Form 10-Q CARVER BANCORP INC For: Jun 30
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E-mailUNITED 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 June 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
(Exact name of registrant as specified in its charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| (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 oNo
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 | ☒ | 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 August 12, 2022 | |||||||
| Common Stock, par value $0.01 | ||||||||
TABLE OF CONTENTS
| Page | ||||||||
PART I. FINANCIAL INFORMATION
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
| $ in thousands except per share data | June 30, 2022 | March 31, 2022 | |||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents: | |||||||||||
| Cash and due from banks | $ | $ | |||||||||
| Money market investments | |||||||||||
| Total cash and cash equivalents | |||||||||||
| Investment securities: | |||||||||||
| Available-for-sale, at fair value | |||||||||||
Held-to-maturity, at amortized cost (fair value of $ | |||||||||||
| Total investment securities | |||||||||||
| Loans receivable: | |||||||||||
| Real estate mortgage loans | |||||||||||
| Commercial business loans | |||||||||||
| Consumer loans | |||||||||||
| Loans, gross | |||||||||||
| Allowance for loan and lease losses | ( | ( | |||||||||
| Total loans receivable, net | |||||||||||
| Premises and equipment, net | |||||||||||
| Federal Home Loan Bank of New York (“FHLB-NY”) stock, at cost | |||||||||||
| Accrued interest receivable | |||||||||||
| Right-of-use assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| LIABILITIES | |||||||||||
| Deposits: | |||||||||||
| Non-interest bearing checking | $ | $ | |||||||||
| Interest-bearing deposits: | |||||||||||
| Interest-bearing checking | |||||||||||
| Savings | |||||||||||
| Money market | |||||||||||
| Certificates of deposit | |||||||||||
| Escrow | |||||||||||
| Total interest-bearing deposits | |||||||||||
| Total deposits | |||||||||||
| Advances from the FHLB-NY and other borrowed money | |||||||||||
| Operating lease liability | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| EQUITY | |||||||||||
Preferred stock, (par value $ | |||||||||||
Preferred stock (par value $ | |||||||||||
Preferred stock (par value $ | |||||||||||
Common stock (par value | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
Treasury stock, at cost ( | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See accompanying notes to consolidated financial statements
1
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, | ||||||||||||||
| $ in thousands, except per share data | 2022 | 2021 | ||||||||||||
| Interest income: | ||||||||||||||
| Loans | $ | $ | ||||||||||||
| Mortgage-backed securities | ||||||||||||||
| Investment securities | ||||||||||||||
| Money market investments | ||||||||||||||
| Total interest income | ||||||||||||||
| Interest expense: | ||||||||||||||
| Deposits | ||||||||||||||
| Advances and other borrowed money | ||||||||||||||
| Total interest expense | ||||||||||||||
| Net interest income | ||||||||||||||
| (Recovery of) provision for loan losses | ( | |||||||||||||
| Net interest income after (recovery of) provision for loan losses | ||||||||||||||
| Non-interest income: | ||||||||||||||
| Depository fees and charges | ||||||||||||||
| Loan fees and service charges | ||||||||||||||
| Other | ||||||||||||||
| Total non-interest income | ||||||||||||||
| Non-interest expense: | ||||||||||||||
| Employee compensation and benefits | ||||||||||||||
| Net occupancy expense | ||||||||||||||
| Equipment, net | ||||||||||||||
| Data processing | ||||||||||||||
| Consulting fees | ||||||||||||||
| Federal deposit insurance premiums | ||||||||||||||
| Other | ||||||||||||||
| Total non-interest expense | ||||||||||||||
| Loss before income taxes | ( | ( | ||||||||||||
| Income tax expense | ||||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| Loss per common share: | ||||||||||||||
| Basic | $ | ( | $ | ( | ||||||||||
| Diluted | ( | ( | ||||||||||||
See accompanying notes to consolidated financial statements
2
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended June 30, | ||||||||||||||
| $ in thousands | 2022 | 2021 | ||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| 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) | ( | |||||||||||||
| Total other comprehensive (loss) income, net of tax | ( | |||||||||||||
| Total comprehensive loss, net of tax | $ | ( | $ | ( | ||||||||||
See accompanying notes to consolidated financial statements
3
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the Three Months Ended June 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 June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance — March 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of taxes | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||
| Conversion of Series D preferred stock to common stock | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Balance — June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||
Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance — March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of taxes | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Conversion of Series D preferred stock to common stock | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Balance — June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements
4
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended June 30, | ||||||||||||||
| $ in thousands | 2022 | 2021 | ||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||||||||
| (Recovery of) provision for loan losses | ( | |||||||||||||
| Stock based compensation expense | ||||||||||||||
| Depreciation and amortization expense | ||||||||||||||
| Amortization and accretion of loan premiums and discounts and deferred charges | ( | |||||||||||||
| Amortization and accretion of premiums and discounts — securities | ||||||||||||||
| Decrease in accrued interest receivable | ||||||||||||||
| Increase in other assets | ( | ( | ||||||||||||
| Decrease in other liabilities | ( | ( | ||||||||||||
| Net cash used in operating activities | ( | ( | ||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||
| Proceeds from principal payments, maturities and calls of investments: Available-for-sale | ||||||||||||||
| Proceeds from principal payments, maturities and calls of investments: Held-to-maturity | ||||||||||||||
| Loans held-for investment, net of repayments/payoffs and (originations) | ||||||||||||||
| Loans purchased from third parties | ( | ( | ||||||||||||
| Proceeds from participation loans sold | ||||||||||||||
| Purchase of FHLB-NY stock, net | ( | ( | ||||||||||||
| Purchase of premises and equipment | ( | ( | ||||||||||||
| Net cash provided by (used in) investing activities | ( | |||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||
| Net (decrease) increase in deposits | ( | |||||||||||||
| Increase (decrease) in FHLB-NY advances and other borrowings | ( | |||||||||||||
| Increase in long-term debt | ||||||||||||||
| Net cash (used in) provided by financing activities | ( | |||||||||||||
| Net (decrease) increase in cash and cash equivalents | ( | |||||||||||||
| Cash and cash equivalents at beginning of period | ||||||||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||||||||
| Supplemental cash flow information: | ||||||||||||||
| Noncash financing and investing activities | ||||||||||||||
| Recognition of right-of-use asset | $ | $ | ||||||||||||
| Recognition of operating lease liability | ||||||||||||||
| Conversion of preferred stock to common stock | $ | $ | ||||||||||||
| Cash paid for: | ||||||||||||||
| Interest | $ | $ | ||||||||||||
| Income taxes | ||||||||||||||
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 and June 17, 2022. The interest rate was 5.08 % and the total amount of deferred interest was $26 thousand at June 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
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 month periods ended June 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 June 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. Less than 71 percent of the City’s pandemic-induced job losses have returned, and unemployment remains high at 6.5 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
Three Months Ended June 30, | ||||||||||||||
| $ in thousands except per share data | 2022 | 2021 | ||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| Weighted average common shares outstanding - basic | ||||||||||||||
| Weighted average common shares outstanding – diluted | ||||||||||||||
| Basic loss per common share | $ | ( | $ | ( | ||||||||||
| Diluted loss per common share | ( | ( | ||||||||||||
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 months ended June 30, 2022 and 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.
