NY advances and other borrowings 39,997 ( 18,155 )
Increase in long-term debt — 2,500
Issuance of preferred stock — 4,000
Net cash provided by financing activities 38,250 35,151
Net increase in cash and cash equivalents 34,527 3,539
Cash and cash equivalents at beginning of period 61,018 75,591
Cash and cash equivalents at end of period $ 95,545 $ 79,130
Supplemental cash flow information:
Noncash financing and investing activities
Recognition of right-of-use asset $ 1,103 $ 680
Recognition of operating lease liability 1,103 680
Recognition of finance lease asset 58 —
Recognition of finance lease liability 58 —
Conversion of preferred stock to common stock $ 550 $ 1,650
Cash paid for:
Interest $ 1,518 $ 4,261
Income taxes 112 91
See accompanying notes to consolidated financial statements
5
CARVER BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1. ORGANIZATION
Nature of operations
Carver Bancorp, Inc. (on a stand-alone basis, the “Company” or “Registrant”), was incorporated in May 1996 and its principal wholly-owned subsidiary is Carver Federal Savings Bank (the “Bank” or “Carver Federal”). Carver Federal's wholly-owned subsidiaries are CFSB Realty Corp., Carver Community Development Corporation (“CCDC”) and CFSB Credit Corp., which is currently inactive. The Bank has a real estate investment trust, Carver Asset Corporation ("CAC"), that was formed in February 2004.
“Carver,” the “Company,” “we,” “us” or “our” refers to the Company along with its consolidated subsidiaries. The Bank was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally-chartered mutual savings and loan association. The Bank converted to a federal savings bank in 1986. On October 24, 1994, the Bank converted from a mutual holding company structure to stock form and issued 2,314,375 shares of its common stock, par value $ 0.01 per share. On October 17, 1996, the Bank completed its reorganization into a holding company structure (the “Reorganization”) and became a wholly-owned subsidiary of the Company.
Carver Federal’s principal business consists of attracting deposit accounts through its branches and investing those funds in mortgage loans and other investments permitted by federal savings banks. The Bank has seven branches located throughout the City of New York that primarily serve the communities in which they operate.
In September 2003, the Company formed Carver Statutory Trust I (the “Trust”) for the sole purpose of issuing trust preferred securities and investing the proceeds in an equivalent amount of floating rate junior subordinated debentures of the Company. In accordance with Accounting Standards Codification (“ASC”) 810, “Consolidations,” Carver Statutory Trust I is unconsolidated for financial reporting purposes. On September 17, 2003, Carver Statutory Trust I issued 13,000 shares, liquidation amount $ 1,000 per share, of floating rate capital securities. Gross proceeds from the sale of these trust preferred debt securities of $ 13 million, and proceeds from the sale of the trust's common securities of $ 0.4 million, were used to purchase approximately $ 13.4 million aggregate principal amount of the Company's floating rate junior subordinated debt securities due 2033. The trust preferred debt securities are redeemable at par quarterly at the option of the Company beginning on or after September 17, 2008, and have a mandatory redemption date of September 17, 2033. Cash distributions on the trust preferred debt securities are cumulative and payable at a floating rate per annum resetting quarterly with a margin of 3.05 % over the three-month LIBOR. During the second quarter of fiscal year 2017, the Company applied for and was granted regulatory approval to settle all outstanding debenture interest payments through September 2016. Such payments were made in September 2016. Interest on the debentures had been deferred beginning with the December 2016 payment, per the terms of the agreement, which permit such deferral for up to twenty consecutive quarters, as the Company is prohibited from making payments without prior regulatory approval. During the fourth quarter of fiscal year 2021, the Company applied for and was granted regulatory approval to settle all outstanding debenture interest payments through June 2021. Full payment was made on June 16, 2021. The Company deferred the September 17, 2021 interest payment, but has since had discussions with the Federal Reserve Bank of Philadelphia regarding future quarterly payments. A streamlined process has been developed for the Company to request regulatory approval to make debenture interest payments. On December 16, 2021, the Company paid the deferred interest that was due on September 17, 2021 and the interest scheduled for December 17, 2021. Subsequently, the Company made the regular quarterly interest payment on its outstanding debentures due on March 17, 2022, June 17, 2022 and September 17, 2022. The interest rate was 6.58 % and the total amount of deferred interest was $ 29 thousand at September 30, 2022.
Carver relies primarily on dividends from Carver Federal to pay cash dividends to its stockholders and to engage in share repurchase programs. The OCC regulates all capital distributions, including dividend payments, by Carver Federal to Carver, and the FRB regulates dividends paid by Carver. As the subsidiary of a savings and loan association holding company, Carver Federal must file a notice or an application (depending on the proposed dividend amount) with the OCC (and a notice with the FRB) prior to the declaration of each capital distribution. The OCC will disallow any proposed dividend, for among other reasons, that would result in Carver Federal’s failure to meet the OCC minimum capital requirements. In accordance with the Agreement defined directly below, Carver Federal is currently prohibited from paying any dividends without prior OCC approval, and, as such, has suspended Carver’s regular quarterly cash dividend on its common stock. There are no assurances that dividend payments to Carver will resume.
6
Regulation
On May 24, 2016, the Bank entered into a Formal Agreement ("the Agreement") with the OCC to undertake certain compliance-related and other actions. As a result of the Agreement, the Bank must obtain the approval of the OCC prior to effecting any change in its directors or senior executive officers. The Bank may not declare or pay dividends or make any other capital distributions, including to the Company, without first filing an application with the OCC and receiving the prior approval of the OCC. Furthermore, the Bank must seek the OCC's written approval and the FDIC's written concurrence before entering into any "golden parachute payments" as that term is defined under 12 U.S.C. § 1828(k) and 12 C.F.R. Part 359. As a result of the Formal Agreement, Carver was issued an Individual Minimum Capital Ratio (“IMCR”) letter by the OCC, which requires the Bank to maintain minimum regulatory capital levels of 9% for its Tier1 leverage ratio and 12% for its total risk-based capital ratio.
The Company is subject to similar requirements as the Bank. The Company must provide notice to the FRB prior to affecting any change in its directors or senior executive officers. The Company is also subject to the restrictions on golden parachute and indemnification payments, as set forth in 12 C.F.R. Part 359. Written approval of the Federal Reserve Bank is required prior to: (1) the declaration or payment of dividends by the Company to its stockholders, (2) the declaration or payment of dividends by the Bank to the Company, (3) any distributions of interest or principal by the Company on subordinated debentures or trust preferred securities, (4) any purchases or redemptions of the Company’s stock and (5) the Company incurring, increasing or guaranteeing certain long-term debt outside the ordinary course of business. These limitations could affect our operations and financial performance.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidated financial statement presentation
The consolidated financial statements include the accounts of the Company, the Bank and the Bank’s wholly-owned or majority-owned subsidiaries, Carver Asset Corporation, CFSB Realty Corp., CCDC, and CFSB Credit Corp., which is currently inactive. All significant intercompany accounts and transactions have been eliminated in consolidation.
Variable interest entities ("VIEs") are consolidated, as required, when Carver has a controlling financial interest in these entities and is deemed to be the primary beneficiary. Carver is normally deemed to have a controlling financial interest and be the primary beneficiary if it has both (a) the power to direct activities of a VIE that most significantly impact the entity's economic performance; and (b) the obligation to absorb losses of the entity that could benefit from the activities that could potentially be significant to the VIE.
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ended March 31, 2023. The consolidated balance sheet at September 30, 2022 has been derived from the unaudited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the period then ended. These unaudited consolidated financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended March 31, 2022. Amounts subject to significant estimates and assumptions are items such as the allowance for loan losses, realization of deferred tax assets, assessment of other-than-temporary impairment of securities, and the fair value of financial instruments. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses or future writedowns of real estate owned may be necessary based on changes in economic conditions in the areas where Carver Federal has extended mortgages and other credit instruments. Actual results could differ significantly from those assumptions. Current market conditions increase the risk and complexity of the judgments in these estimates.
Certain comparative amounts for the prior period have been reclassified to conform to current period presentations. Such reclassifications had no effect on net income or shareholders' equity.
7
Recent Events
The business climate continues to present significant challenges as banks continue to absorb heightened regulatory costs and compete for limited loan demand. Significant increases in food and energy prices resulted from swift increases in the rate of inflation. Additionally, the Federal Reserve has increased the federal funds rate at each of its meetings in 2022, and will likely continue to increase the rate in order to bring down inflation that is at a 40-year high.
For Carver, the economic climate of New York City (“the City”), in particular, impacts our business as the City lags behind the rest of New York State and the nation both in restoring pandemic job losses and in rebounding to pre-pandemic levels of unemployment. The City is still missing 176,000 jobs, representing the slowest recovery of any major metropolitan area, and unemployment remains high at 5.6 percent.
The Company is closely monitoring its asset quality, liquidity, and capital positions, as well as the credit risk in its loan portfolio. Management is actively working to minimize the current and future impact of this unusual situation, and is continuing to make adjustments to operations where appropriate or necessary to mitigate risk. However, these factors and events may have negative effects on the business, financial condition, and results of operations of the Company and its customers.
NOTE 3. LOSS PER COMMON SHARE
The following table reconciles the loss available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted loss per share for the following periods:
Three Months Ended Six Months Ended
September 30, September 30,
$ in thousands except per share data 2022 2021 2022 2021
Net loss (income) $ ( 955 ) $ 1,084 $ ( 1,812 ) $ ( 1,672 )
Less: Participated securities share of undistributed earnings — 399 — —
Net (loss) income available to common shareholders $ ( 955 ) $ 685 $ ( 1,812 ) $ ( 1,672 )
Weighted average common shares outstanding - basic 4,291,672 3,498,861 4,260,178 3,440,827
Effect of dilutive shares — 2,014,952 — —
Weighted average common shares outstanding – diluted 4,291,672 5,513,813 4,260,178 3,440,827
Basic (loss) income per common share $ ( 0.22 ) $ 0.20 $ ( 0.43 ) $ ( 0.49 )
Diluted (loss) income per common share ( 0.22 ) 0.19 ( 0.43 ) ( 0.49 )
The Company has preferred stock which are entitled to receive dividends if declared on the Company's common stock and are therefore considered to be participating securities. Basic earnings (loss) per share (“EPS”) is computed using the two class method. This calculation divides net income (loss) available to common stockholders after the allocation of undistributed earnings to the participating securities by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. These potentially dilutive shares are then included in the weighted average number of shares outstanding for the period. Dilution calculations are not applicable to net loss periods. For the three and six months ended September 30, 2022 and six months ended September 31, 2021, all restricted shares and outstanding stock options were anti-dilutive.
NOTE 4. COMMON STOCK DIVIDENDS AND ISSUANCES
On October 28, 2011, the United States Department of the Treasury (the "Treasury Department") exchanged the CDCI Series B preferred stock for 2,321,286 shares of Carver common stock and the Series C preferred stock converted into 1,208,039 shares of Carver common stock and 45,118 shares of Series D preferred stock. Series C stock was previously reported as mezzanine equity, and upon conversion to common and Series D preferred stock is now reported as equity attributable to Carver Bancorp, Inc. The holders of the Series D Preferred Stock are entitled to receive dividends, on an as-converted basis, simultaneously to the payment of any dividends on the common stock.
8
In June 2020, The Goldman Sachs Group, Inc., an institutional investor, notified the Company of their intention to effect a series of transfers of up to all its holdings of Series D Preferred Stock. The conversion and subsequent sale of shares were completed on July 2, 2020: 13,519 Series D Preferred Stock shares were converted into 1,653,397 shares of Common Stock, which were subsequently sold in the open market. The conversion and sale had no impact on the Company's total capital.
On July 9, 2020, the Company received notice that Morgan Stanley International Holdings Inc. ("Morgan Stanley"), an institutional investor, relinquished its ownership of 180,573 shares of Company common stock and 13,523 shares of Company Preferred Series D Stock to the Company at no cost to the Company.
On August 6, 2020, the Company entered into a Securities Purchase Agreement (the "Agreement") with the Treasury Department to repurchase 2,321,286 shares of Company common stock, owned by the Treasury Department for an aggregate purchase price of $ 2.5 million. The stock repurchase provided for in the Agreement was completed on August 6, 2020. Upon completion of the repurchase pursuant to the Agreement, the Treasury Department was no longer a stockholder in the Company. In connection with the repurchase, Morgan Stanley provided a grant of $2.5 million that was considered contributed capital to the Company to fund the repurchase transaction.
On October 15, 2020, the Company entered into an agreement with Banc of America Strategic Investments Corporation under which it issued and sold 147,227 shares of its common stock, par value $0.01, at a price of $ 6.62 per share. The shares were issued on October 15, 2020, in a private placement exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and Regulation D of the rules and regulations promulgated thereunder.
On January 22, 2021, Prudential Insurance Company of America ("Prudential"), an institutional investor, notified the Company of its intention to cancel 475 of its holdings of Series D Preferred Stock and convert such shares into 58,093 shares of common stock. During fiscal year 2022, Prudential donated a total of 3,850 shares of its holdings of Series D Preferred Stock to third parties. The third parties notified the Company of their intention to cancel the shares and convert them into 470,855 shares of Common Stock. During the three months ended September 30, 2022, Prudential donated a total of 550 shares of its holdings of Series D Preferred Stock to third parties. The third parties notified the Company of their intention to cancel the shares and convert them into 67,265 shares of Common Stock. The conversions had no impact on the Company's total capital.
On February 1, 2021, the Company entered into an agreement with Wells Fargo Central Pacific Holdings, Inc., under which it sold: (i) 157,806 shares of its common stock, par value $0.01 per share, at a purchase price of $ 7.75 per share, and (ii) 3,177 shares of a new series of preferred stock, Series E non-cumulative non-voting participating preferred stock, par value $0.01 per share, at a purchase price of $ 1,000 per share, in a private placement for gross proceeds of approximately $ 4.4 million. Upon the completion of certain transfers of the Series E preferred stock by Wells Fargo Central Pacific Holdings, Inc., the Series E preferred stock would be convertible into common stock at a conversion price of $7.96 per share. The issuance of the shares is exempt from registration pursuant to the exemption provided under Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended. The offering was made only to accredited investors as that term is defined in Rule 501(a) of Regulation D under the Act.
On February 16, 2021, the Company entered into an agreement with J.P. Morgan Chase Community Development Corporation ("J.P. Morgan"), under which it sold: (i) 112,612 shares of its common stock, par value $0.01 per share, at a purchase price of $ 8.88 per share, and (ii) 5,000 shares of a new series of preferred stock, Series F non-cumulative non-voting non-convertible preferred stock, par value $0.01 per share ("Series F Preferred Stock"), at a purchase price of $ 1,000 per share, in a private placement for gross proceeds of approximately $ 6.0 million. On September 27, 2021, the Company entered into an agreement with J.P. Morgan under which it sold an additional 4,000 shares of its Series F Preferred Stock, at a purchase price of $ 1,000 per share, in a private placement for gross proceeds of $ 4.0 million. The issuances of the shares were exempt from registration pursuant to the exemption provided under Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended. The offerings were made only to accredited investors as that term is defined in Rule 501(a) of Regulation D under the Act.
On December 14, 2021, the Company entered into a Sales Agreement (the "Sales Agreement") with Piper Sandler & Co. (“Piper Sandler”), as sales agent, pursuant to which the Company may offer and sell shares of our common stock, par value $0.01 per share, having an aggregate gross sales prices of up to $20.0 million (the “ATM Shares”) from time to time. Any sales made under the Sales Agreement will be sales deemed to be "at-the-market (ATM) offerings," as defined in Rule 415 under the Securities Act of 1933, as amended. These sales will be made through ordinary broker transactions on the NASDAQ Capital Market stock exchange at market prices prevailing at the time, at prices related to the prevailing market prices, or at negotiated prices. The Company may instruct Piper Sandler not to sell ATM Shares if the sales cannot be effected at or above the price designated by the Company from time to time. The Company is not obligated to make any sales of the ATM Shares under the
9
Sales Agreement. The offering of ATM Shares pursuant to the Sales Agreement will terminate upon the earlier of (a) the sale of all of the ATM Shares subject to the Sales Agreement or (b) the termination of the Sales Agreement by Piper Sandler or the Company, as permitted therein. The Company will pay Piper Sandler a commission rate equal to 3.0% of the aggregate gross proceeds from each sale of ATM Shares and have agreed to provide Piper Sandler with customary indemnification and contribution rights. The Company will also reimburse Piper Sandler for certain specified expenses in connection with entering into the Sales Agreement. The Company intends to use the net proceeds of these offerings for general corporate purposes, including support for organic loan growth and repayment of all or a portion of the outstanding principal amount of our outstanding subordinated debt securities. During fiscal year 2022, the Company sold an aggregate of 397,367 shares of common stock under the ATM offering program, resulting in gross proceeds of $3.1 million and net proceeds to the Company of $3.0 million after deducting commissions and expenses. There were no additional offerings during the six months ended September 30, 2022.
NOTE 5. OTHER COMPREHENSIVE INCOME (LOSS)
The following tables set forth changes in each component of accumulated other comprehensive income (loss), net of tax for the six months ended September 30, 2022 and 2021:
Other
At Comprehensive At
$ in thousands March 31, 2022 Loss, net of tax September 30, 2022
Net unrealized income (loss) on securities available-for-sale $ ( 6,662 ) $ ( 7,058 ) $ ( 13,720 )
Other
At Comprehensive At
$ in thousands March 31, 2021 Income, net of tax September 30, 2021
Net unrealized income (loss) on securities available-for-sale $ ( 3,175 ) $ 1,491 $ ( 1,684 )
There were no reclassifications out of accumulated other comprehensive loss to the consolidated statement of operations for the six months ended September 30, 2022 and 2021.
NOTE 6. INVESTMENT SECURITIES
The Bank utilizes mortgage-backed and other investment securities in its asset/liability management strategy. In making investment decisions, the Bank considers, among other things, its yield and interest rate objectives, its interest rate and credit risk position, and its liquidity and cash flow.
Generally, the investment policy of the Bank is to invest funds among categories of investments and maturities based upon the Bank’s asset/liability management policies, investment quality, loan and deposit volume and collateral requirements, liquidity needs and performance objectives. Debt securities are classified into three categories: trading, held-to-maturity, and available-for-sale. At September 30, 2022, securities with fair value of $ 55.0 million, or 95.6 %, of the Bank’s total securities were classified as available-for-sale, and securities with amortized cost of $ 2.5 million, or 4.4 %, were classified as held-to-maturity, compared to $ 67.6 million and $ 5.3 million at March 31, 2022, respectively. The Bank had no securities classified as trading at September 30, 2022 and March 31, 2022.
Other investments as of September 30, 2022 primarily consists of the Bank's investment in a limited partnership Community Capital Fund and a $5 million bank-owned life insurance policy ("BOLI") that was purchased during the first quarter of fiscal year 2023 as a channel to add to the Company's non-interest income revenue by means of an investment considered safe and sound by the Company's regulators. The investment in the limited partnership is measured using the equity method. The BOLI is carried at the cash surrender value of the underlying policies. Income generated from the investment and the increase in the cash surrender value of the BOLI is included in other non-interest income on the Statements of Operations. Other investments totaled $6.2 million at September 30, 2022 and are included in Other Assets on the Statements of Financial Condition.
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The following tables set forth the amortized cost and fair value of securities available-for-sale and held-to-maturity at September 30, 2022 and March 31, 2022:
At September 30, 2022
Amortized Gross Unrealized
$ in thousands Cost Gains Losses Fair Value
Available-for-Sale:
Mortgage-backed Securities:
Government National Mortgage Association $ 375 $ 1 $ 1 $ 375
Federal Home Loan Mortgage Corporation 22,448 — 4,491 17,957
Federal National Mortgage Association 12,094 — 2,484 9,610
Total mortgage-backed securities 34,917 1 6,976 27,942
U.S. Government Agency Securities 10,743 — 24 10,719
Corporate Bonds 5,270 — 2,297 2,973
Muni Securities 17,730 — 4,422 13,308
Asset-backed Securities 101 — 2 99
Total available-for-sale $ 68,761 $ 1 $ 13,721 $ 55,041
Held-to-Maturity:
Mortgage-backed Securities:
Government National Mortgage Association $ 399 $ — $ 11 $ 388
Federal National Mortgage Association and Other 2,112 — 139 1,973
Total held-to maturity $ 2,511 $ — $ 150 $ 2,361
At March 31, 2022
Amortized Gross Unrealized
$ in thousands Cost Gains Losses Fair Value
Available-for-Sale:
Mortgage-backed Securities:
Government National Mortgage Association $ 439 $ 9 $ — $ 448
Federal Home Loan Mortgage Corporation 23,744 — 2,197 21,547
Federal National Mortgage Association 12,852 — 1,268 11,584
Total mortgage-backed securities 37,035 9 3,465 33,579
U.S. Government Agency Securities 13,864 — 79 13,785
Corporate Bonds 5,271 — 1,150 4,121
Muni Securities 17,741 — 1,973 15,768
Asset-backed Securities 347 — 4 343
Total available-for-sale $ 74,258 $ 9 $ 6,671 $ 67,596
Held-to-Maturity:
Mortgage-backed Securities:
Government National Mortgage Association $ 481 $ 27 $ — $ 508
Federal National Mortgage Association and Other 4,773 9 14 4,768
Total held-to-maturity $ 5,254 $ 36 $ 14 $ 5,276
There were no sales of available-for-sale and held-to-maturity securities for the six months ended September 30, 2022 and September 30, 2021.
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The following tables set forth the unrealized losses and fair value of securities in an unrealized loss position at September 30, 2022 and March 31, 2022 for less than 12 months and 12 months or longer:
At September 30, 2022
Less than 12 months 12 months or longer Total
Unrealized Fair Unrealized Fair Unrealized Fair
$ in thousands Losses Value Losses Value Losses Value
Available-for-Sale:
Mortgage-backed securities $ 45 $ 1,272 $ 6,931 $ 26,344 $ 6,976 $ 27,616
U.S. Government Agency securities 4 4,573 20 6,146 24 10,719
Corporate bonds — — 2,297 2,973 2,297 2,973
Muni securities 1,087 4,105 3,335 9,203 4,422 13,308
Asset-backed securities 2 99 — — 2 99
Total available-for-sale securities $ 1,138 $ 10,049 $ 12,583 $ 44,666 $ 13,721 $ 54,715
Held-to-Maturity:
Mortgage-backed securities $ 150 $ 2,324 $ — $ — $ 150 $ 2,324
Total held-to-maturity securities $ 150 $ 2,324 $ — $ — $ 150 $ 2,324
At March 31, 2022
Less than 12 months 12 months or longer Total
Unrealized Fair Unrealized Fair Unrealized Fair
$ in thousands Losses Value Losses Value Losses Value
Available-for-Sale:
Mortgage-backed securities $ 519 $ 7,057 $ 2,946 $ 26,128 $ 3,465 $ 33,185
U.S. Government Agency securities — — 79 13,785 79 13,785
Corporate bonds — — 1,150 4,121 1,150 4,121
Muni securities 1,640 13,512 333 2,256 1,973 15,768
Asset-backed securities 4 343 — — 4 343
Total available-for-sale securities $ 2,163 $ 20,912 $ 4,508 $ 46,290 $ 6,671 $ 67,202
Held-to-Maturity:
Mortgage-backed securities $ 14 $ 2,204 $ — $ — $ 14 $ 2,204
Total held-to-maturity securities $ 14 $ 2,204 $ — $ — $ 14 $ 2,204
A total of 25 securities had an unrealized loss at September 30, 2022 compared to 23 at March 31, 2022. Mortgage-backed securities, U.S. government agency securities, municipal securities and a corporate bond security represented 50.5 %, 19.6 %, 24.3 % and 5.4 %, respectively, of total available-for-sale securities in an unrealized loss position at September 30, 2022. There were five mortgage-backed securities, two U.S. government agency securities, one corporate bond and four municipal securities that had an unrealized loss position for more than 12 months at September 30, 2022. Given the high credit quality of the mortgage-backed securities, which are backed by the U.S. government's guarantees, the high credit quality and strong financial performance of the U.S. Government Agency and municipal securities, and the corporate security that is a reputable institution in good financial standing, the risk of credit loss is minimal. Management believes that these unrealized losses are a direct result of the current rate environment and the Company has the ability and intent to hold the securities until maturity or the valuations recover. The Bank did not have any securities that were classified as having other-than-temporary impairment in its investment portfolio at September 30, 2022.
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The following is a summary of the amortized cost and fair value of debt securities at September 30, 2022, by remaining period to contractual maturity (ignoring earlier call dates, if any). Actual maturities may differ from contractual maturities because certain security issuers have the right to call or prepay their obligations. The table below does not consider the effects of possible prepayments or unscheduled repayments.
Weighted
$ in thousands Amortized Cost Fair Value Average Yield
Available-for-Sale:
Less than one year $ 101 $ 99 ( 0.85 ) %
One through five years — — — %
Five through ten years 6,344 5,965 3.23 %
After ten years 27,399 21,035 2.67 %
Mortgage-backed securities 34,917 27,942 1.53 %
Total $ 68,761 $ 55,041 1.99 %
Held-to-maturity:
Mortgage-backed securities $ 2,511 $ 2,361 2.77 %
NOTE 7. 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 fiscal year 2021, we increased our qualitative factors and assessment criteria due to the ongoing pandemic. In fiscal year 2022, we adjusted our qualitative factors and assessment criteria from high to medium based on improving economic factors, such as unemployment and overall increased activity due to less pandemic related restrictions. The increase in the qualitative reserves was related to the overall increase in our loan portfolio. These increases in reserves were partially offset by decreases in our quantitative reserve analysis as the rolling 20 quarter historical loss look back period improved for most of our loan categories. During fiscal year-to-date 2023, we again increased our qualitative factors and assessment criteria to high due to the economic climate in general and its impact on the New York City ("NYC") metropolitan area in which the Company operates. With inflation at a 40-year high, the Federal Reserve has increased the federal funds rate 3.0% since September 30, 2021. In terms of restoring pre-pandemic jobs, NYC represents the slowest recovery of any major metropolitan area and reports a high unemployment rate of 5.6%. In spite of the strict analysis applied to our qualitative reserves, the Company's overall allowance declined moderately as the level of gross loans decreased and the rolling 20 quarter loss look back period revealed little in recorded losses.
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.
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The following is a summary of loans receivable at September 30, 2022 and March 31, 2022:
September 30, 2022 March 31, 2022
$ in thousands Amount Percent Amount Percent
Gross loans receivable:
One-to-four family $ 66,302 11.6 % $ 69,297 12.0 %
Multifamily 171,946 30.1 % 160,800 27.9 %
Commercial real estate 172,341 30.2 % 174,270 30.2 %
Business (1) 159,422 27.9 % 170,497 29.6 %
Consumer (2) 1,409 0.2 % 1,623 0.3 %
Total loans receivable $ 571,420 100.0 % $ 576,487 100.0 %
Unamortized premiums, deferred costs and fees, net 2,989 3,017
Allowance for loan losses ( 5,509 ) ( 5,624 )
Total loans receivable, net $ 568,900 $ 573,880
(1) Includes PPP loans and business overdrafts
( 2) Includes personal loans and consumer overdrafts
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 ALLL reserves required. As of September 30, 2022, the Bank had approved and funded approximately 420 applications totaling $ 57.1 million of loans under the PPP. The Bank has begun to receive debt forgiveness payments on PPP loans closed during the first and second rounds of the program. Business loans included PPP loans outstanding totaling $5.3 million as of September 30, 2022.
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. 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. At September 30, 2022 and March 31, 2022, 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 loan losses based upon the method of evaluating loan impairment for the three and six month periods ended September 30, 2022 and 2021, and the fiscal year ended March 31, 2022.