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.
8
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 June 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 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,
9
NOTE 5. OTHER COMPREHENSIVE INCOME (LOSS)
| $ in thousands | At March 31, 2022 | Other Comprehensive Income, net of tax | At June 30, 2022 | |||||||||||||||||
| Net unrealized income (loss) on securities available-for-sale | $ | ( | $ | ( | $ | ( | ||||||||||||||
| $ in thousands | At March 31, 2021 | Other Comprehensive Loss, net of tax | At June 30, 2021 | |||||||||||||||||
| Net unrealized income (loss) on securities available-for-sale | $ | ( | $ | $ | ( | |||||||||||||||
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 June 30, 2022, securities with fair value of $60.7 million, or 92.3 %, of the Bank’s total securities were classified as available-for-sale, and securities with amortized cost of $5.1 million, or 7.7 %, 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 June 30, 2022 and March 31, 2022.
Other investments as of June 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. These securities are measured at fair value with changes in fair value reflected in net income. Other investments totaled $6.1 million at June 30, 2022 and are included in Other Assets on the Statements of Financial Condition.
10
At June 30, 2022 | ||||||||||||||||||||||||||
| Amortized | Gross Unrealized | |||||||||||||||||||||||||
| $ in thousands | Cost | Gains | Losses | Fair Value | ||||||||||||||||||||||
| Available-for-Sale: | ||||||||||||||||||||||||||
| Mortgage-backed Securities: | ||||||||||||||||||||||||||
| Government National Mortgage Association | $ | $ | $ | $ | ||||||||||||||||||||||
| Federal Home Loan Mortgage Corporation | ||||||||||||||||||||||||||
| Federal National Mortgage Association | ||||||||||||||||||||||||||
| Total mortgage-backed securities | ||||||||||||||||||||||||||
| U.S. Government Agency Securities | ||||||||||||||||||||||||||
| Corporate Bonds | ||||||||||||||||||||||||||
| Muni Securities | ||||||||||||||||||||||||||
| Asset-backed Securities | ||||||||||||||||||||||||||
| Total available-for-sale | $ | $ | $ | $ | ||||||||||||||||||||||
| Held-to-Maturity: | ||||||||||||||||||||||||||
| Mortgage-backed Securities: | ||||||||||||||||||||||||||
| Government National Mortgage Association | $ | $ | $ | $ | ||||||||||||||||||||||
| Federal National Mortgage Association and Other | ||||||||||||||||||||||||||
| Total held-to maturity | $ | $ | $ | $ | ||||||||||||||||||||||
At March 31, 2022 | ||||||||||||||||||||||||||
| Amortized | Gross Unrealized | |||||||||||||||||||||||||
| $ in thousands | Cost | Gains | Losses | Fair Value | ||||||||||||||||||||||
| Available-for-Sale: | ||||||||||||||||||||||||||
| Mortgage-backed Securities: | ||||||||||||||||||||||||||
| Government National Mortgage Association | $ | $ | $ | $ | ||||||||||||||||||||||
| Federal Home Loan Mortgage Corporation | ||||||||||||||||||||||||||
| Federal National Mortgage Association | ||||||||||||||||||||||||||
| Total mortgage-backed securities | ||||||||||||||||||||||||||
| U.S. Government Agency Securities | ||||||||||||||||||||||||||
| Corporate Bonds | ||||||||||||||||||||||||||
| Muni Securities | ||||||||||||||||||||||||||
| Asset-backed Securities | ||||||||||||||||||||||||||
| Total available-for-sale | $ | $ | $ | $ | ||||||||||||||||||||||
| Held-to-Maturity: | ||||||||||||||||||||||||||
| Mortgage-backed Securities: | ||||||||||||||||||||||||||
| Government National Mortgage Association | $ | $ | $ | $ | ||||||||||||||||||||||
| Federal National Mortgage Association and Other | ||||||||||||||||||||||||||
| Total held-to-maturity | $ | $ | $ | $ | ||||||||||||||||||||||
There were no
11
At June 30, 2022 | ||||||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||||||||||||
| $ in thousands | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | ||||||||||||||||||||||||||||||||
| Available-for-Sale: | ||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| U.S. Government Agency securities | ||||||||||||||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||||||||||||||
| Muni securities | ||||||||||||||||||||||||||||||||||||||
| Asset-backed securities | ||||||||||||||||||||||||||||||||||||||
| Total available-for-sale securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Held-to-Maturity: | ||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Total held-to-maturity securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
At March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||||||||||||
| $ in thousands | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | ||||||||||||||||||||||||||||||||
| Available-for-Sale: | ||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| U.S. Government Agency securities | ||||||||||||||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||||||||||||||
| Muni securities | ||||||||||||||||||||||||||||||||||||||
| Asset-backed securities | ||||||||||||||||||||||||||||||||||||||
| Total available-for-sale securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Held-to-Maturity: | ||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Total held-to-maturity securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
A total of 23 securities had an unrealized loss at June 30, 2022 and March 31, 2022. Mortgage-backed securities, U.S. government agency securities, municipal securities and a corporate bond security represented 54.6 %, 12.5 %, 26.0 % and 6.3 %, respectively, of total available-for-sale securities in an unrealized loss position at June 30, 2022. There were four mortgage-backed securities, two U.S. government agency securities, one corporate bond and one municipal security that had an unrealized loss position for more than 12 months at June 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 June 30, 2022.
12
| $ in thousands | Amortized Cost | Fair Value | Weighted Average Yield | ||||||||||||||
| Available-for-Sale: | |||||||||||||||||
| Less than one year | $ | $ | % | ||||||||||||||
| One through five years | % | ||||||||||||||||
| Five through ten years | % | ||||||||||||||||
| After ten years | % | ||||||||||||||||
| Mortgage-backed securities | 1.43 | % | |||||||||||||||
| Total | $ | $ | % | ||||||||||||||
| Held-to-maturity: | |||||||||||||||||
| Mortgage-backed securities | $ | $ | 2.43 | % | |||||||||||||
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.
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.