Three months ended September 30, 2022
One-to-four
$ in thousands family Multifamily Commercial Real Estate Business Consumer Unallocated Total
Allowance for loan losses:
Beginning Balance $ 649 $ 1,053 $ 1,108 $ 2,321 $ 113 $ 360 $ 5,604
Charge-offs — — — — ( 11 ) — ( 11 )
Recoveries 90 — 10 4 1 — 105
Provision for (recovery of) Loan Losses ( 35 ) 2 490 ( 511 ) ( 21 ) ( 114 ) ( 189 )
Ending Balance $ 704 $ 1,055 $ 1,608 $ 1,814 $ 82 $ 246 $ 5,509
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Six months ended September 30, 2022
One-to-four
$ in thousands 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 — — — — ( 24 ) — ( 24 )
Recoveries 90 — 10 23 2 — 125
Provision for (recovery of) Loan Losses ( 117 ) ( 59 ) 441 ( 706 ) ( 19 ) 244 ( 216 )
Ending Balance $ 704 $ 1,055 $ 1,608 $ 1,814 $ 82 $ 246 $ 5,509
Allowance for Loan Losses Ending Balance: collectively evaluated for impairment $ 603 $ 1,055 $ 1,014 $ 1,700 $ 82 $ 246 $ 4,700
Allowance for Loan Losses Ending Balance: individually evaluated for impairment 101 — 594 114 — — 809
Loan Receivables Ending Balance: $ 67,180 $ 173,169 $ 173,325 $ 159,312 $ 1,423 $ — $ 574,409
Ending Balance: collectively evaluated for impairment 61,798 173,169 163,870 153,008 1,423 — 553,268
Ending Balance: individually evaluated for impairment 5,382 — 9,455 6,304 — — 21,141
At March 31, 2022
$ in thousands One-to-four family Multifamily Commercial Real Estate Business Consumer Unallocated Total
Allowance for Loan Losses Ending Balance: collectively evaluated for impairment $ 731 $ 1,114 $ 1,157 $ 2,428 $ 123 $ 2 $ 5,555
Allowance for Loan Losses Ending Balance: individually evaluated for impairment — — — 69 — — 69
Loan Receivables Ending Balance: $ 70,261 $ 162,261 $ 175,313 $ 170,031 $ 1,638 $ — $ 579,504
Ending Balance: collectively evaluated for impairment 65,369 161,746 175,313 163,991 1,638 — 568,057
Ending Balance: individually evaluated for impairment 4,892 515 — 6,040 — — 11,447
Three months ended September 30, 2021
One-to-four
$ in thousands family Multifamily Commercial Real Estate Business Consumer Unallocated Total
Allowance for loan losses:
Beginning Balance $ 1,086 $ 826 $ 870 $ 2,104 $ 144 $ 184 $ 5,214
Charge-offs — — — — ( 44 ) — ( 44 )
Recoveries — — — 1 12 128 141
Provision for (recovery of) Loan Losses ( 71 ) 88 132 1 25 29 204
Ending Balance $ 1,015 $ 914 $ 1,002 $ 2,106 $ 137 $ 341 $ 5,515
15
Six months ended September 30, 2021
$ in thousands One-to-four family Multifamily Commercial Real Estate Business Consumer Unallocated Total
Allowance for loan losses:
Beginning Balance $ 1,058 $ 880 $ 907 $ 1,855 $ 165 $ 275 $ 5,140
Charge-offs — — — — ( 99 ) — ( 99 )
Recoveries — — — 50 20 128 198
Provision for (recovery of) Loan Losses ( 43 ) 34 95 201 51 ( 62 ) 276
Ending Balance $ 1,015 $ 914 $ 1,002 $ 2,106 $ 137 $ 341 $ 5,515
The following is a summary of nonaccrual loans at September 30, 2022 and March 31, 2022.
$ in thousands September 30, 2022 March 31, 2022
Gross loans receivable:
One-to-four family $ 4,371 $ 4,892
Multifamily — 515
Commercial real estate 9,455 4,601
Business 1,179 1,448
Consumer 87 25
Total nonaccrual loans $ 15,092 $ 11,481
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.
At September 30, 2022 and March 31, 2022, other non-performing assets totaled $ 60 thousand, respectively, which consisted of other real estate owned comprised of one foreclosed residential property. 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, 2022 and March 31, 2022.
Although we believe that substantially all risk elements at September 30, 2022 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.
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.
16
At September 30, 2022, and based on the most recent analysis performed in the current quarter, the risk category by class of loans is as follows:
Commercial
$ in thousands Multifamily Real Estate Business
Credit Risk Profile by Internally Assigned Grade:
Pass $ 171,570 $ 163,156 $ 145,602
Special Mention 776 714 6,179
Substandard 823 9,455 7,531
Total $ 173,169 $ 173,325 $ 159,312
One-to-four family Consumer
Credit Risk Profile Based on Payment Activity:
Performing $ 61,798 $ 1,423
Non-Performing 5,382 —
Total $ 67,180 $ 1,423
At March 31, 2022, 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 $ 155,274 $ 164,543 $ 155,196
Special Mention 897 8,157 6,302
Substandard 6,090 2,613 8,533
Total $ 162,261 $ 175,313 $ 170,031
One-to-four family Consumer
Credit Risk Profile Based on Payment Activity:
Performing $ 65,369 $ 1,613
Non-Performing 4,892 25
Total $ 70,261 $ 1,638
The following table presents an aging analysis of the recorded investment of past due loans receivables at September 30, 2022 and March 31, 2022.
.
September 30, 2022
30-59 Days 60-89 Days Total Past Total Loans
$ in thousands Past Due Past Due 90 or More Days Past Due Due Current Receivables
One-to-four family $ — $ — $ 4,043 $ 4,043 $ 63,137 $ 67,180
Multifamily — — — — 173,169 173,169
Commercial real estate 4,522 — 4,933 9,455 163,870 173,325
Business — — 663 663 158,649 159,312
Consumer — 39 92 131 1,292 1,423
Total $ 4,522 $ 39 $ 9,731 $ 14,292 $ 560,117 $ 574,409
March 31, 2022
30-59 Days 60-89 Days Total Past
$ in thousands Past Due Past Due 90 or More Days Past Due Due Current Total Loans Receivables
One-to-four family $ 1,943 $ — $ 5,229 $ 7,172 $ 63,089 $ 70,261
Multifamily 4,435 115 515 5,065 157,196 162,261
Commercial real estate 4,010 — 4,601 8,611 166,702 175,313
Business 923 40 664 1,627 168,404 170,031
Consumer 84 45 25 154 1,484 1,638
Total $ 11,395 $ 200 $ 11,034 $ 22,629 $ 556,875 $ 579,504
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The following table presents information on impaired loans with the associated allowance amount, if applicable, at September 30, 2022 and March 31, 2022.
At September 30, 2022 At March 31, 2022
Unpaid Unpaid
Recorded Principal Associated Recorded Principal Associated
$ in thousands Investment Balance Allowance Investment Balance Allowance
With no specific allowance recorded:
One-to-four family $ 4,342 $ 4,937 $ — $ 4,892 $ 5,576 $ —
Multifamily — — — 515 515 —
Commercial real estate 7,847 7,940 — — — —
Business 1,179 1,222 — 837 909 —
With an allowance recorded:
One-to-four family 1,040 1,039 101 — — —
Commercial real estate 1,608 1,608 594 — — —
Business 5,125 5,125 114 5,203 5,203 69
Total $ 21,141 $ 21,871 $ 809 $ 11,447 $ 12,203 $ 69
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, 2022 and 2021.
For the Three Months Ended September 30, For the Six Months Ended September 30,
2022 2021 2022 2021
$ 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 $ 4,772 $ 9 $ 3,735 $ 3 $ 4,617 $ 41 $ 3,728 $ 6
Multifamily 55 — 625 — 257 3 883 —
Commercial real estate 7,008 39 555 — 3,923 82 192 —
Business 1,207 17 2,245 — 1,008 26 2,199 —
With an allowance recorded:
One-to-four family 742 9 75 — 520 23 74 1
Commercial real estate 804 — — — 804 — — —
Business 5,144 71 5,383 73 5,164 143 5,363 149
Total $ 19,732 $ 145 $ 12,618 $ 76 $ 16,293 $ 318 $ 12,439 $ 156
In certain circumstances, loan modifications involve a troubled borrower to whom the Bank may grant a concession. In cases where the Bank grants any significant concessions to a troubled borrower, the Bank accounts for the modification as a TDR. 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 six months ended September 30, 2022. No loan modifications were made during the three months ended September 30, 2022. There were no loan modifications made during the three and six months ended September 30, 2021. Total TDR loans at September 30, 2022 were $ 7.2 million, $ 1.0 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, 2022, total TDR loans were $ 6.9 million, of which $ 1.7 million were non-performing. The following table presents an analysis of the loan modifications that were classified as TDRs during the three and six months ended September 30, 2022.
Loan Modifications for the six months ended
September 30, 2022
Recorded investment
$ in thousands Number of loans at time of modification
One-to-four family 2 $ 1,047
18
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, 2022 and 2021, there were no modified loans that defaulted within 12 months of modification.
At September 30, 2022, there were 4 loans in the TDR portfolio totaling $ 6.2 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, 2022, there were 2 loans in the TDR portfolio totaling $ 5.2 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 $ 30 thousand at September 30, 2022 and at March 31, 2022. There were no advances or principal repayments during the six months ended September 30, 2022.
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.
NOTE 8. FAIR VALUE MEASUREMENTS
Fair value is an “exit” price, representing the amount that would be received when selling an asset, or paid when transferring a liability, in an orderly transaction between market participants. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Fair value measurements are categorized in a a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
• Level 1— Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
• Level 2— Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
◦ Level 3— Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s categorization within this valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
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The following table presents, by valuation hierarchy, assets that are measured at fair value on a recurring basis as of September 30, 2022 and March 31, 2022, and that are included in the Company’s Consolidated Statements of Financial Condition at these dates:
Fair Value Measurements at September 30, 2022, Using
Significant Other Significant
Quoted Prices in Active Markets for Identical Assets Observable Inputs Unobservable Inputs Total Fair
$ in thousands (Level 1) (Level 2) (Level 3) Value
Mortgage servicing rights $ — $ — $ 157 $ 157
Investment securities
Available-for-sale:
Mortgage-backed securities:
Government National Mortgage Association — 375 — 375
Federal Home Loan Mortgage Corporation — 17,957 — 17,957
Federal National Mortgage Association — 9,610 — 9,610
U.S. Government Agency securities — 10,719 — 10,719
Corporate bonds — 2,973 — 2,973
Muni securities — 13,308 — 13,308
Asset-backed securities — 99 — 99
Total available-for-sale securities — 55,041 — 55,041
Total assets $ — $ 55,041 $ 157 $ 55,198
Fair Value Measurements at March 31, 2022, Using
Quoted Prices in Significant
Active Markets for Significant Other Unobservable
Identical Assets Observable Inputs Inputs Total Fair
$ in thousands (Level 1) (Level 2) (Level 3) Value
Mortgage servicing rights $ — $ — $ 162 $ 162
Investment securities
Available-for-sale:
Mortgage-backed securities:
Government National Mortgage Association — 448 — 448
Federal Home Loan Mortgage Corporation — 21,547 — 21,547
Federal National Mortgage Association — 11,584 — 11,584
U.S. Government Agency securities — 13,785 — 13,785
Corporate bonds — 4,121 — 4,121
Muni securities — 15,768 — 15,768
Asset-backed securities — 343 — 343
Total available-for-sale securities — 67,596 — 67,596
Total assets $ — $ 67,596 $ 162 $ 67,758
Instruments for which unobservable inputs are significant to their fair value measurement (i.e., Level 3) include mortgage servicing rights (“MSR”). Level 3 assets accounted for 0.02 % of the Company’s total assets at September 30, 2022 and March 31, 2022.
The Company reviews and updates the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next that are related to the observable inputs to a fair value measurement may result in a reclassification from one hierarchy level to another.
Below is a description of the methods and significant assumptions utilized in estimating the fair value of available-for-sale securities and MSR:
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.
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If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to market information, models also incorporate transaction details, such as maturity and cash flow assumptions. Securities valued in this manner would generally be classified within Level 2 of the valuation hierarchy and primarily include such instruments as mortgage-related securities and corporate debt.
In the six month period ended September 30, 2022, there were no transfers of investments into or out of each level of the fair value hierarchy.
In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. In valuing certain securities, the determination of fair value may require benchmarking to similar instruments or analyzing default and recovery rates. Quoted price information for the MSRs is not available. Therefore, MSRs are valued using market-standard models to model the specific cash flow structure. Key inputs to the model consist of principal balance of loans being serviced, servicing fees and discount and prepayment rates.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The following table includes a rollforward of assets classified by the Company within Level 3 of the valuation hierarchy for the six months ended September 30, 2022 and 2021:
Beginning balance, Ending balance,
$ in thousands April 1, 2022 Total Realized/Unrealized Gains/(Losses) Recorded in Income (1) Issuances / (Settlements) Transfers to/(from) Level 3 September 30, 2022 Change in Unrealized Gains/(Losses) Related to Instruments Held at September 30, 2022
Mortgage servicing rights 162 ( 5 ) — — 157 ( 5 )
Beginning balance, Ending balance,
$ in thousands April 1, 2021 Total Realized/Unrealized Gains/(Losses) Recorded in Income (1) Issuances / (Settlements) Transfers to/(from) Level 3 September 30, 2021 Change in Unrealized Gains/(Losses) Related to Instruments Held at September 30, 2021
Mortgage servicing rights 147 4 — — 151 4
(1) Includes net servicing cash flows and the passage of time.
For Level 3 assets measured at fair value on a recurring basis as of September 30, 2022 and March 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:
Fair Value
$ in thousands September 30, 2022 Valuation Technique Significant Unobservable Inputs Significant Unobservable Input Value
Mortgage servicing rights 157 Discounted Cash Flow Weighted Average Constant Prepayment Rate (1) 4.07 %
Option Adjusted Spread ("OAS") applied to Treasury curve 1000 basis points
Fair Value
$ in thousands March 31, 2022 Valuation Technique Significant Unobservable Inputs Significant Unobservable Input Value
Mortgage servicing rights 162 Discounted Cash Flow Weighted Average Constant Prepayment Rate (1) 6.70 %
Option Adjusted Spread ("OAS" applied to Treasury curve 1000 basis points
(1) Represents annualized loan repayment rate assumptions
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Certain assets are measured at fair value on a non-recurring basis. Such instruments are subject to fair value adjustments under certain circumstances (e.g. when there is evidence of impairment). The following table presents assets and liabilities that were measured at fair value on a non-recurring basis as of September 30, 2022 and March 31, 2022, and that are included in the Company’s Consolidated Statements of Financial Condition at these dates:
Fair Value Measurements at September 30, 2022 Using
Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Total Fair Value
$ in thousands (Level 1) (Level 2) (Level 3)
Impaired loans $ — $ — $ 6,964 $ 6,964
Other real estate owned — — 60 $ 60
Fair Value Measurements at March 31, 2022, Using
Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Total Fair Value
$ in thousands (Level 1) (Level 2) (Level 3)
Impaired loans $ — $ — $ 5,334 $ 5,334
Other real estate owned — — 60 $ 60
For Level 3 assets measured at fair value on a non-recurring basis as of September 30, 2022 and March 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:
Fair Value
$ in thousands September 30, 2022 Valuation Technique Significant Unobservable Inputs Significant Unobservable Input Value
Impaired loans $ 6,964 Appraisal of collateral Appraisal adjustments 7.5% cost to sell
Other real estate owned 60 Appraisal of collateral Appraisal adjustments 7.5% cost to sell
$ in thousands Fair Value March 31, 2022 Valuation Technique Significant Unobservable Inputs Significant Unobservable Input Value
Impaired loans $ 5,334 Appraisal of collateral Appraisal adjustments 7.5% cost to sell
Other real estate owned 60 Appraisal of collateral Appraisal adjustments 7.5% cost to sell
The fair values of collateral dependent impaired loans are determined using various valuation techniques, including consideration of appraised values and other pertinent real estate market data.
Other real estate owned represents property acquired by the Bank in settlement of loans less costs to sell (i.e., through foreclosure, repossession or as an in-substance foreclosure). These assets are recorded at the lower of their cost or fair value. At the time of acquisition of the real estate owned, the real property value is adjusted to its current fair value. Any subsequent adjustments will be to the lower of cost or fair value. As of September 30, 2022 and March 31, 2022, we had loans with a carrying value of $ 5.3 million and $ 3.1 million, respectively, for which formal foreclosure proceedings were in process.
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosures regarding the fair value of financial instruments are required to include, in addition to the carrying value, the fair value of certain financial instruments, both assets and liabilities recorded on and off-balance sheet, for which it is practicable to estimate fair value. Accounting guidance defines financial instruments as cash, evidence of ownership of an entity, or a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument. The fair value of a financial instrument is discussed below. In cases where quoted market prices are not available, estimated fair values have been determined by the Bank using the best available data and estimation methodology suitable for each such category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate their recorded carrying value. The Bank's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact the Bank's fair value of all interest-earning assets and interest-bearing liabilities, other than those which are short-term in maturity.
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The carrying amounts and estimated fair values of the Bank’s financial instruments and estimation methodologies at September 30, 2022 and March 31, 2022 are as follows:
September 30, 2022
Carrying Estimated Quoted Prices in Active Markets for Identical Assets
$ in thousands Amount Fair Value (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
Financial Assets:
Cash and cash equivalents $ 95,545 $ 95,545 $ 95,545 $ — $ —
Securities available-for-sale 55,041 55,041 — 55,041 —
Securities held-to-maturity 2,511 2,361 — 2,361 —
Loans receivable 568,900 533,604 — — 533,604
Accrued interest receivable 1,844 1,844 — 1,844 —
Mortgage servicing rights 157 157 — — 157
Financial Liabilities:
Deposits $ 626,370 $ 620,393 $ 479,086 $ 141,307 $ —
Advances from FHLB of New York 40,000 39,976 — 39,976 —
Other borrowed money 15,903 14,546 — 14,546 —
Accrued interest payable 353 353 — 353 —
March 31, 2022
Carrying Estimated
$ in thousands Amount Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
Financial Assets:
Cash and cash equivalents $ 61,018 $ 61,018 $ 61,018 $ — $ —
Securities available-for-sale 67,596 67,596 — 67,596 —
Securities held-to-maturity 5,254 5,276 — 5,276 —
Loans receivable 573,880 563,821 — — 563,821
Accrued interest receivable 2,414 2,414 — 2,414 —
Mortgage servicing rights 162 162 — — 162
Financial Liabilities:
Deposits $ 628,117 $ 624,160 $ 485,884 $ 138,276 $ —
Other borrowed money 15,906 15,673 — 15,673 —
Accrued interest payable 91 91 — 91 —
NOTE 10. NON-INTEREST REVENUE AND EXPENSE
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain non-interest income streams such as gains on sales of residential mortgage and SBA loans, income associated with servicing assets, and loan fees, including residential mortgage originations to be sold and prepayment and late fees charged across all loan categories are also not in scope of the new guidance. Topic 606 is applicable to non-interest revenue streams, such as depository fees, service charges and commission revenues. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Non-interest revenue streams in-scope of Topic 606 are discussed below.
Depository fees and charges
Depository fees and charges primarily relate to service fees on deposit accounts and fees earned from debit cards and check cashing transactions. Service fees on deposit accounts consist of ATM fees, NSF fees, account maintenance charges and other deposit related fees. The revenue is recognized monthly when the Bank's performance obligations are complete, or as
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incurred for transaction-based fees in accordance with the fee schedules for the Bank's deposit products and services.
Loan fees and service charges
Loan fees and service charges primarily relate to program management fees and fees earned in accordance with the Bank's standard lending fees (such as inspection and late charges). These standard lending fees are earned on a monthly basis upon receipt.
Other non-interest income
Other non-interest income includes correspondent banking fees, and income associated with an advertising services agreement covering marketing and use of the Bank's office space with a third party. The revenue is recognized on a monthly basis.
Interchange income
The Company earns interchange fees from debit card holder transactions conducted through various payment networks. Interchange fees from cardholder transactions are recognized daily, concurrently with the transaction processing services provided by an outsource technology solution and are presented on a net basis.
The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended September 30, 2022 and 2021:
Three Months Ended September 30, Six Months Ended September 30,
$ in thousands 2022 2021 2022 2021
Non-interest income
In-scope of Topic 606
Depository fees and charges $ 553 $ 592 $ 1,108 $ 1,195
Loan fees and service charges 132 41 248 139
Other non-interest income 152 636 162 1,511
Non-interest income (in-scope of Topic 606) 837 1,269 1,518 2,845
Non-interest income (out-of-scope of Topic 606) 262 1,895 290 1,960
Total non-interest income $ 1,099 $ 3,164 $ 1,808 $ 4,805
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The following table sets forth other non-interest income and expense totals exceeding 1% of the aggregate of total interest income and non-interest income for any of the periods presented:
Three Months Ended September 30, Six Months Ended September 30,
$ in thousands 2022 2021 2022 2021
Other non-interest income:
Correspondent banking fees $ 143 $ 624 143 1,489
Other 103 19 138 90
Total non-interest income $ 246 $ 643 $ 281 $ 1,579
Other non-interest expense:
Advertising $ 111 $ 180 $ 264 $ 279
Legal expense 112 248 183 327
Insurance and surety 289 179 585 378
Audit expense 148 137 299 248
Data lines / internet 99 104 194 213
Security services 75 59 149 107
Retail expenses 250 245 467 488
Loss contingency 23 ( 101 ) 34 2,016
Director's fees 123 71 246 142
Other 612 592 1,179 1,176
Total non-interest expense $ 1,842 $ 1,714 $ 3,600 $ 5,374
NOTE 11. LEASES
The Company applies Accounting Standards Codification Topic 842, Leases , ("ASC 842") to its leases. The Company has operating leases related to its administrative offices, seven retail branches and four ATM centers. Two of the operating leases are for branch locations where the Company had entered into a sale and leaseback transaction. The gain had been calculated utilizing the profit on sale in excess of the present value of the minimum lease payments, and the profit on the sale was deferred from gain recognition to be amortized into income over the terms of the leases in accordance with ASC 840. ASC 842 does not require previous sale and leaseback transactions accounted for under ASC 840 to be reassessed. As of September 30, 2022, operating ROU lease assets and related lease liabilities totaled $ 13.5 million and $ 14.3 million, respectively.
As the implicit rates of the Company's existing leases are not readily determinable, the incremental borrowing rate used in determining the lease liability obligation for each individual lease was the FHLB-NY fixed-rate advance rates based on the remaining lease terms as of April 1, 2019.
As of September 30, 2022, the Company had $ 125 thousand and $ 115 thousand of ROU asset and lease liability, respectively, for finance leases related to equipment. The ROU asset is included in Premises and Equipment, net, and the lease liability is included in Advances from the FHLB-NY and Other Borrowed Money on the statements of financial condition.
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The following tables present information about the Company's leases and the related lease costs as of and for the three and six months ended September 30, 2022:
September 30, 2022
Weighted-average remaining lease term
Operating leases 5.7 years
Finance lease 2.6 years
Weighted-average discount rate
Operating leases 3.03 %
Finance lease 2.74 %
Three Months Ended Six Months Ended
September 30, September 30,
$ in thousands 2022 2021 2022 2021
Operating lease expense $ 716 $ 726 $ 1,432 $ 1,438
Finance lease cost
Amortization of right-of use asset 15 18 32 35
Interest on lease liability 1 1 2 1
Cash paid for amounts included in the measurement of lease liabilities
Operating leases 696 694 1,392 1,380
Finance lease 19 12 38 36
Maturities of lease liabilities at September 30, 2022 are as follows:
$ in thousands Operating Leases Finance Leases
Year ending March 31,
2023 $ 1,382 $ 38
2024 2,921 41
2025 2,705 18
2026 2,687 16
2027 2,441 5
Thereafter 3,535 —
Total lease payments 15,671 118
Interest ( 1,325 ) ( 3 )
Lease liability $ 14,346 $ 11 5
NOTE 12. IMPACT OF RECENT ACCOUNTING STANDARDS
Accounting Standards Recently Adopted
On April 1, 2021, the Company adopted ASU No. 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which was part of the FASB's simplification initiative to reduce complexity, while maintaining or improving the usefulness of information provided to users of financial statements. The amendments in this update simplified the accounting for income taxes and improved consistent application of GAAP by removing certain exceptions and clarifying and amending existing guidance for areas of Topic 740. The adoption of the standard did not have a material impact on the Company's financial statements.
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Accounting Standards Not Yet Adopted
In June 2016, the FASB issued ASU No. 016-13, "Financial Instruments - Credit Loss," which updates the guidance on recognition and measurement of credit losses for financial assets. The new requirements, known as the current expected credit loss model ("CECL") will require entities to adopt an impairment model based on expected losses rather than incurred losses. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019 (for the Company, the fiscal year ending March 31, 2021), including interim periods within those fiscal years. In May 2019, the FASB issued ASU No. 2019-05, "Financial Instruments - Credit Losses (Topic 326): Target Transition Relief," to provide transition relief by giving entities an option to irrevocably elect the fair value option for certain financial assets measured at amortized cost upon adoption of ASU 2016-13. In November 2019, the FASB issued ASU No. 2019-10, which extended the CECL implementation date for smaller reporting companies, as defined by the SEC. The new effective date is for fiscal years beginning after December 15, 2022 (for the Company, the fiscal year ending March 31, 2024), including interim periods within those fiscal years. In November 2019, the FASB issued ASU No. 2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses," to amend or clarify guidance regarding expected recoveries for purchased financial assets with credit deterioration, transition relief for troubled debt restructurings, disclosures related to accrued interest receivables, and financial assets secured by collateral maintenance provisions. The Company is currently in the implementation stage of ASU 2016-13 and has engaged two vendors to assist management in evaluating the requirements of the new standard, modeling requirements and assessment of the impact of the adoption of the new standard on its consolidated statements of financial condition and results of operations. In March 2022, the FASB issued ASU No. 2022-02, "Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures," which eliminates the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. The amendments also require disclosure of current period gross writeoffs by year of origination. The effective dates for the amendments in ASU 2022-02 are the same as the effective dates in ASU 2016-13. The Company is evaluating the impacts of this ASU and does not believe it will have a material impact on the consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We anticipate this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. The Company is evaluating the impacts of this ASU and has not yet determined whether LIBOR transition and this ASU will have a material impact on the Company's consolidated statements of financial condition and results of operations.