13
June 30, 2022 | March 31, 2022 | |||||||||||||||||||||||||
| $ in thousands | Amount | Percent | Amount | Percent | ||||||||||||||||||||||
| Gross loans receivable: | ||||||||||||||||||||||||||
| One-to-four family | $ | % | $ | % | ||||||||||||||||||||||
| Multifamily | % | % | ||||||||||||||||||||||||
| Commercial real estate | % | % | ||||||||||||||||||||||||
Business (1) | % | % | ||||||||||||||||||||||||
Consumer (2) | % | % | ||||||||||||||||||||||||
| Total loans receivable | $ | % | $ | % | ||||||||||||||||||||||
| Unamortized premiums, deferred costs and fees, net | ||||||||||||||||||||||||||
| Allowance for loan losses | ( | ( | ||||||||||||||||||||||||
| Total loans receivable, net | $ | $ | ||||||||||||||||||||||||
(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 June 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 $7.9 million as of June 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 June 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.
14
Three months ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| $ in thousands | One-to-four family | Multifamily | Commercial Real Estate | Business | Consumer | Unallocated | Total | |||||||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Charge-offs | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||||||||||
| Provision for (recovery of) Loan Losses | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Allowance for Loan Losses Ending Balance: collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Allowance for Loan Losses Ending Balance: individually evaluated for impairment | ||||||||||||||||||||||||||||||||||||||||||||
| Loan Receivables Ending Balance: | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Ending Balance: collectively evaluated for impairment | ||||||||||||||||||||||||||||||||||||||||||||
| Ending Balance: individually evaluated for impairment | ||||||||||||||||||||||||||||||||||||||||||||
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 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Allowance for Loan Losses Ending Balance: individually evaluated for impairment | ||||||||||||||||||||||||||||||||||||||||||||
| Loan Receivables Ending Balance: | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Ending Balance: collectively evaluated for impairment | ||||||||||||||||||||||||||||||||||||||||||||
| Ending Balance: individually evaluated for impairment | ||||||||||||||||||||||||||||||||||||||||||||
Three months ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| $ in thousands | One-to-four family | Multifamily | Commercial Real Estate | Business | Consumer | Unallocated | Total | |||||||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Charge-offs | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||||||||||
| Provision for (recovery of) Loan Losses | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
15
The following is a summary of nonaccrual loans at June 30, 2022 and March 31, 2022.
| $ in thousands | June 30, 2022 | March 31, 2022 | |||||||||
| Gross loans receivable: | |||||||||||
| One-to-four family | $ | $ | |||||||||
| Multifamily | |||||||||||
| Commercial real estate | |||||||||||
| Business | |||||||||||
| Consumer | |||||||||||
| Total nonaccrual loans | $ | $ | |||||||||
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 June 30, 2022 and March 31, 2022, other non-performing assets totaled $60 one no
Although we believe that substantially all risk elements at June 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.
| $ in thousands | Multifamily | Commercial Real Estate | Business | |||||||||||||||||
| Credit Risk Profile by Internally Assigned Grade: | ||||||||||||||||||||
| Pass | $ | $ | $ | |||||||||||||||||
| Special Mention | ||||||||||||||||||||
| Substandard | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
| One-to-four family | Consumer | |||||||||||||||||||
| Credit Risk Profile Based on Payment Activity: | ||||||||||||||||||||
| Performing | $ | $ | ||||||||||||||||||
| Non-Performing | ||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||
16
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 | $ | $ | $ | |||||||||||||||||
| Special Mention | ||||||||||||||||||||
| Substandard | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
| One-to-four family | Consumer | |||||||||||||||||||
| Credit Risk Profile Based on Payment Activity: | ||||||||||||||||||||
| Performing | $ | $ | ||||||||||||||||||
| Non-Performing | ||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||
.
June 30, 2022 | ||||||||||||||||||||||||||||||||||||||
| $ in thousands | 30-59 Days Past Due | 60-89 Days Past Due | 90 or More Days Past Due | Total Past Due | Current | Total Loans Receivables | ||||||||||||||||||||||||||||||||
| One-to-four family | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Multifamily | ||||||||||||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||||||||
| Business | ||||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| $ in thousands | 30-59 Days Past Due | 60-89 Days Past Due | 90 or More Days Past Due | Total Past Due | Current | Total Loans Receivables | ||||||||||||||||||||||||||||||||
| One-to-four family | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Multifamily | ||||||||||||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||||||||
| Business | ||||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
At June 30, 2022 | At March 31, 2022 | |||||||||||||||||||||||||||||||||||||
| $ in thousands | Recorded Investment | Unpaid Principal Balance | Associated Allowance | Recorded Investment | Unpaid Principal Balance | Associated Allowance | ||||||||||||||||||||||||||||||||
| With no specific allowance recorded: | ||||||||||||||||||||||||||||||||||||||
| One-to-four family | $ | $ | $ | — | $ | $ | $ | — | ||||||||||||||||||||||||||||||
| Multifamily | — | — | ||||||||||||||||||||||||||||||||||||
| Commercial real estate | — | — | ||||||||||||||||||||||||||||||||||||
| Business | — | — | ||||||||||||||||||||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||||||||||||||||||||
| One-to-four family | ||||||||||||||||||||||||||||||||||||||
| Business | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
17
The following tables presents information on average balances of impaired loans and the interest income recognized on a cash basis for the three month periods ended June 30, 2022 and 2021.
For the Three Months Ended June 30, | ||||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||||
| $ in thousands | Average Balance | Interest Income Recognized | Average Balance | Interest Income Recognized | ||||||||||||||||||||||
| With no specific allowance recorded: | ||||||||||||||||||||||||||
| One-to-four family | $ | $ | $ | $ | ||||||||||||||||||||||
| Multifamily | ||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||
| Business | ||||||||||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||||||||
| One-to-four family | ||||||||||||||||||||||||||
| Business | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
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 three months ended June 30, 2022. There were no loan modifications made during the three months ended June 30, 2021. Total TDR loans at June 30, 2022 were $7.6 million, $1.4 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 modification that was classified as a TDR during the three months ended June 30, 2022.
| Loan Modifications for the three months ended | ||||||||||||||
| June 30, 2022 | ||||||||||||||
| $ in thousands | Number of loans | Recorded investment at time of modification | ||||||||||||
| One-to-four family | $ | |||||||||||||
In an effort to proactively resolve delinquent loans, the Bank has selectively extended to certain borrowers concessions such as extensions, rate reductions or forbearance agreements. For the periods ended June 30, 2022 and 2021, there were no
At June 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 June 30, 2022 and at March 31, 2022. There were no advances or principal repayments during the three months ended June 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.
18
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.