In November 2021, the FASB issued ASU No. 2021-10 "Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance," to improve the financial reporting of government assistance received by business entities by requiring the disclosure of (1) the types of assistance received, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. ASU 2021-10 is effective
for all entities for financial statements issued for annual periods beginning after December 15, 2021 (for the Company, the fiscal year ending March 31, 2023). Early application of the guidance is permitted. The Company is evaluating the impacts of this ASU to determine whether it will have a material impact on the Company's consolidated statements of financial condition and results of operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 which may be identified by the use of such words as “may,” “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate,” “predict,” “continue,” and “potential” or the negative of these terms or other comparable terminology. Examples of forward-looking statements include, but are not limited to, estimates with respect to the Company's financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates. These factors include but are not limited to the following:
• the effects of COVID-19, which includes, but is not limited to, the length of time that the pandemic continues, the duration of restrictive orders and the imposition of restrictions on businesses and travel, the remedial actions and stimulus measures adopted by federal, state, and local governments, the health of our employees and the inability of employees to work due to illness, quarantine, or government mandates, the business continuity plans of our customers and our vendors, the increased likelihood of cybersecurity risk, data breaches, or fraud due to employees working from home, the ability of our borrowers to continue to repay their loan obligations, and the effect of the pandemic on the general economy and the business of our borrowers;
• the ability of the Bank to comply with the Formal Agreement ("Agreement") between the Bank and the Office of the Comptroller of the Currency, and the effect of the restrictions and requirements of the Formal Agreement on the Bank's non-interest expenses and net income;
• the ability of the Company to obtain approval from the Federal Reserve Bank of Philadelphia (the "Federal Reserve Bank") to distribute interest payments owed to the holders of the Company's subordinated debt securities;
• the limitations imposed on the Company which require, among other things, written approval of the Federal Reserve Bank prior to the declaration or payment of dividends, any increase in debt by the Company, or the redemption of Company common stock, and the effect on operations resulting from such limitations;
• the market price and trading volume of our shares of common stock has been and may continue to be volatile, and purchasers of our securities could incur substantial losses;
• changes in the level of trends of delinquencies and write-offs and in our allowance and provision for loan losses;
• changes in interest rates, which may reduce net interest margin and net interest income;
• the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings;
• national and/or local changes in economic conditions, which could occur from numerous causes, including political changes, domestic and international policy changes, unrest, war and weather, or conditions in the real estate, securities markets or the banking industry, which could affect liquidity in the capital markets, the volume of loan originations, deposit flows, real estate values, the levels of non-interest income and the amount of loan losses;
• adverse changes in the financial industry and the securities, credit, national and local real estate markets (including real estate values);
• changes in our existing loan portfolio composition (including reduction in commercial real estate loan concentration) and credit quality or changes in loan loss requirements;
• legislative or regulatory changes that may adversely affect the Company’s business, including but not limited to new capital regulations, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements, regulatory fees and compliance costs, and the resources we have available to address such changes;
• changes in the level of government support of housing finance;
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• changes to state rent control laws, which may impact the credit quality of multifamily housing loans;
• our ability to control costs and expenses;
• risks related to a high concentration of loans secured by property located in our market area;
• increases in competitive pressure among financial institutions or non-financial institutions;
• changes in consumer spending, borrowing and savings habits;
• technological changes that may be more difficult to implement or more costly than anticipated;
• changes in deposit flows, loan demand, real estate values, borrowing facilities, capital markets and investment opportunities, which may adversely affect our business;
• changes in accounting standards, policies and practices, as may be adopted or established by the regulatory agencies or the Financial Accounting Standards Board could negatively impact the Company's financial results;
• litigation or regulatory actions, whether currently existing or commencing in the future, which may restrict our operations or strategic business plan;
• the ability to originate and purchase loans with attractive terms and acceptable credit quality; and
• the ability to attract and retain key members of management, and to address staffing needs in response to product demand or to implement business initiatives.
Because forward-looking statements are subject to numerous assumptions, risks and uncertainties, actual results or future events could differ possibly materially from those that the Company anticipated in its forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and the Company assumes no obligation to, and expressly disclaims any obligation to, update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements, except as legally required.
Overview
Carver Bancorp, Inc. is the holding company for Carver Federal Savings Bank, a federally chartered savings bank. The Company is headquartered in New York, New York. The Company conducts business as a unitary savings and loan holding company, and the principal business of the Company consists of the operation of Carver Federal. Carver Federal was founded in 1948 to serve African-American communities whose residents, businesses and institutions had limited access to mainstream financial services. The Bank remains headquartered in Harlem, and predominantly all of its seven branches and five stand-alone 24/7 ATM centers are located in low- to moderate-income neighborhoods. Many of these historically underserved communities have experienced unprecedented growth and diversification of incomes, ethnicity and economic opportunity, after decades of public and private investment.
Carver Federal is among the largest African-American operated banks in the United States. The Bank remains dedicated to expanding wealth-enhancing opportunities in the communities it serves by increasing access to capital and other financial services for consumers, businesses and non-profit organizations, including faith-based institutions. A measure of its progress in achieving this goal includes the Bank's sixth consecutive "Outstanding" rating, issued by the OCC following its most recent Community Reinvestment Act (“CRA”) examination in March 2022. The OCC found that 90% of Carver Federal's loans were made within our assessment area, and the Bank has demonstrated excellent responsiveness to its assessment area's needs through its community development lending, investing and service activities. The Bank had approximately $755.7 million in assets and 110 employees as of September 30, 2022.
Carver Federal engages in a wide range of consumer and commercial banking services. The Bank provides deposit products, including demand, savings and time deposits for consumers, businesses, and governmental and quasi-governmental agencies in its local market area within New York City. In addition to deposit products, Carver Federal offers a number of other consumer and commercial banking products and services, including debit cards, online account opening and banking,
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online bill pay and telephone banking. Carver Federal also offers a suite of products and services for unbanked and underbanked consumers, branded as Carver Community Cash. This includes check cashing, wire transfers, bill payment, reloadable prepaid cards and money orders.
Carver Federal offers loan products covering a variety of asset classes, including commercial and multifamily mortgages, and business loans. The Bank finances mortgage and loan products through deposits or borrowings. Funds not used to originate mortgages and loans are invested primarily in U.S. government agency securities and mortgage-backed securities.
The Bank's primary market area for deposits consists of the areas served by its seven branches in the Brooklyn, Manhattan and Queens boroughs of New York City. The neighborhoods in which the Bank's branches are located have historically been low- to moderate-income areas. The Bank's primary lending market includes Kings, New York, Bronx and Queens Counties in New York City, and lower Westchester County, New York. Although the Bank's branches are primarily located in areas that were historically underserved by other financial institutions, the Bank faces significant competition for deposits and mortgage lending in its market areas. Management believes that this competition has become more intense as a result of increased examination emphasis by federal banking regulators on financial institutions' fulfillment of their responsibilities under the CRA and more recently due to the decline in demand for loans. Carver Federal's market area has a high density of financial institutions, many of which have greater financial resources, name recognition and market presence, and all of which are competitors to varying degrees. The Bank's competition for loans comes principally from commercial banks, savings institutions and mortgage banking companies. The Bank's most direct competition for deposits comes from commercial banks, savings institutions and credit unions. Competition for deposits also comes from money market mutual funds, corporate and government securities funds, and financial intermediaries such as brokerage firms and insurance companies. Many of the Bank's competitors have substantially greater resources and offer a wider array of financial services and products. This, combined with competitors' larger presence in the New York market, add to the challenges the Bank faces in expanding its current market share and growing its near-term profitability.
Carver Federal's 74-year history in its market area, its community involvement and relationships, targeted products and services and personal service consistent with community banking, help the Bank compete with competitors in its market.
The Bank's unconsolidated variable interest entities ("VIEs"), in which the Company holds significant variable interests or has continuing involvement through servicing a majority of assets in a VIE at September 30, 2022, are presented below.
Involvement with SPE (000's) Funded Exposure Unfunded Exposure Total
$ in thousands Recognized Gain (Loss) (000's) Total Rights transferred Significant unconsolidated VIE assets Total Involvement with SPE asset Debt Investments Equity Investments Funding Commitments Maximum exposure to loss
Carver Statutory Trust 1 (1) $ — $ — $ 13,403 $ 13,403 $ 13,029 $ 403 $ — $ — $ 13,432
(1) Carver Statutory Trust I debt investment includes deferred interest of $29 thousand.
Critical Accounting Estimates
Note 2 to the Company’s audited Consolidated Financial Statements for the year ended March 31, 2022 included in its Form 10-K for the year ended March 31, 2022, as supplemented by this report, contains a summary of significant accounting policies. The Company believes its policies with respect to the methodologies used to determine the allowance for loan and lease losses is the most critical accounting policy. This policy involves a high degree of complexity, requiring management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could result in material differences in the Company's results of operations or financial condition. The following description of these policies should be read in conjunction with the corresponding section of the Company’s Form 10-K for the year ended March 31, 2022.
Allowance for Loan and Lease Losses
The ALLL reflects management's evaluation of the loans presenting identified loss potential, as well as the risk inherent in various components of the portfolio. There is significant judgment applied in estimating the ALLL. These assumptions and estimates are susceptible to significant changes based on the current environment. In a continued effort to combat inflation, the Federal Reserve approved a fourth consecutive 0.75-point interest rate hike in November 2022, and has indicated that it will likely continue to increase rates to higher than previously projected, although at potentially smaller increments, to bring down inflation that is at a 40-year high. A rising rate environment can negatively impact the Company if
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the higher debt service costs on adjustable-rate loans lead to borrowers' inability to pay contractual obligations. Further, any change in the size of the loan portfolio or any of its components could necessitate an increase in the ALLL even though there may not be a decline in credit quality or an increase in potential problem loans. As such, there can never be assurance that the ALLL accurately reflects the actual loss potential inherent in a loan portfolio.
General Reserve Allowance
Carver's maintenance of a general reserve allowance in accordance with ASC Subtopic 450-20 includes the Bank's evaluation of the risk to potential loss of homogeneous pools of loans based upon historical loss factors and a review of nine different environmental factors that are then applied to each pool. The pools of loans (“Loan Type”) are:
• One-to-four family
• Multifamily
• Commercial Real Estate
• Business Loans
• Consumer (including Overdraft Accounts)
The Bank next applies to each pool a risk factor that determines the level of general reserves for that specific pool. The Bank estimates its historical charge-offs via a lookback analysis. The actual historical loss experience by major loan category is expressed as a percentage of the outstanding balance of all loans within the category. As the loss experience for a particular loan category increases or decreases, the level of reserves required for that particular loan category also increases or decreases. The Bank’s historical charge-off rate reflects the period over which the charge-offs were confirmed and recognized, not the period over which the earlier losses occurred. That is, the charge-off rate measures the confirmation of losses over a period that occurs after the earlier actual losses. During the period between the loss-causing events and the eventual confirmations of losses, conditions may have changed. There is always a time lag between the period over which average charge-off rates are calculated and the date of the financial statements. During that period, conditions may have changed. Another factor influencing the General Reserve is the Bank’s loss emergence period ("LEP") assumptions which represent the Bank’s estimate of the average amount of time from the point at which a loss is incurred to the point at which the loss is confirmed, either through the identification of the loss or a charge-off. Based upon adequate management information systems and effective methodologies for estimating losses, management has established a LEP floor of one year on all pools. In some pools, such as Commercial Real Estate, Multifamily and Business pools, the Bank demonstrates a LEP in excess of 12 months. The Bank also recognizes losses in accordance with regulatory charge-off criteria.
Because actual loss experience may not adequately predict the level of losses inherent in a portfolio, the Bank reviews nine qualitative factors to determine if reserves should be adjusted based upon any of those factors. As the risk ratings worsen, some of the qualitative factors tend to increase. The nine qualitative factors the Bank considers and may utilize are:
1. Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses ( Policy & Procedures ).
2. Changes in relevant economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments ( Economy ).
3. Changes in the nature or volume of the loan portfolio and in the terms of loans ( Nature & Volume ).
4. Changes in the experience, ability, and depth of lending management and other relevant staff ( Management ).
5. Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans ( Problem Assets ).
6. Changes in the quality of the loan review system ( Loan Review ).
7. Changes in the value of underlying collateral for collateral dependent loans ( Collateral Values ).
8. The existence and effect of any concentrations of credit and changes in the level of such concentrations ( Concentrations ).
9. The effect of other external forces such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio ( External Forces ).
Specific Reserve Allowance
The Bank also maintains a specific reserve allowance for criticized and classified loans individually reviewed for impairment in accordance with ASC Subtopic 310-10 guidelines. The amount assigned to the specific reserve allowance is individually determined based upon the loan. The ASC Subtopic 310-10 guidelines require the use of one of three approved methods to estimate the amount to be reserved and/or charged off for such credits. The three methods are as follows:
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1. The present value of expected future cash flows discounted at the loan's effective interest rate;
2. The loan's observable market price; or
3. The fair value of the collateral if the loan is collateral dependent.
The Bank may choose the appropriate ASC Subtopic 310-10 measurement on a loan-by-loan basis for an individually impaired loan, except for an impaired collateral dependent loan. Guidance requires impairment of a collateral dependent loan to be measured using the fair value of collateral method. A loan is considered "collateral dependent" when the repayment of the debt will be provided solely by the underlying collateral, and there are no other available and reliable sources of repayment.
All substandard and doubtful loans and any other loans that the Chief Credit Officer deems appropriate for review, are identified and reviewed for individual evaluation for impairment in accordance with ASC Subtopic 310-10. Loans rated Substandard have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are inadequately protected by the current sound worth, paying capacity of the obligor, or of the collateral pledged, if any. 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. Carver also performs impairment analysis for all TDRs. If it is determined that it is probable the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement, the loan is categorized as impaired. Loans determined to be impaired are evaluated to determine the amount of impairment based on one of the three measurement methods noted above. In accordance with guidance, if there is no impairment amount, no reserve is established for the loan.
An unallocated loan loss allowance is appropriate when it reflects an estimate of probable loss, determined in accordance with GAAP and is properly supported.
Financial institutions were not required to comply with ASU No. 2016-13, "Financial Instruments - Credit Loss," which updates the guidance on recognition and measurement of credit losses for financial assets, from the enactment date of the CARES Act until the earlier of the end of the President's declaration of a National Emergency or December 31, 2020. The new methodology requirements, know as the current expected credit loss model ("CECL"), will require entities to adopt an impairment model based on expected losses, rather than incurred losses. The Consolidated Appropriations Act, 2021, that was enacted in December 2020, provided for a further extension of the required CECL adoption date to January 1, 2022. For smaller reporting companies, as defined by the SEC, the FASB further extended the CECL implementation date. The new effective date is for fiscal years beginning after December 15, 2022 (for the Company, the fiscal year ending March 31, 2024), including interim periods within those fiscal years.
Stock Repurchase Program
On August 6, 2002, the Company announced a stock repurchase program to repurchase up to 15,442 shares of its outstanding common stock. As of September 30, 2022, 11,744 shares of its common stock have been repurchased in open market transactions at an average price of $235.80 per share (as adjusted for 1-for-15 reverse stock split that occurred on October 27, 2011). As a result of the Company's participation in the TARP CDCI, the Treasury Department's prior approval was required to make further repurchases. On October 28, 2011, the Treasury Department converted its preferred stock into common stock, which it continued to hold. On August 6, 2020, the Company repurchased all 2,321,286 shares of its common stock held by the Treasury Department for an aggregate purchase price of $2.5 million. The purchase price was funded by a third party grant. As of August 6, 2020, the Company is no longer bound by the TARP CDCI restrictions as the U.S. Treasury is no longer a common stockholder of the Company.