Fair Value Measurements at June 30, 2022, Using | ||||||||||||||||||||||||||
| $ in thousands | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | ||||||||||||||||||||||
| Mortgage servicing rights | $ | $ | $ | $ | ||||||||||||||||||||||
| Investment securities | ||||||||||||||||||||||||||
| Available-for-sale: | ||||||||||||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||||
| Government National Mortgage Association | ||||||||||||||||||||||||||
| Federal Home Loan Mortgage Corporation | ||||||||||||||||||||||||||
| Federal National Mortgage Association | ||||||||||||||||||||||||||
| U.S. Government Agency securities | ||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||
| Muni securities | ||||||||||||||||||||||||||
| Asset-backed securities | ||||||||||||||||||||||||||
| Total available-for-sale securities | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
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Fair Value Measurements at March 31, 2022, Using | ||||||||||||||||||||||||||
| $ in thousands | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | ||||||||||||||||||||||
| Mortgage servicing rights | $ | $ | $ | $ | ||||||||||||||||||||||
| Investment securities | ||||||||||||||||||||||||||
| Available-for-sale: | ||||||||||||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||||
| Government National Mortgage Association | ||||||||||||||||||||||||||
| Federal Home Loan Mortgage Corporation | ||||||||||||||||||||||||||
| Federal National Mortgage Association | ||||||||||||||||||||||||||
| U.S. Government Agency securities | ||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||
| Muni securities | ||||||||||||||||||||||||||
| Asset-backed securities | ||||||||||||||||||||||||||
| Total available-for-sale securities | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
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 June 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.
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 three month period ended June 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.
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| $ in thousands | Beginning balance, April 1, 2022 | Total Realized/Unrealized Gains/(Losses) Recorded in Income (1) | Issuances / (Settlements) | Transfers to/(from) Level 3 | Ending balance, June 30, 2022 | Change in Unrealized Gains/(Losses) Related to Instruments Held at June 30, 2022 | |||||||||||||||||||||||||||||
| Mortgage servicing rights | |||||||||||||||||||||||||||||||||||
| $ in thousands | Beginning balance, April 1, 2021 | Total Realized/Unrealized Gains/(Losses) Recorded in Income (1) | Issuances / (Settlements) | Transfers to/(from) Level 3 | Ending balance, June 30, 2021 | Change in Unrealized Gains/(Losses) Related to Instruments Held at June 30, 2021 | |||||||||||||||||||||||||||||
| Mortgage servicing rights | |||||||||||||||||||||||||||||||||||
(1) Includes net servicing cash flows and the passage of time.
| $ in thousands | Fair Value June 30, 2022 | Valuation Technique | Significant Unobservable Inputs | Significant Unobservable Input Value | ||||||||||||||||||||||
| Mortgage servicing rights | Discounted Cash Flow | Weighted Average Constant Prepayment Rate (1) | % | |||||||||||||||||||||||
| Option Adjusted Spread ("OAS") applied to Treasury curve | 1000 basis points | |||||||||||||||||||||||||
| $ in thousands | Fair Value March 31, 2022 | Valuation Technique | Significant Unobservable Inputs | Significant Unobservable Input Value | ||||||||||||||||||||||
| Mortgage servicing rights | Discounted Cash Flow | Weighted Average Constant Prepayment Rate (1) | % | |||||||||||||||||||||||
| Option Adjusted Spread ("OAS" applied to Treasury curve | 1000 basis points | |||||||||||||||||||||||||
(1) Represents annualized loan repayment rate assumptions
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 June 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 June 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 | $ | $ | $ | $ | ||||||||||||||||||||||
| Other real estate owned | $ | |||||||||||||||||||||||||
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 | $ | $ | $ | $ | ||||||||||||||||||||||
| Other real estate owned | $ | |||||||||||||||||||||||||
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| $ in thousands | Fair Value June 30, 2022 | Valuation Technique | Significant Unobservable Inputs | Significant Unobservable Input Value | ||||||||||||||||||||||
| Impaired loans | $ | Appraisal of collateral | Appraisal adjustments | 7.5% cost to sell | ||||||||||||||||||||||
| Other real estate owned | 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 | $ | Appraisal of collateral | Appraisal adjustments | 7.5% cost to sell | ||||||||||||||||||||||
| Other real estate owned | 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.
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.
June 30, 2022 | ||||||||||||||||||||||||||||||||
| $ in thousands | Carrying Amount | Estimated 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 | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Securities available-for-sale | ||||||||||||||||||||||||||||||||
| Securities held-to-maturity | ||||||||||||||||||||||||||||||||
| Loans receivable | ||||||||||||||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||||||||||||||
| Mortgage servicing rights | ||||||||||||||||||||||||||||||||
| Financial Liabilities: | ||||||||||||||||||||||||||||||||
| Deposits | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Advances from FHLB of New York | ||||||||||||||||||||||||||||||||
| Other borrowed money | ||||||||||||||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||||||||||||||
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March 31, 2022 | ||||||||||||||||||||||||||||||||
| $ in thousands | Carrying Amount | Estimated 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 | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Securities available-for-sale | ||||||||||||||||||||||||||||||||
| Securities held-to-maturity | ||||||||||||||||||||||||||||||||
| Loans receivable | ||||||||||||||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||||||||||||||
| Mortgage servicing rights | ||||||||||||||||||||||||||||||||
| Financial Liabilities: | ||||||||||||||||||||||||||||||||
| Deposits | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Other borrowed money | ||||||||||||||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||||||||||||||
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 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. Interchangee 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.
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Three Months Ended June 30, | ||||||||||||||
| $ in thousands | 2022 | 2021 | ||||||||||||
| Non-interest income | ||||||||||||||
| In-scope of Topic 606 | ||||||||||||||
| Depository fees and charges | $ | $ | ||||||||||||
| Loan fees and service charges | ||||||||||||||
| Other non-interest income | ||||||||||||||
| Non-interest income (in-scope of Topic 606) | ||||||||||||||
| Non-interest income (out-of-scope of Topic 606) | ||||||||||||||
| Total non-interest income | $ | $ | ||||||||||||
Three Months Ended June 30, | ||||||||||||||
| $ in thousands | 2022 | 2021 | ||||||||||||
| Other non-interest income: | ||||||||||||||
| Correspondent banking fees | $ | $ | ||||||||||||
| Other | ||||||||||||||
| Total non-interest income | $ | $ | ||||||||||||
| Other non-interest expense: | ||||||||||||||
| Advertising | $ | $ | ||||||||||||
| Legal expense | ||||||||||||||
| Insurance and surety | ||||||||||||||
| Audit expense | ||||||||||||||
| Data lines / internet | ||||||||||||||
| Security services | ||||||||||||||
| Retail expenses | ||||||||||||||
| Loss contingency | ||||||||||||||
| Director's fees | ||||||||||||||
| Other | ||||||||||||||
| Total non-interest expense | $ | $ | ||||||||||||
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 June 30, 2022, operating ROU lease assets and related lease liabilities totaled $13.0 million and $13.8 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.
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As of June 30, 2022, the Company had $34 thousand and $25 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.