Liquidity and Capital Resources
Liquidity is a measure of the Bank's ability to generate adequate cash to meet its financial obligations. The principal cash requirements of a financial institution are to cover potential deposit outflows, fund increases in its loan and investment portfolios and ongoing operating expenses. The Bank's primary sources of funds are deposits, borrowed funds and principal and interest payments on loans, mortgage-backed securities and investment securities. While maturities and scheduled amortization of loans, mortgage-backed securities and investment securities are predictable sources of funds, deposit flows and loan and mortgage-backed securities prepayments are strongly influenced by changes in general interest rates, economic conditions and competition. Carver Federal monitors its liquidity utilizing guidelines that are contained in a policy developed by its management and approved by its Board of Directors. Carver Federal's several liquidity measurements are evaluated on a frequent basis.
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Management believes Carver Federal’s short-term assets have sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash requirements, including interest payments on our subordinated debt securities. Additionally, Carver Federal has other sources of liquidity including the ability to borrow from the Federal Home Loan Bank of New York (“FHLB-NY”) utilizing unpledged mortgage-backed securities and certain mortgage loans, the sale of available-for-sale securities and the sale of certain mortgage loans. Net borrowings increased $40.1 million, or 252.2%, to $56.0 million at September 30, 2022, compared to $15.9 million at March 31, 2022 as the Bank secured a $40 million 90-day advance from the FHLB-NY during the second quarter of fiscal year 2023. At September 30, 2022, based on available collateral held at the FHLB-NY, Carver Federal had the ability to borrow from the FHLB-NY an additional $3.1 million on a secured basis, utilizing mortgage-related loans and securities as collateral. The Bank has the ability to pledge additional loans as collateral in order to borrow up to 30% of its total assets. During the six months ended September 30, 2022, the Bank repaid its remaining $3 thousand outstanding advance under its PPP liquidity facility ("PPPLF") at the Federal Reserve. The Company also had $13.4 million in subordinated debt securities and $2.5 million in low interest loans outstanding as of September 30, 2022.
The Bank's most liquid assets are cash and short-term investments. The level of these assets is dependent on the Bank's operating, investing and financing activities during any given period. At September 30, 2022 and March 31, 2022, assets qualifying for short-term liquidity, including cash and cash equivalents, totaled $95.5 million and $61.0 million, respectively.
During fiscal year 2022, the Company entered into a sales agreement with an agent to sell, from time to time, our common stock having an aggregate offering price of up to $20.0 million, in an “at the market offering.” As of March 31, 2022, we have sold an aggregate of 397,367 shares of our common stock pursuant to the terms of such sales agreement, for aggregate gross proceeds of approximately $3.1 million. Aggregate net proceeds received were approximately $3.0 million, after deducting expenses and commissions paid to the agent. There were no additional offerings during the six months ended September 30, 2022.
The most significant potential liquidity challenge the Bank faces is variability in its cash flows as a result of mortgage refinance activity. When mortgage interest rates decline, customers’ refinance activities tend to accelerate, causing the cash flow from both the mortgage loan portfolio and the mortgage-backed securities portfolio to accelerate. In contrast, when mortgage interest rates increase, refinance activities tend to slow, causing a reduction of liquidity. However, in a rising rate environment, customers generally tend to prefer fixed-rate mortgage loan products over variable rate products. Carver Federal is also at risk of deposit outflows due to a competitive interest rate environment.
The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During the six months ended September 30, 2022, total cash and cash equivalents increased $34.5 million to $95.5 million at September 30, 2022, compared to $61.0 million at March 31, 2022, reflecting cash provided by financing activities of $38.3 million and cash provided by investing activities of $6.1 million, partially offset by cash used in operating activities of $9.9 million. Net cash provided by financing activities of $38.3 million resulted from an increase of $40.0 million in FHLB-NY advances and other borrowings, partially offset by a net decrease in deposits of $1.7 million. The Bank secured a $40.0 million short-term advance from the FHLB-NY during the second quarter to ensure the availability of sufficient liquidity for forecasted loan closings. Net cash provided by investing activities of $6.1 million was attributable to loan principal repayments and payoffs, net of originations and purchases, and investment paydowns. This was offset by the purchase of a $5.0 million bank-owned life insurance policy during the first quarter. Net cash used in operating activities totaled $9.9 million, which was primarily due to a $9.0 million decrease in other liabilities related to an outstanding teller check from the prior fiscal year that cleared during the first quarter of the current fiscal year.
Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. In common with all U.S. banks, Carver Federal’s capital adequacy is measured in accordance with the Basel III regulatory framework governing capital adequacy, stress testing, and market liquidity risk. The final rule, which became effective for the Bank on January 1, 2015, established a minimum Common Equity Tier 1 (CET1) ratio, a minimum leverage ratio and increases in the Tier 1 and Total risk-based capital ratios. The rule also limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer" consisting of 2.5% of CET1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was phased in annually beginning January 1, 2016. On January 1, 2019, the full capital conservation buffer requirement of 2.5% became effective, making its minimum CET1 plus buffer 7%, its minimum Tier 1 capital plus buffer 8.5% and its minimum total capital plus buffer 10.5%. Regardless of Basel III’s minimum requirements, Carver Federal, as a result of the Formal Agreement, was issued an Individual Minimum Capital Ratio (“IMCR”) letter by the OCC, which requires the Bank to maintain minimum regulatory capital levels of 9% for its Tier1 leverage ratio and 12% for its total risk-based capital ratio.
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In accordance with the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies have adopted, effective January 1, 2020, a final rule whereby financial institutions and financial institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, will be eligible to opt into a “Community Bank Leverage Ratio” framework. Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules and will be considered to have met the “well capitalized” ratio requirements under the Prompt Corrective Action statutes. The CARES Act and implementing rules temporarily reduced the Community Bank Leverage Ratio to 8%, to be gradually increased back to 9% by 2022. The CARES Act also provides that, during the same time period, if a qualifying community banking organization falls no more than 1% below the community bank leverage ratio, it will have a two quarter grace period to satisfy the community bank leverage ratio. The agencies reserved the authority to disallow the use of the Community Bank Leverage Ratio by a financial institution or holding company based on the risk profile of the organization.
The table below presents the capital position of the Bank at September 30, 2022:
September 30, 2022
($ in thousands) Amount Ratio
Tier 1 leverage capital
Regulatory capital $ 75,790 10.51 %
Individual minimum capital requirement 64,926 9.00 %
Minimum capital requirement 28,856 4.00 %
Excess over individual minimum capital requirement 10,864 1.51 %
Common equity Tier 1
Regulatory capital $ 75,790 13.30 %
Minimum capital requirement 39,894 7.00 %
Excess 35,896 6.30 %
Tier 1 risk-based capital
Regulatory capital $ 75,790 13.30 %
Minimum capital requirement 48,443 8.50 %
Excess 27,347 4.80 %
Total risk-based capital
Regulatory capital $ 81,422 14.29 %
Individual minimum capital requirement 68,390 12.00 %
Minimum capital requirement 59,841 10.50 %
Excess over individual minimum capital requirement 13,032 2.29 %
Bank Regulatory Matters
On May 24, 2016, the Bank entered into a Formal Agreement with the OCC to undertake certain compliance-related and other actions. As a result of the Formal Agreement, the Bank must obtain the approval of the OCC prior to effecting any change in its directors or senior executive officers. The Bank may not declare or pay dividends or make any other capital distributions, including to the Company, without first filing an application with the OCC and receiving the prior approval of the OCC. Furthermore, the Bank must seek the OCC's written approval and the FDIC's written concurrence before entering into any "golden parachute payments" as that term is defined under 12 U.S.C. § 1828(k) and 12 C.F.R. Part 359. As a result of the Formal Agreement, Carver was issued an Individual Minimum Capital Ratio (“IMCR”) letter by the OCC, which requires the Bank to maintain minimum regulatory capital levels of 9% for its Tier1 leverage ratio and 12% for its total risk based capital ratio.
At September 30, 2022, the Bank's capital level exceeded the regulatory requirements and its IMCR requirements with a Tier 1 leverage capital ratio of 10.51%, Common Equity Tier 1 capital ratio of 13.30%, Tier 1 risk-based capital ratio of 13.30%, and a total risk-based capital ratio of 14.29%.
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The Company is subject to similar requirements as the Bank. The Company must provide notice to the FRB prior to affecting any change in its directors or senior executive officers. The Company is also subject to the restrictions on golden parachute and indemnification payments, as set forth in 12 C.F.R. Part 359. Written approval of the Federal Reserve Bank is required prior to: (1) the declaration or payment of dividends by the Company to its stockholders, (2) the declaration or payment of dividends by the Bank to the Company, (3) any distributions of interest or principal by the Company on subordinated debentures or trust preferred securities, (4) any purchases or redemptions of the Company’s stock and (5) the Company incurring, increasing or guaranteeing certain long-term debt outside the ordinary course of business. These limitations could affect our operations and financial performance.
Mortgage Representation and Warranty Liabilities
During the period 2004 through 2009, the Bank originated 1-4 family residential mortgage loans and sold the loans to the Federal National Mortgage Association (“FNMA”). The loans were sold to FNMA with the standard representations and warranties for loans sold to the Government Sponsored Entities ("GSEs"). The Bank may be required to repurchase these loans in the event of breaches of these representations and warranties. In the event of a repurchase, the Bank is typically required to pay the unpaid principal balance as well as outstanding interest and fees. The Bank then recovers the loan or, if the loan has been foreclosed, the underlying collateral. The Bank is exposed to any losses on repurchased loans after giving effect to any recoveries on the collateral. The Bank has not received a request to repurchase any of these loans since the second quarter of fiscal 2015, and there have not been any additional requests from FNMA for loans to be reviewed. At September 30, 2022, the Bank continues to service 81 loans with a principal balance of $12.9 million for FNMA that had been sold with standard representations and warranties.
The following table presents information on open requests from FNMA. The amounts presented are based on outstanding loan principal balances.
$ in thousands Loans sold to FNMA
Open claims as of March 31, 2022 (1) $ 1,363
Gross new demands received —
Loans repurchased/made whole —
Demands rescinded —
Advances on open claims —
Principal payments received on open claims 29
Open claims as of September 30, 2022 (1) $ 1,392
(1) The open claims include all open requests received by the Bank where either FNMA has requested loan files for review, where FNMA has not formally rescinded the repurchase request or where the Bank has not agreed to repurchase the loan. The amounts reflected in this table are the unpaid principal balance and do not incorporate any losses the Bank would incur upon the repurchase of these loans.
Management has established a representation and warranty reserve for losses associated with the repurchase of mortgage loans sold by the Bank to FNMA that we consider to be both probable and reasonably estimable. These reserves are reported in the consolidated statement of financial condition as a component of other liabilities. The table below summarizes changes in our representation and warranty reserves during the six months ended September 30, 2022:
$ in thousands September 30, 2022
Representation and warranty repurchase reserve, March 31, 2022 (1) $ 123
Net adjustment to reserve for repurchase losses (2) (22)
Representation and warranty repurchase reserve, September 30, 2022 (1) $ 101
(1) Reported in our consolidated statements of financial condition as a component of other liabilities.
(2) Component of other non-interest expense.
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Comparison of Financial Condition at September 30, 2022 and March 31, 2022
Assets
At September 30, 2022, total assets were $755.7 million, reflecting an increase of $20.4 million, or 2.8%, from total assets of $735.3 million at March 31, 2022. The increase was primarily attributable to increases of $34.5 million in cash and cash equivalents and $5.2 million in other assets, partially offset by decreases of $15.3 million and $5.0 million in the Bank's net investment and loan portfolios, respectively.
Total cash and cash equivalents increased $34.5 million, or 56.6%, from $61.0 million at March 31, 2022 to $95.5 million at September 30, 2022. The increase in cash was primarily due to an increase in borrowings, net loan activity and paydowns received on investment securities, partially offset by a decrease in total deposits of $1.7 million.
Total investment securities decreased $15.3 million, or 21.0%, to $57.6 million at September 30, 2022, compared to $72.9 million at March 31, 2022 due to scheduled principal payments received of approximately $5.5 million and a $7.0 million increase in unrealized losses in the available-for-sale portfolio. In addition, there was an early payoff of a $2.5 million mortgage-backed security in the held-to-maturity portfolio during the second quarter.
Gross portfolio loans decreased $5.1 million, or 0.9%, to $574.4 million at September 30, 2022, compared to $579.5 million at March 31, 2022 primarily due to attrition and payoffs of $77.9 million. The unexpected high level of payoffs was primarily due to commercial real estate borrowers who perceived the rising rate environment, coupled with high inflation, as the right time to exit contractual debt and take advantage of a small window of new opportunities. These were partially offset by new loan originations of $64.0 million and loan pool purchases of $8.9 million.
Other assets increased $5.2 million, or 72.7%, to $12.4 million at September 30, 2022, compared to $7.2 million at March 31, 2022 primarily due to the purchase of a $5.0 million bank-owned life insurance policy during the first quarter of fiscal year 2023 as a channel to add to the Company's non-interest income revenue by means of an investment considered safe and sound by the Company's regulators.
Liabilities and Equity
Total liabilities increased $29.3 million, or 4.3%, to $709.5 million at September 30, 2022, compared to $680.2 million at March 31, 2022, primarily due to an increase in advances from the FHLB-NY, partially offset by decreases in total deposits and other liabilities.
Deposits decreased $1.7 million, or 0.3%, to $626.4 million at September 30, 2022, compared to $628.1 million at March 31, 2022. There was significant activity in the portfolio in the intervening months. In the 30 days following fiscal year-end 2022, deposits decreased $30.6 million. The decline was primarily related to a $25.0 million withdrawal by one customer, who left a balance of $25.0 million in the Bank. Carver had previously been informed of the intended withdrawal as well as the reason behind it, which was concern regarding a large deposit concentration with one bank. Following that, a $15 million time deposit from a branch of the U.S. Military matured and was not renewed due to their liquidity requirements at the time. At the time of the first quarter 10-Q filing as of June 30, 2022, the Company's total deposits had declined $39.8 million from March 31, 2022. In the following quarter, an increase in interest rates, coupled with significant outreach efforts from the retail team, culminated in increases in certificate of deposit and money market accounts strong enough to bring the deposit portfolio back to a level just shy of that at March 31, 2022.