June 30, 2022 | ||||||||
| Weighted-average remaining lease term | ||||||||
| Operating leases | ||||||||
| Finance lease | ||||||||
| Weighted-average discount rate | ||||||||
| Operating leases | % | |||||||
| Finance lease | % | |||||||
Three Months Ended June 30, | ||||||||||||||
| $ in thousands | 2022 | 2021 | ||||||||||||
| Operating lease expense | $ | $ | ||||||||||||
| Finance lease cost | ||||||||||||||
| Amortization of right-of use asset | ||||||||||||||
| Interest on lease liability | ||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||
| Operating leases | ||||||||||||||
| Finance lease | ||||||||||||||
| $ in thousands | Operating Leases | Finance Leases | ||||||||||||
| Year ending March 31, | ||||||||||||||
| 2023 | $ | $ | ||||||||||||
| 2024 | ||||||||||||||
| 2025 | ||||||||||||||
| 2026 | ||||||||||||||
| 2027 | ||||||||||||||
| Thereafter | ||||||||||||||
| Total lease payments | ||||||||||||||
| Interest | ( | ( | ||||||||||||
| Lease liability | $ | $ | ||||||||||||
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.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
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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;
•changes to state rent control laws, which may impact the credit quality of multifamily housing loans;
•our ability to control costs and expenses;
27
•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 four 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 $690.9 million in assets and 109 employees as of June 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, 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.
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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 70-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 June 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 | $ | 13,026 | $ | 403 | $ | — | $ | — | $ | 13,429 | |||||||||||
(1) Carver Statutory Trust I debt investment includes deferred interest of $26 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. Citing strong job gains, the Federal Reserve approved a second consecutive interest rate hike in July 2022, and will likely continue to increase the rate to bring down inflation that is at a 40-year high. A rising rate environment can negatively impact the Company if 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.
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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:
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.
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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 June 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.
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 $10.0
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million, or 62.9%, to $25.9 million at June 30, 2022, compared to $15.9 million at March 31, 2022 as the Bank secured a $10 million overnight advance from the FHLB-NY at quarter-end. At June 30, 2022, based on available collateral held at the FHLB-NY, Carver Federal had the ability to borrow from the FHLB-NY an additional $36.2 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 three months ended June 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 June 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 June 30, 2022 and March 31, 2022, assets qualifying for short-term liquidity, including cash and cash equivalents, totaled $43.4 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 three months ended June 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 three months ended June 30, 2022, total cash and cash equivalents decreased $17.6 million to $43.4 million at June 30, 2022, compared to $61.0 million at March 31, 2022, reflecting cash used in financing activities of $29.8 million and cash used in operating activities of $14.8 million, partially offset by cash provided by investing activities of $27.0 million. Net cash used in financing activities of $29.8 million resulted from a net decrease in deposits of $39.8 million, partially offset by an increase of $10.0 million in FHLB-NY advances and other borrowings. The net decrease in deposits was primarily attributable to large outflows from several accounts, including $30.7 million from a customer relationship and $10.1 million from a brokered money market account. The Bank secured a $10.0 million overnight advance from the FHLB-NY on June 30, 2022 to ensure the availability of sufficient liquidity for forecasted loan closings. Net cash used in operating activities totaled $14.8 million, which was primarily due to a $4.8 million increase in other assets from the purchase of a $5.0 million bank-owned life insurance policy, and a $9.5 million decrease in other liabilities related to an outstanding teller check from the prior fiscal year that cleared during the first quarter. Net cash provided by investing activities of $27.0 million was attributable to loan principal repayments and payoffs, net of originations and purchases, and investment paydowns.
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.
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 $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, will be eligible to opt into a “Community Bank Leverage Ratio” framework. Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain
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a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules and will be considered to have met the “well capitalized” ratio requirements under the Prompt Corrective Action statutes. The CARES Act and implementing rules temporarily reduced the Community Bank Leverage Ratio to 8%, to be gradually increased back to 9% by 2022. The CARES Act also provides that, during the same time period, if a qualifying community banking organization falls no more than 1% below the community bank leverage ratio, it will have a two quarter grace period to satisfy the community bank leverage ratio. The agencies reserved the authority to disallow the use of the Community Bank Leverage Ratio by a financial institution or holding company based on the risk profile of the organization.
The table below presents the capital position of the Bank at June 30, 2022:
June 30, 2022 | ||||||||||||||
| ($ in thousands) | Amount | Ratio | ||||||||||||
| Tier 1 leverage capital | ||||||||||||||
| Regulatory capital | $ | 76,331 | 10.97 | % | ||||||||||
| Individual minimum capital requirement | 62,624 | 9.00 | % | |||||||||||
| Minimum capital requirement | 27,833 | 4.00 | % | |||||||||||
| Excess over individual minimum capital requirement | 13,707 | 1.97 | % | |||||||||||
| Common equity Tier 1 | ||||||||||||||
| Regulatory capital | $ | 76,331 | 13.87 | % | ||||||||||
| Minimum capital requirement | 38,528 | 7.00 | % | |||||||||||
| Excess | 37,803 | 6.87 | % | |||||||||||
| Tier 1 risk-based capital | ||||||||||||||
| Regulatory capital | $ | 76,331 | 13.87 | % | ||||||||||
| Minimum capital requirement | 46,784 | 8.50 | % | |||||||||||
| Excess | 29,547 | 5.37 | % | |||||||||||
| Total risk-based capital | ||||||||||||||
| Regulatory capital | $ | 82,049 | 14.91 | % | ||||||||||
| Individual minimum capital requirement | 66,048 | 12.00 | % | |||||||||||
| Minimum capital requirement | 57,792 | 10.50 | % | |||||||||||
| Excess over individual minimum capital requirement | 16,001 | 2.91 | % | |||||||||||
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 June 30, 2022, the Bank's capital level exceeded the regulatory requirements and its IMCR requirements with a Tier 1 leverage capital ratio of 10.97%, Common Equity Tier 1 capital ratio of 13.87%, Tier 1 risk-based capital ratio of 13.87%, and a total risk-based capital ratio of 14.91%.
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.
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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 June 30, 2022, the Bank continues to service 86 loans with a principal balance of $13.6 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 | (5) | |||||||
Open claims as of June 30, 2022 (1) | $ | 1,358 | ||||||
(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 three months ended June 30, 2022:
| $ in thousands | June 30, 2022 | |||||||
Representation and warranty repurchase reserve, March 31, 2022 (1) | $ | 123 | ||||||
Net adjustment to reserve for repurchase losses (2) | (26) | |||||||
Representation and warranty repurchase reserve, June 30, 2022 (1) | $ | 97 | ||||||
(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 June 30, 2022 and March 31, 2022
Assets
At June 30, 2022, total assets were $690.9 million, reflecting a decrease of $44.4 million, or 6.0%, from total assets of $735.3 million at March 31, 2022. The reduction was primarily attributable to decreases of $17.6 million in cash and cash equivalents and $24.1 million and $7.1 million in the Bank's net loan and investment portfolios, respectively, partially offset by an increase of $4.7 million in other assets.
Total cash and cash equivalents decreased $17.6 million, or 28.9%, from $61.0 million at March 31, 2022 to $43.4 million at June 30, 2022. The decrease in cash was primarily due to a decrease in total deposits of $39.8 million, partially offset by net loan activity and paydowns received on investment securities.
Total investment securities decreased $7.1 million, or 9.7%, to $65.8 million at June 30, 2022, compared to $72.9 million at March 31, 2022 due to scheduled principal payments received of approximately $3.3 million and a $3.6 million increase in unrealized losses in the available-for-sale portfolio.
Gross portfolio loans decreased $24.1 million, or 4.2%, to $555.4 million at June 30, 2022, compared to $579.5 million at March 31, 2022 primarily due to attrition and payoffs of $55.5 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 $22.4 million and loan pool purchases of $8.9 million.
Other assets increased $4.7 million, or 65.7%, to $11.9 million at June 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.
Liabilities and Equity
Total liabilities decreased $39.9 million, or 5.9%, to $640.3 million at June 30, 2022, compared to $680.2 million at March 31, 2022, primarily due to decreases in total deposits and other liabilities, partially offset by an increase in advances from the FHLB-NY.
Deposits decreased $39.8 million, or 6.3%, to $588.3 million at June 30, 2022, compared to $628.1 million at March 31, 2022, due primarily to large outflows from several deposit accounts including $30.7 million from one large customer withdrawal, and $10.1 million from a high cost brokered money market account.
Advances from the FHLB-NY and other borrowed money increased $10.0 million to $25.9 million at June 30, 2022, compared to $15.9 million at March 31, 2022. The Bank secured a $10.0 million overnight advance from the FHLB-NY to ensure the availability of sufficient liquidity for projected loan closings.
Other liabilities decreased $9.5 million, or 43.6%, to $12.3 million at June 30, 2022, compared to $21.8 million at March 31, 2022 due to a decrease in retail liabilities, primarily attributable to an outstanding teller check from the prior fiscal year that cleared during the first quarter.
Total equity decreased $4.5 million, or 8.2%, to $50.6 million at June 30, 2022, compared to $55.1 million at March 31, 2022. The decrease was due to a net loss of $0.9 million, coupled with an increase of $3.6 million in unrealized losses on securities available-for-sale for the three month period ended June 30, 2022.
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
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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 June 30, 2022:
| $ in thousands | |||||
| Commitments to fund mortgage loans | $ | 7,750 | |||
| Lines of credit | 4,072 | ||||
| Commitment to fund private equity investment | 253 | ||||
| Total | $ | 12,075 | |||
Comparison of Operating Results for the Three Months Ended June 30, 2022 and 2021
Overview
The Company reported net loss of $0.9 million for the three months ended June 30, 2022, compared to a net loss of $2.8 million for the comparable prior year quarter. The change in our results was primarily driven by an increase in net interest income and a decrease in non-interest expense. These were partially offset by a decrease in non-interest income compared to the prior year quarter.
The following table reflects selected operating ratios for the three months ended June 30, 2022 and 2021 (unaudited):
Three Months Ended June 30, | |||||||||||||||||
| Selected Financial Data: | 2022 | 2021 | |||||||||||||||
Return on average assets (1) | (0.49) | % | (1.60) | % | |||||||||||||
Return on average stockholders' equity (2) | (6.44) | % | (20.83) | % | |||||||||||||
Return on average stockholders' equity, excluding AOCI (2) (8) | (5.52) | % | (19.92) | % | |||||||||||||
Net interest margin (3) | 3.46 | % | 2.80 | % | |||||||||||||
Interest rate spread (4) | 3.36 | % | 2.65 | % | |||||||||||||
Efficiency ratio (5) | 113.55 | % | 142.65 | % | |||||||||||||
Operating expenses to average assets (6) | 4.25 | % | 5.21 | % | |||||||||||||
Average stockholders' equity to average assets (7) | 7.64 | % | 7.68 | % | |||||||||||||
Average stockholders' equity, excluding AOCI, to average assets (7) (8) | 8.91 | % | 8.03 | % | |||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 1.32 | x | 1.35 | 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
36
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.
Three Months Ended June 30, | ||||||||||||||
| $ in thousands | 2022 | 2021 | ||||||||||||
| Average Stockholders' Equity | ||||||||||||||
| Average Stockholders' Equity | $ | 53,222 | $ | 52,929 | ||||||||||
| Average AOCI | (8,839) | (2,408) | ||||||||||||
| Average Stockholders' Equity, excluding AOCI | $ | 62,061 | $ | 55,337 | ||||||||||
| Return on Average Stockholders' Equity | (6.44) | % | (20.83) | % | ||||||||||
| Return on Average Stockholders' Equity, excluding AOCI | (5.52) | % | (19.92) | % | ||||||||||
| Average Stockholders' Equity to Average Assets | 7.64 | % | 7.68 | % | ||||||||||
| Average Stockholders' Equity, excluding AOCI, to Average Assets | 8.91 | % | 8.03 | % | ||||||||||
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 $1.1 million, or 23.4%, to $5.8 million for the three months ended June 30, 2022, compared to $4.7 million for the same quarter last year.
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 three months ended June 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.