Advances from the FHLB-NY and other borrowed money increased $40.1 million to $56.0 million at September 30, 2022, compared to $15.9 million at March 31, 2022. The Bank secured a $40.0 million 90-day advance from the FHLB-NY during the second quarter to ensure the availability of sufficient liquidity for projected loan closings.
Other liabilities decreased $9.0 million, or 41.3%, to $12.8 million at September 30, 2022, compared to $21.8 million at March 31, 2022 due to a decrease in outstanding teller checks from the prior fiscal year that cleared during the first quarter.
Total equity decreased $8.9 million, or 16.2%, to $46.2 million at September 30, 2022, compared to $55.1 million at March 31, 2022. The decrease was due to a net loss of $1.8 million, coupled with an increase of $7.0 million in unrealized losses on securities available-for-sale for the six month period ended September 30, 2022.
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Asset/Liability Management
The Company's primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between the rates on interest-earning assets and interest-bearing liabilities, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and assets, and the credit quality of earning assets. Management's asset/liability objectives are to maintain a strong, stable net interest margin, to utilize the Company's capital effectively without taking undue risks, to maintain adequate liquidity and to manage its exposure to changes in interest rates.
The economic environment is uncertain regarding future interest rate trends. Management monitors the Company's cumulative gap position, which is the difference between the sensitivity to rate changes on the Company's interest-earning assets and interest-bearing liabilities. In addition, the Company uses various tools to monitor and manage interest rate risk, such as a model that projects net interest income based on increasing or decreasing interest rates.
Off-Balance Sheet Arrangements and Contractual Obligations
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and in connection with its overall investment strategy. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are not recorded in the consolidated financial statements. Such instruments primarily include lending obligations, including commitments to originate mortgage and consumer loans and to fund unused lines of credit.
The following table reflects the Bank's outstanding commitments as of September 30, 2022:
$ in thousands
Commitments to fund mortgage loans $ 2,400
Lines of credit 4,399
Commitment to fund private equity investment 253
Total $ 7,052
Comparison of Operating Results for the Three and Six Months Ended September 30, 2022 and 2021
Overview
The Company reported net loss of $1.0 million for the three months ended September 30, 2022, compared to net income of $1.1 million for the comparable prior year quarter. The change in our results was primarily driven by a decrease in non-interest income and an increase in non-interest expense, partially offset by an increase in net interest income after (recovery of) provision for loan losses, compared to the prior year quarter. For the six months ended September 30, 2022, the Company reported a net loss of $1.8 million, compared to a net loss of $1.7 million for the prior year period. The change in our results was primarily driven by a decrease in non-interest income, partially offset by an increase in net interest income and a decrease in non-interest expense compared to the prior year period.
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The following table reflects selected operating ratios for the three and six months ended September 30, 2022 and 2021 (unaudited):
Six Months Ended
Three Months Ended September 30, September 30,
Selected Financial Data: 2022 2021 2022 2021
Return on average assets (1) (0.53) % 0.63 % (0.51) % (0.49) %
Return on average stockholders' equity (2) (7.51) % 8.32 % (6.96) % (6.37) %
Return on average stockholders' equity, excluding AOCI (2) (8) (6.27) % 8.21 % (5.90) % (6.19) %
Net interest margin (3) 3.14 % 3.14 % 3.30 % 2.97 %
Interest rate spread (4) 2.94 % 3.02 % 3.14 % 2.83 %
Efficiency ratio (5) 117.33 % 84.53 % 115.45 % 109.55 %
Operating expenses to average assets (6) 4.29 % 4.11 % 4.27 % 4.66 %
Average stockholders' equity to average assets (7) 7.04 % 7.62 % 7.33 % 7.65 %
Average stockholders' equity, excluding AOCI, to average assets (7) (8) 8.43 % 7.71 % 8.66 % 7.87 %
Average interest-earning assets to average interest-bearing liabilities 1.29 x 1.37 x 1.31 x 1.36 x
(1 ) Net income (loss), annualized, divided by average total assets.
(2 ) Net income (loss), annualized, divided by average total stockholders' equity.
(3) Net interest income, annualized, divided by average interest-earning assets.
(4) Combined weighted average interest rate earned less combined weighted average interest rate cost.
(5) Operating expense divided by sum of net interest income and non-interest income.
(6) Non-interest expense, annualized, divided by average total assets.
(7) Total average stockholders' equity divided by total average assets for the period.
(8) See Non-GAAP Financial Measures disclosure for comparable GAAP measures.
Non-GAAP Financial Measures
In addition to evaluating the Company's results of operations in accordance with U.S. generally accepted accounting principles (“GAAP”), management routinely supplements their evaluation with an analysis of certain non-GAAP financial measures, such as the return on average stockholders' equity excluding average accumulated other comprehensive income (loss) ("AOCI"), and average stockholders' equity excluding AOCI to average assets. Management believes these non-GAAP financial measures provide information that is useful to investors in understanding the Company's underlying operating performance and trends, and facilitates comparisons with the performance of other banks and thrifts.
Return on equity measures how efficiently we generate profits from the resources provided by our net assets. Return on average stockholders' equity is calculated by dividing annualized net income (loss) attributable to Carver by average stockholders' equity, excluding AOCI. Management believes that this performance measure explains the results of the Company's ongoing businesses in a manner that allows for a better understanding of the underlying trends in the Company's current businesses. For purposes of the Company's presentation, AOCI includes the changes in the market or fair value of its investment portfolio. These fluctuations have been excluded due to the unpredictable nature of this item and is not necessarily indicative of current operating or future performance.
Six Months Ended
Three Months Ended September 30, September 30,
$ in thousands 2022 2021 2022 2021
Average Stockholders' Equity
Average Stockholders' Equity $ 50,861 $ 52,146 $ 52,035 $ 52,536
Average AOCI (10,020) (648) (9,433) (1,523)
Average Stockholders' Equity, excluding AOCI $ 60,881 $ 52,794 $ 61,468 $ 54,059
Return on Average Stockholders' Equity (7.51) % 8.32 % (6.96) % (6.37) %
Return on Average Stockholders' Equity, excluding AOCI (6.27) % 8.21 % (5.90) % (6.19) %
Average Stockholders' Equity to Average Assets 7.04 % 7.62 % 7.33 % 7.65 %
Average Stockholders' Equity, excluding AOCI, to Average Assets 8.43 % 7.71 % 8.66 % 7.87 %
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Analysis of Net Interest Income
The Company’s profitability is primarily dependent upon net interest income and is also affected by the provision for loan losses, non-interest income, non-interest expense and income taxes. Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned and paid. The Company’s net interest income is significantly impacted by changes in interest rate and market yield curves. Net interest income increased $0.3 million, or 5.8%, to $5.5 million for the three months ended September 30, 2022, compared to $5.2 million for the same quarter last year. Net interest income increased $1.5 million, or 15.3%, to $11.3 million for the six months ended September 30, 2022, compared to $9.8 million for the prior year period.
The following table sets forth certain information relating to the Company’s average interest-earning assets and average interest-bearing liabilities, and their related average yields and costs for the six months ended September 30, 2022 and 2021. Average yields are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods shown. Average balances are derived from daily or month-end balances as available and applicable. Management does not believe that the use of average monthly balances instead of average daily balances represents a material difference in information presented. The average balance of loans includes loans on which the Company has discontinued accruing interest. The yield includes fees, which are considered adjustment to yield.
For the Three Months Ended September 30,
2022 2021
Average Average Average Average
$ in thousands Balance Interest Yield/Cost Balance Interest Yield/Cost
Interest-Earning Assets:
Loans (1) $ 569,074 $ 6,005 4.22 % $ 496,219 $ 5,323 4.29 %
Mortgage-backed securities 33,174 156 1.88 % 47,222 158 1.34 %
Investment securities (2) 37,692 201 2.13 % 43,878 209 1.91 %
Money market investments 60,378 363 2.39 % 69,905 28 0.16 %
Total interest-earning assets 700,318 6,725 3.84 % 657,224 5,718 3.48 %
Non-interest-earning assets 21,973 27,464
Total assets $ 722,291 $ 684,688
Interest-Bearing Liabilities:
Deposits
Interest-bearing checking $ 58,561 $ 20 0.14 % $ 50,446 $ 7 0.06 %
Savings and clubs 111,960 54 0.19 % 112,025 31 0.11 %
Money market 183,698 422 0.91 % 146,220 89 0.24 %
Certificates of deposit 139,703 329 0.93 % 145,557 305 0.83 %
Mortgagors deposits 2,604 2 0.30 % 2,399 2 0.33 %
Total deposits 496,526 827 0.66 % 456,647 434 0.38 %
Borrowed money 44,654 395 3.51 % 23,169 120 2.05 %
Total interest-bearing liabilities 541,180 1,222 0.90 % 479,816 554 0.46 %
Non-interest-bearing liabilities
Demand deposits 104,086 125,700
Other liabilities 26,164 27,026
Total liabilities 671,430 632,542
Stockholders' equity 50,861 52,146
Total liabilities and equity $ 722,291 $ 684,688
Net interest income $ 5,503 $ 5,164
Average interest rate spread 2.94 % 3.02 %
Net interest margin 3.14 % 3.14 %
(1) Includes nonaccrual loans
(2) Includes FHLB-NY stock
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For the Six Months Ended September 30,
2022 2021
Average Average Average Average
$ in thousands Balance Interest Yield/Cost Balance Interest Yield/Cost
Interest-Earning Assets:
Loans (1) $ 567,995 $ 11,982 4.22 % $ 491,645 $ 10,162 4.13 %
Mortgage-backed securities 34,952 316 1.81 % 48,328 402 1.66 %
Investment securities (2) 36,816 366 1.99 % 44,686 434 1.94 %
Money market investments 46,416 434 1.86 % 76,188 49 0.13 %
Total interest-earning assets 686,179 13,098 3.82 % 660,847 11,047 3.34 %
Non-interest-earning assets 23,470 26,199
Total assets $ 709,649 $ 687,046
Interest-Bearing Liabilities:
Deposits
Interest-bearing checking $ 58,427 $ 28 0.10 % $ 49,187 $ 14 0.06 %
Savings and clubs 113,113 85 0.15 % 111,974 62 0.11 %
Money market 184,222 551 0.60 % 144,867 176 0.24 %
Certificates of deposit 135,330 575 0.85 % 147,702 702 0.95 %
Mortgagors deposits 3,072 (1) (0.06) % 2,621 5 0.38 %
Total deposits 494,164 1,238 0.50 % 456,351 959 0.42 %
Borrowed money 30,761 543 3.52 % 29,347 272 1.85 %
Total interest-bearing liabilities 524,925 1,781 0.68 % 485,698 1,231 0.51 %
Non-interest-bearing liabilities
Demand deposits 105,347 120,598
Other liabilities 27,342 28,214
Total liabilities 657,614 634,510
Stockholders' equity 52,035 52,536
Total liabilities and equity $ 709,649 $ 687,046
Net interest income $ 11,317 $ 9,816
Average interest rate spread 3.14 % 2.83 %
Net interest margin 3.30 % 2.97 %
(1) Includes nonaccrual loans
(2) Includes FHLB-NY stock
Interest Income
Interest income increased $1.0 million, or 17.5%, to $6.7 million for the three months ended September 30, 2022, compared to $5.7 million for the prior year quarter. For the six months ended September 30, 2022, interest income increased $2.1 million, or 19.1%, to $13.1 million, compared to $11.0 million for the prior year period. Interest income on loans increased $0.7 million and $1.8 million for the three and six months ended September 30, 2022, respectively, primarily due to an increase in average loan balances for the two comparative periods of $72.9 million, or 14.7%, and $76.4 million, or 15.5%, respectively. The increase in the loan portfolio was driven by a restructured lending team and funded by an increase in total deposits during the fiscal year. Interest income on money market investments increased $0.4 million for the three and six months ended September 30, 2022, primarily due to an increase in interest rates on the Bank's interest-bearing account at the Federal Reserve Bank. Interest income on mortgage-backed and investment securities was lower due to a decrease in average balances, despite an increase in yields compared to the prior year periods.
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Interest Expense
Interest expense increased $0.6 million to $1.2 million for the three months ended September 30, 2022, compared to $0.6 million for the prior year quarter, an increase of 100.0%. On September 30, 2021, the prime rate was 3.25%. On September 30, 2022, it was 6.25%. The heightened rate environment is reflected in the average cost of interest-bearing deposits for the two quarterly periods under review. For the three months ended September 30, 2021, that cost was 0.38%; for the same period in 2022, it was 0.66%. A rate/volume analysis indicates that 89% of the $0.4 million increase in deposit interest expense for the quarterly period is attributable to rate. The rising rate environment had the same impact on borrowing costs - the Company's floating rate trust preferred securities increased from an average cost of 3.18% for the three months ended September 30, 2021, to an average cost of 5.27% for the current quarter. Advances from the FHLB repriced quickly and dramatically, increasing from an average cost of 0.35% in the prior year to 2.86% in the current quarter.
For the six months ended September 30, 2022, interest expense increased $0.6 million, or 50.0%, to $1.8 million, compared to $1.2 million for the prior year period. Interest expense on deposits increased $0.2 million for the six months ended September 30, 2022, primarily due to an increase in the average balances and rates paid on money market accounts of $39.3 million and 36 basis points, respectively. Interest expense on borrowings was almost $0.3 million higher in the current six-month period, primarily due to an increase in the average borrowing rate from 1.85% in the prior year-to-date period to 3.52% for the current six-month period, an increase of 90.3%.