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For the Three Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||||||||||||||||
| $ in thousands | Average Balance | Interest | Average Yield/Cost | Average Balance | Interest | Average Yield/Cost | ||||||||||||||||||||||||||||||||
| Interest-Earning Assets: | ||||||||||||||||||||||||||||||||||||||
Loans (1) | $ | 566,904 | $ | 5,977 | 4.22 | % | $ | 487,020 | $ | 4,839 | 3.97 | % | ||||||||||||||||||||||||||
| Mortgage-backed securities | 36,749 | 159 | 1.73 | % | 49,446 | 244 | 1.97 | % | ||||||||||||||||||||||||||||||
Investment securities(2) | 35,931 | 165 | 1.84 | % | 45,503 | 225 | 1.98 | % | ||||||||||||||||||||||||||||||
| Money market investments | 32,300 | 72 | 0.89 | % | 82,540 | 21 | 0.10 | % | ||||||||||||||||||||||||||||||
| Total interest-earning assets | 671,884 | 6,373 | 3.80 | % | 664,509 | 5,329 | 3.20 | % | ||||||||||||||||||||||||||||||
| Non-interest-earning assets | 24,983 | 24,920 | ||||||||||||||||||||||||||||||||||||
| Total assets | $ | 696,867 | $ | 689,429 | ||||||||||||||||||||||||||||||||||
| Interest-Bearing Liabilities: | ||||||||||||||||||||||||||||||||||||||
| Deposits | ||||||||||||||||||||||||||||||||||||||
| Interest-bearing checking | $ | 58,291 | $ | 8 | 0.06 | % | $ | 47,914 | $ | 7 | 0.06 | % | ||||||||||||||||||||||||||
| Savings and clubs | 114,279 | 31 | 0.11 | % | 111,922 | 31 | 0.11 | % | ||||||||||||||||||||||||||||||
| Money market | 184,750 | 129 | 0.28 | % | 143,499 | 87 | 0.24 | % | ||||||||||||||||||||||||||||||
| Certificates of deposit | 130,910 | 246 | 0.75 | % | 149,870 | 397 | 1.06 | % | ||||||||||||||||||||||||||||||
| Mortgagors deposits | 3,545 | (3) | (0.34) | % | 2,845 | 3 | 0.42 | % | ||||||||||||||||||||||||||||||
| Total deposits | 491,775 | 411 | 0.34 | % | 456,050 | 525 | 0.46 | % | ||||||||||||||||||||||||||||||
| Borrowed money | 16,716 | 148 | 3.55 | % | 35,594 | 152 | 1.71 | % | ||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 508,491 | 559 | 0.44 | % | 491,644 | 677 | 0.55 | % | ||||||||||||||||||||||||||||||
| Non-interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||
| Demand deposits | 106,622 | 115,440 | ||||||||||||||||||||||||||||||||||||
| Other liabilities | 28,532 | 29,416 | ||||||||||||||||||||||||||||||||||||
| Total liabilities | 643,645 | 636,500 | ||||||||||||||||||||||||||||||||||||
| Stockholders' equity | 53,222 | 52,929 | ||||||||||||||||||||||||||||||||||||
| Total liabilities and equity | $ | 696,867 | $ | 689,429 | ||||||||||||||||||||||||||||||||||
| Net interest income | $ | 5,814 | $ | 4,652 | ||||||||||||||||||||||||||||||||||
| Average interest rate spread | 3.36 | % | 2.65 | % | ||||||||||||||||||||||||||||||||||
| Net interest margin | 3.46 | % | 2.80 | % | ||||||||||||||||||||||||||||||||||
(1) Includes nonaccrual loans | ||||||||||||||||||||||||||||||||||||||
(2) Includes FHLB-NY stock | ||||||||||||||||||||||||||||||||||||||
Interest Income
Interest income increased $1.1 million, or 20.8%, to $6.4 million for the three months ended June 30, 2022, compared to $5.3 million for the prior year quarter. Interest income on loans increased $1.2 million, or 25.0%, for the three months ended June 30, 2022, primarily due to a $79.9 million, or 16.4%, increase in average loan balances coupled with an increase in the average yield on the portfolio of 25 basis points. The increase in the loan portfolio was driven by a restructured lending team and funded by an increase in total deposits during the prior fiscal year. Interest income on mortgage-backed and investment securities was lower due to a decrease in average balances and yields compared to the prior year period.
Interest Expense
Interest expense decreased $0.1 million, or 14.3%, to $0.6 million for the three months ended June 30, 2022, compared to $0.7 million for the prior year quarter. Interest expense on deposits decreased $0.1 million, or 20.0%, for the three months ended June 30, 2022, primarily due to a decrease in the average balances and rates paid on certificates of deposit. Interest expense on borrowings remained relatively flat despite an increase in average rates, due to a decrease in average borrowings as the Bank paid down advances on its PPPLF at the Federal Reserve.
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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 $360 thousand unallocated reserve, or 6.4% of ALLL as of June 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.
39
The following table summarizes the activity in the ALLL for the three month periods ended June 30, 2022 and 2021 and the fiscal year ended March 31, 2022:
| $ in thousands | Three Months Ended June 30, 2022 | Fiscal Year Ended March 31, 2022 | Three Months Ended June 30, 2021 | |||||||||||||||||
| Beginning Balance | 5,624 | $ | 5,140 | $ | 5,140 | |||||||||||||||
| Less: Charge-offs | ||||||||||||||||||||
| One-to-four family | — | — | — | |||||||||||||||||
| Multifamily | — | — | — | |||||||||||||||||
| Commercial real estate | — | — | — | |||||||||||||||||
| Business | — | — | — | |||||||||||||||||
| Consumer | (13) | (257) | (55) | |||||||||||||||||
| Total charge-offs | (13) | (257) | (55) | |||||||||||||||||
| Add: Recoveries | ||||||||||||||||||||
| One-to-four family | — | 13 | — | |||||||||||||||||
| Multifamily | — | — | — | |||||||||||||||||
| Commercial real estate | — | — | — | |||||||||||||||||
| Business | 19 | 102 | 49 | |||||||||||||||||
| Consumer | 1 | 23 | 8 | |||||||||||||||||
| Total recoveries | 20 | 138 | 57 | |||||||||||||||||
| Net recoveries (charge-offs) | 7 | (119) | 2 | |||||||||||||||||
| Provision for (recovery of) loan losses | (27) | 603 | 72 | |||||||||||||||||
| Ending Balance | $ | 5,604 | $ | 5,624 | $ | 5,214 | ||||||||||||||
| Ratios: | ||||||||||||||||||||
| Net recoveries (charge-offs) to average loans outstanding (annualized) | ||||||||||||||||||||
| One-to-four family | — | % | 0.02 | % | — | % | ||||||||||||||
| Multifamily | — | % | — | % | — | % | ||||||||||||||
| Commercial real estate | — | % | — | % | — | % | ||||||||||||||
| Business | 0.05 | % | 0.06 | % | 0.13 | % | ||||||||||||||
| Consumer | (3.04) | % | (11.55) | % | (8.07) | % | ||||||||||||||
| Total loans | — | % | (0.02) | % | — | % | ||||||||||||||
| Allowance to total loans | 1.01 | % | 0.97 | % | 1.07 | % | ||||||||||||||
| Allowance to nonaccrual loans | 46.26 | % | 48.99 | % | 76.69 | % | ||||||||||||||
The Company recorded a $27 thousand recovery of loan loss for the three months ended June 30, 2022, compared to a $72 thousand provision for loan loss for the prior year quarter. Net recoveries of $7 thousand were recognized during the first quarter, compared to net recoveries of $2 thousand for the prior year quarter.
At June 30, 2022, nonaccrual loans totaled $12.1 million, or 1.8% of total assets, compared to $11.5 million, or 1.6% of total assets at March 31, 2022. The ALLL was $5.6 million at June 30, 2022, which represents a ratio of the ALLL to nonaccrual loans of 46.3% compared to a ratio of 49.0% at March 31, 2022. The ratio of the allowance for loan losses to total loans was 1.01% at June 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 June 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.