Provision for Loan Losses and Asset Quality
The Bank maintains an ALLL that management believes is adequate to absorb inherent and probable losses in its loan portfolio. The adequacy of the ALLL is determined by management’s continuous review of the Bank’s loan portfolio, including the identification and review of individual problem situations that may affect a borrower’s ability to repay.
Management reviews the overall portfolio quality through an analysis of delinquency and non-performing loan data, estimates of the value of underlying collateral, current charge-offs and other factors that may affect the portfolio, including a review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and composition of the loan portfolio. The general valuation allowance applied to those 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 fiscal year 2021, we increased our qualitative factors and assessment criteria due to the ongoing pandemic. In fiscal year 2022, we adjusted our qualitative factors and assessment criteria from high to medium based on improving economic factors, such as unemployment and overall increased activity due to less pandemic related restrictions. The increase in the qualitative reserves was related to the overall increase in our loan portfolio. These increases in reserves were partially offset by decreases in our quantitative reserve analysis as the rolling 20 quarter historical loss look back period improved for most of our loan categories. The Bank continues to maintain a $246 thousand unallocated reserve, or 4.5 % of ALLL as of September 30, 2022.
The ALLL reflects management’s evaluation of the loans presenting identified loss potential, as well as the risk inherent in various components of the portfolio. Any change in the size of the loan portfolio or any of its components could necessitate an increase in the ALLL even though there may not be a decline in credit quality or an increase in potential problem loans. Loans made under the PPP are fully guaranteed by the SBA; therefore, these loans do not have an associated allowance.
The Bank’s provision for loan loss methodology is consistent with the Interagency Policy Statement on the Allowance for Loan and Lease Losses (the “Interagency Policy Statement”) released by the OCC on December 13, 2006. For additional information regarding the Bank’s ALLL policy, refer to Note 2 of the Notes to Consolidated Financial Statements, “Summary of Significant Accounting Policies” included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022.
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The following table summarizes the activity in the ALLL for the six month periods ended September 30, 2022 and 2021 and the fiscal year ended March 31, 2022:
$ in thousands Six Months Ended September 30, 2022 Fiscal Year Ended March 31, 2022 Six Months Ended September 30, 2021
Beginning Balance 5,624 $ 5,140 $ 5,140
Less: Charge-offs
One-to-four family — — —
Multifamily — — —
Commercial real estate — — —
Business — — —
Consumer (24) (257) (99)
Total charge-offs (24) (257) (99)
Add: Recoveries
One-to-four family 90 13 —
Multifamily — — —
Commercial real estate 10 — —
Business 23 102 50
Consumer 2 23 20
Unallocated — — 128
Total recoveries 125 138 198
Net recoveries (charge-offs) 101 (119) 99
Provision for (recovery of) loan losses (216) 603 276
Ending Balance $ 5,509 $ 5,624 $ 5,515
Ratios:
Net recoveries (charge-offs) to average loans outstanding (annualized)
One-to-four family 0.26 % 0.02 % — %
Multifamily — % — % — %
Commercial real estate 0.01 % — % — %
Business 0.03 % 0.06 % 0.06 %
Consumer (2.86) % (11.55) % (7.13) %
Total loans 0.04 % (0.02) % 0.04 %
Allowance to total loans 0.96 % 0.97 % 1.06 %
Allowance to nonaccrual loans 36.50 % 46.43 % 82.04 %
The Company recorded a $189 thousand recovery of loan loss for the three months ended September 30, 2022, compared to a $204 thousand provision for loan loss for the prior year quarter. Net recoveries of $94 thousand were recognized during the second quarter, compared to net recoveries of $97 thousand for the prior year quarter. For the six months ended September 30, 2022, the Company recorded a $216 thousand recovery of loan loss, compared to a $276 thousand provision for loan loss for the prior year period. Net recoveries of $101 thousand were recognized for the six months ended September 30, 2022, compared to net recoveries of $99 thousand in the prior year period.
At September 30, 2022, nonaccrual loans totaled $15.1 million, or 2.0% of total assets, compared to $11.5 million, or 1.6% of total assets at March 31, 2022. The ALLL was $5.5 million at September 30, 2022, which represents a ratio of the ALLL to nonaccrual loans of 36.5% compared to a ratio of 49.0% at March 31, 2022. The ratio of the allowance for loan losses to total loans was 0.96% at September 30, 2022, compared to 0.97% at March 31, 2022.
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. 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. At September 30, 2022 and March 31, 2022, no loans were on COVID-related deferrals as the remaining 90-day loan deferments expired and borrowers became current.
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Non-performing Assets
Non-performing assets consist of nonaccrual loans, loans held-for-sale and property acquired in settlement of loans, which is known as other real estate owned (OREO), including foreclosure. When a borrower fails to make a payment on a loan, the Bank and/or its loan servicers take prompt steps to have the delinquency cured and the loan restored to current status. This includes a series of actions such as phone calls, letters, customer visits and, if necessary, legal action. In the event the loan has a guarantee, the Bank may seek to recover on the guarantee, including, where applicable, from the SBA. Loans that remain delinquent are reviewed for reserve provisions and charge-off. The Bank’s collection efforts continue after the loan is charged off, except when a determination is made that collection efforts have been exhausted or are not productive.
The Bank may from time to time agree to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). Loans modified in a TDR are placed on nonaccrual status until the Bank 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. At September 30, 2022, loans classified as TDR totaled $7.2 million, of which $6.2 million were classified as performing. At March 31, 2022, loans classified as TDR totaled $6.9 million, of which $5.2 million were classified as performing.
At September 30, 2022, non-performing assets totaled $15.2 million, or 2.0% of total assets compared to $11.5 million, or 1.6% of total assets at March 31, 2022. The following table sets forth information with respect to the Bank’s non-performing assets at the dates indicated:
Non Performing Assets
$ in thousands September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021
Loans accounted for on a nonaccrual basis (1) :
Gross loans receivable:
One-to-four family $ 4,371 $ 4,600 $ 4,892 $ 4,919 $ 3,500
Multifamily — 109 515 516 882
Commercial real estate 9,455 6,170 4,601 185 192
Business 1,179 1,234 1,448 2,091 2,148
Consumer 87 — 25 57 —
Total nonaccrual loans 15,092 12,113 11,481 7,768 6,722
Other non-performing assets (2) :
Real estate owned 60 60 60 60 60
Total non-performing assets (3) $ 15,152 $ 12,173 $ 11,541 $ 7,828 $ 6,782
Nonaccrual loans to total loans 2.63 % 2.18 % 1.98 % 1.41 % 1.29 %
Non-performing loans to total loans 2.63 % 2.18 % 1.98 % 1.41 % 1.29 %
Non-performing assets to total assets 2.00 % 1.76 % 1.57 % 1.08 % 0.96 %
Allowance to total loans 0.96 % 1.01 % 0.97 % 0.99 % 1.06 %
Allowance to nonaccrual loans 36.50 % 46.26 % 48.99 % 70.65 % 82.04 %
(1) Nonaccrual status denotes any loan where the delinquency exceeds 90 days past due, or in the opinion of management, the collection of contractual interest and/or principal is doubtful. Payments received on a nonaccrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on assessment of the ability to collect on the loan.
(2) Other non-performing assets generally represent loans that the Bank is in the process of selling and has designated held-for-sale or property acquired by the Bank in settlement of loans less costs to sell (i.e., through foreclosure, repossession or as an in-substance foreclosure). These assets are recorded at the lower of their cost or fair value.
(3) Troubled debt restructured loans performing in accordance with their modified terms for less than six months and those not performing in accordance with their modified terms are considered nonaccrual and are included in the nonaccrual category in the table above. At September 30, 2022, there were $6.2 million TDR loans that have performed in accordance with their modified terms for a period of at least six months. These loans are generally considered performing loans and are not presented in the table above.
Subprime Loans
In the past, the Bank originated or purchased a limited amount of subprime loans (which are defined by the Bank as those loans where the borrowers have FICO scores of 660 or less at origination). At September 30, 2022, the Bank had $2.9 million in subprime loans, or 0.5% of its total loan portfolio, of which $0.7 million are non-performing loans.
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Non-Interest Income
Non-interest income decreased $2.1 million, or 65.6%, to $1.1 million for the three months ended September 30, 2022, compared to $3.2 million for the prior year quarter. For the six months ended September 30, 2022, non-interest income decreased $3.0 million, or 62.5%, to $1.8 million, compared to $4.8 million for the prior year period. Non-interest income in the prior year included $1.8 million grant income recognized from the Bank's award through the CDFI Fund's Rapid Response Program. In addition, other non-interest income includes correspondent banking fees related to the Bank's servicing of PPPLF activity for a correspondent bank that were $0.5 million and $1.3 million higher for the three and six months ended September 30, 2021, compared to the current year periods, respectively.
Non-Interest Expense
Non-interest expense increased $0.7 million, or 10.0%, to $7.7 million for the three months ended September 30, 2022, compared to $7.0 million for the prior year quarter. Employee compensation and benefits increased by $0.3 million in the current period due equally to merit increases, recruiting fees and employer portion of 401K contribution. Net equipment expense was $0.1 million higher as a result of additional hardware/software maintenance contracts put in place for new business strategies being implemented. Data processing expense increased by $0.1 million in the current quarterly period due to upgraded cybersecurity systems and an improved remote work environment. The cost to provide insurance and surety for the Company increased by $0.1 million based on the economic environment.
For the six months ended September 30, 2022, non-interest expense decreased $0.8 million, or 5.0%, to $15.2 million, compared to $16.0 million for the prior year period. Other non-interest expense in the prior year period included a $2.1 million loss contingency accrual related to a wire fraud matter that occurred during the first quarter, with the Bank recovering approximately $126 thousand during the second quarter of fiscal year 2022. Employee compensation and benefits and consulting fees were higher compared to the prior year period due to agency fees and the increased use of consultants for temporary assistance in the underwriting department as the Company sought to add permanent staff due to increased loan volume.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Not applicable, as the Company is a smaller reporting company.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. As of September 30, 2022, the Company’s management, including the Company's Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Accounting Officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as amended. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must necessarily reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2022.
(b) Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting during the fiscal quarter to which this report relates, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company and the Bank or one of its wholly-owned subsidiaries are parties to various legal proceedings incident to their business. At September 30, 2022, certain claims, suits, complaints and investigations (collectively “proceedings”) involving the Company and the Bank or a subsidiary, arising in the ordinary course of business, have been filed or are pending. The Company is unable at this time to determine the ultimate outcome of each proceeding, but believes, after discussions with legal counsel representing the Company and the Bank or the subsidiary in these proceedings, that it has meritorious defenses to each proceeding and appropriate measures have been taken to defend the interests of the Company, Bank or subsidiary. There were no legal proceedings pending or known to be contemplated against us that in the opinion of management, would be expected to have a material adverse effect on the financial condition or results of operations of the Company or the Bank.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A - Risk Factors" in our most recent Annual Report on Form 10-K, which could materially affect the Company's business, financial condition, or future operating results. The risks described in this form are not the only risks presently facing the Company. Additional risks and uncertainties not currently known to the Company, or currently deemed to be immaterial, also may materially adversely affect the Company's business, financial condition, and/or operating results. There were no material changes in risk factors in the Company's second quarter ended September 30, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
The following exhibits are submitted with this report:
3.1 Certificate of Incorporation of Carver Bancorp, Inc. (1)
3.2 Certificate of Amendment to the Certificate of Incorporation of Carver Bancorp, Inc. (2)
3.3 Second Amended and Restated Bylaws of Carver Bancorp, Inc. (3)
4.1 Stock Certificate of Carver Bancorp, Inc. (1)
4.2 Certificate of Designation for Mandatorily Convertible Non-Voting Participating Preferred Stock Series C and Convertible Non-Cumulative Non-Voting Participating Preferred Stock, Series D of Carver Bancorp, Inc. (4)
4.3 Certificate of Amendment to the Certificate of Incorporation of Carver Bancorp, Inc.(5)
4.4 Certificate of Designations of Non-Cumulative Non-Voting Participating Preferred Stock, Series E, par value $0.01 per share (6)
4.5 Certificate of Amendment of Certificate of Designations of Non-Cumulative Non-Voting Participating Preferred Stock, Series E, par value $0.01 per share (7)
4.6 Amended and Restated Certificate of Designations of Non-Cumulative Non-Voting Participating Preferred Stock, Series F, par value $0.01 per share (8)
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350
32.2 Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350
101 The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in XBRL (Extensive Business Reporting Language): (i) Consolidated Statements of Financial Condition as of September 30, 2022 (unaudited) and March 31, 2022; (ii) Consolidated Statements of Operations for the three and six months ended September 30, 2022 and 2021 (unaudited); (iii) Consolidated Statements of Comprehensive Income/(Loss) for the three and six months ended September 30, 2022 and 2021 (unaudited); (iv) Consolidated Statements of Changes in Equity for the three and six months ended September 30, 2022 and 2021 (unaudited); (v) Consolidated Statements of Cash Flows for the six months ended September 30, 2022 and 2021 (unaudited); and (vi) Notes to Consolidated Financial Statements.
104 The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL.
(1) Incorporated herein by reference from the Exhibits to the Form S-4, Registration Statement and amendments thereto, initially filed on June 7, 1996, Registration No. 333-5559.
(2) Incorporated herein by reference from the Exhibits to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 1, 2011.
(3) Incorporated herein by reference from the Exhibits to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.
(4) Incorporated herein by reference to Exhibit 3.1 to the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission filed on July 6, 2011.
(5) Incorporated herein by reference to Exhibit 3.1 to the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission filed on November 1, 2011.
(6) Incorporated herein by reference to Exhibit 3.1 to the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission filed on February 1, 2021.
(7) Incorporated herein by reference to Exhibit 3.2 to the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission filed on February 1, 2021.
(8) Incorporated herein by reference to Exhibit 3.1 to the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission filed on September 30, 2021.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CARVER BANCORP, INC.
Date: November 14 , 2022 /s/ Michael T. Pugh
Michael T. Pugh
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14 , 2022 /s/ Christina L. Maier
Christina L. Maier
First Senior Vice President and Chief Financial Officer
(Principal Accounting Officer and Principal Financial Officer)
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