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,
40
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 June 30, 2022, loans classified as TDR totaled $7.6 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 June 30, 2022, non-performing assets totaled $12.2 million, or 1.8% 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 | June 30, 2022 | March 31, 2022 | December 31, 2021 | September 30, 2021 | June 30, 2021 | |||||||||||||||||||||||||||
Loans accounted for on a nonaccrual basis (1): | ||||||||||||||||||||||||||||||||
| Gross loans receivable: | ||||||||||||||||||||||||||||||||
| One-to-four family | $ | 4,600 | $ | 4,892 | $ | 4,919 | $ | 3,500 | $ | 3,511 | ||||||||||||||||||||||
| Multifamily | 109 | 515 | 516 | 882 | 885 | |||||||||||||||||||||||||||
| Commercial real estate | 6,170 | 4,601 | 185 | 192 | 192 | |||||||||||||||||||||||||||
| Business | 1,234 | 1,448 | 2,091 | 2,148 | 2,211 | |||||||||||||||||||||||||||
| Consumer | — | 25 | 57 | — | — | |||||||||||||||||||||||||||
| Total nonaccrual loans | 12,113 | 11,481 | 7,768 | 6,722 | 6,799 | |||||||||||||||||||||||||||
Other non-performing assets (2): | ||||||||||||||||||||||||||||||||
| Real estate owned | 60 | 60 | 60 | 60 | 60 | |||||||||||||||||||||||||||
Total non-performing assets (3) | $ | 12,173 | $ | 11,541 | $ | 7,828 | $ | 6,782 | $ | 6,859 | ||||||||||||||||||||||
| Nonaccrual loans to total loans | 2.18 | % | 1.98 | % | 1.41 | % | 1.29 | % | 1.39 | % | ||||||||||||||||||||||
| Non-performing loans to total loans | 2.18 | % | 1.98 | % | 1.41 | % | 1.29 | % | 1.39 | % | ||||||||||||||||||||||
| Non-performing assets to total assets | 1.76 | % | 1.57 | % | 1.08 | % | 0.96 | % | 1.00 | % | ||||||||||||||||||||||
| Allowance to total loans | 1.01 | % | 0.97 | % | 0.99 | % | 1.06 | % | 1.07 | % | ||||||||||||||||||||||
| Allowance to nonaccrual loans | 46.26 | % | 48.99 | % | 70.65 | % | 82.04 | % | 76.69 | % | ||||||||||||||||||||||
(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. | ||||||||||||||||||||||||||||||||
(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. | ||||||||||||||||||||||||||||||||
(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 June 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 June 30, 2022, the Bank had $3.0 million in subprime loans, or 0.5% of its total loan portfolio, of which $0.7 million are non-performing loans.
41
Non-Interest Income
Non-interest income decreased $0.9 million, or 56.3%, to $0.7 million for the three months ended June 30, 2022, compared to $1.6 million for the prior year quarter. Other non-interest income in the prior year quarter included $0.9 million correspondent banking fees related to the Bank's servicing of PPPLF activity for a correspondent bank.
Non-Interest Expense
Non-interest expense decreased $1.6 million, or 17.8%, to $7.4 million for the three months ended June 30, 2022, compared to $9.0 million for the prior year quarter. Other non-interest expense in the prior year quarter included a $2.1 million loss contingency accrual related to a wire fraud matter that occurred during the first quarter of the prior fiscal year. In addition, data processing costs were lower compared to the prior year period as the Company was able to utilize flex credits received from its current core service provider related to conversion costs associated with the Bank's upgrade to a new core banking system. These decreases were partially offset by higher compensation and benefits and consulting fees compared to the prior year period. The increased use of consultants was 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 June 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 June 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.
42
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 June 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 first quarter ended June 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 | |||||||||||
| 3.3 | |||||||||||
| 4.1 | Stock Certificate of Carver Bancorp, Inc. (1) | ||||||||||
| 4.2 | |||||||||||
| 4.3 | |||||||||||
| 4.4 | |||||||||||
| 4.5 | |||||||||||
| 4.6 | |||||||||||
| 31.1 | |||||||||||
| 31.2 | |||||||||||
| 32.1 | |||||||||||
| 32.2 | |||||||||||
| 101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in XBRL (Extensive Business Reporting Language): (i) Consolidated Statements of Financial Condition as of June 30, 2022 (unaudited) and March 31, 2022; (ii) Consolidated Statements of Operations for the three months ended June 30, 2022 and 2021 (unaudited); (iii) Consolidated Statements of Comprehensive Income/(Loss) for the three months ended June 30, 2022 and 2021 (unaudited); (iv) Consolidated Statements of Changes in Equity for the three months ended June 30, 2022 and 2021 (unaudited); (v) Consolidated Statements of Cash Flows for the three months ended June 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 June 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. | ||||||||||
44
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: | August 15, 2022 | /s/ Michael T. Pugh | ||||||
| Michael T. Pugh | ||||||||
| President and Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| Date: | August 15, 2022 | /s/ Christina L. Maier | ||||||
| Christina L. Maier | ||||||||
| First Senior Vice President and Chief Financial Officer | ||||||||
| (Principal Accounting Officer and Principal Financial Officer) | ||||||||
45
Exhibit 31.1
CERTIFICATIONS
I, Michael T. Pugh, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Carver Bancorp, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: | August 15, 2022 | /s/ Michael T. Pugh | ||||||
| Michael T. Pugh | ||||||||
| President and Chief Executive Officer | ||||||||
Exhibit 31.2
CERTIFICATIONS
I, Christina L. Maier, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Carver Bancorp, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: | August 15, 2022 | /s/ Christina L. Maier | ||||||
| Christina L. Maier | ||||||||
First Senior Vice President and Chief Financial Officer | ||||||||
Principal Accounting Officer and Principal Financial Officer | ||||||||
Exhibit 32.1
CERTIFICATION FURNISHED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 18 U.S.C SECTION 1350
The undersigned, Michael T. Pugh, is the President and Chief Executive Officer of Carver Bancorp, Inc. (the “Company”).
This certification is being furnished in connection with the filing by the Company of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 (the “Report”).
I certify that:
a)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
b)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report.
| Date: | August 15, 2022 | /s/ Michael T. Pugh | ||||||
Michael T. Pugh | ||||||||
| President and Chief Executive Officer | ||||||||
Exhibit 32.2
CERTIFICATION FURNISHED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 18 U.S.C SECTION 1350
The undersigned, Christina L. Maier, is the First Senior Vice President and Chief Financial Officer of Carver Bancorp, Inc. (the “Company”).
This certification is being furnished in connection with the filing by the Company of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 (the “Report”).
By execution of this statement, I certify that:
a)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
b)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report.
| Date: | August 15, 2022 | /s/ Christina L. Maier | ||||||
| Christina L. Maier | ||||||||
First Senior Vice President and Chief Financial Officer | ||||||||
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