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CARVER BANCORP : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/14/2019 | 03:35pm EDT

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 which
may be identified by the use of such words as "may," "believe," "expect,"
"anticipate," "should," "plan," "estimate," "predict," "continue," and
"potential" or the negative of these terms or other comparable terminology.
Examples of forward-looking statements include, but are not limited to,
estimates with respect to the Company's financial condition, results of
operations and business that are subject to various factors that could cause
actual results to differ materially from these estimates. These factors include
but are not limited to the following:

• the 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 all future

       interest payments owed to the holders of the Company's subordinated debt

• the limitations imposed on the Company by board resolutions 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 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;

• restrictions set forth in the terms of the Series D preferred stock and in

the exchange agreement with the United States Department of the Treasury

(the "Treasury") that may limit our ability to raise additional capital;

•      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;

• changes in the level of trends of delinquencies and write-offs and in our

       allowance and provision for loan losses;


• 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;

• risks related to a high concentration of loans to borrowers secured by

       property located in our market area;

• changes in interest rates, which may reduce net interest margin and net

       interest income;

•      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


•      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.


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 eight branches and three 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 fifth consecutive "Outstanding" rating, issued by the
OCC following its most recent Community Reinvestment Act ("CRA") examination in
January 2019. The OCC found that approximately 75% of originated and purchased
loans were within Carver's 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 $572.1 million in assets and 109 employees as of June 30, 2019.

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 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.

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
eight 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

The Bank formalized its many community focused investments on August 18, 2005,
by forming Carver Community Development Corporation ("CCDC"). CCDC oversees the
Bank's participation in local economic development and other community-based
initiatives, including financial literacy activities. CCDC coordinates the
Bank's development of an innovative approach to reach the unbanked customer
market in Carver Federal's communities. Importantly, CCDC spearheads the Bank's
applications for grants and other resources to help fund these important
community activities. In this connection, Carver Federal has successfully
competed with large regional and global financial institutions in a number of
competitions for government grants and other awards.

New Markets Tax Credit Award

The New Markets Tax Credit ("NMTC") award is used to stimulate economic
development in low- to moderate-income communities. The NMTC award enables the
Bank to invest with community and development partners in economic development
projects with attractive terms including, in some cases, below market interest
rates, which may have the effect of attracting capital to underserved
communities and facilitating revitalization of the community, pursuant to the
goals of the NMTC program. NMTC awards provide a credit to Carver Federal
against Federal income taxes when the Bank makes qualified investments. The
credits are allocated over seven years from the time of the qualified
investment. Alternatively, the Bank can utilize the award in projects where
another investor entity provides funding and receives the tax benefits of the
award in exchange for the Bank receiving fee income.

In June 2006, CCDC was selected by the U.S. Department of Treasury, in a highly
competitive process, to receive an award of $59 million in NMTC. CCDC received a
second NMTC award of $65 million in May 2009, and a third award of $25 million
in August 2011.  CCDC provides funding to underlying projects. While providing
funding to investments in the NMTC eligible projects, CCDC has retained a 0.01%
interest in other special purpose entities created to facilitate the
investments, with the investors owning the remaining 99.99%.  CCDC also provides
certain administrative services to these entities and receives servicing fee
income during the term of the qualifying projects.  The Bank has determined that
it and CCDC do not have the sole power to direct activities of these special
purpose entities that significantly impact the entities' performance, and
therefore are not


the primary beneficiaries of these entities.  The Bank has a contingent
obligation to reimburse the investors for any loss or shortfall incurred as a
result of the NMTC projects not being in compliance with certain regulations
that would void the investors' ability to otherwise utilize tax credits stemming
from the award.  As of June 30, 2019, all three award allocations have been
fully utilized in qualifying projects.

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, 2019, are presented
                                Involvement with SPE (000's)                                               Funded Exposure                       Unfunded Exposure           Total
                                                         Significant                                                                                           Maximum
$ in            Recognized Gain      Total Rights    unconsolidated VIE    Total Involvement                                                  Funding        exposure to
thousands       (Loss) (000's)       transferred           assets           

with SPE asset Debt Investments Equity Investments Commitments

Trust 1(1)    $               -   $             -   $            13,400   $         13,400   $           14,941   $                400   $             
-   $          -   $ 15,341
CDE 18*                     600            13,254                     -                  -                    -                      -                  -          5,169      5,169
CDE 19                      500            10,746                11,093             11,093                    -                      1                  -          4,191      4,192
CDE 20*                     625            12,500                     -                  -                    -                      -                  -          4,875      4,875
CDE 21                      625            12,500                11,891             11,891                    -                      1                  -          4,875      4,876
Total         $           2,350   $        49,000   $            36,384   $         36,384   $           14,941   $                402   $              

- $ 19,110$ 34,453

* Entities exited the NMTC projects during fiscal years 2018 and 2019 and remain
on the above table pending final dissolution.
(1) Carver Statutory Trust I debt investment includes deferred interest of $1.9

Critical Accounting Policies

Note 2 to the Company's audited Consolidated Financial Statements for the year
ended March 31, 2019 included in its 2019 Form 10-K, 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, securities impairment, assessment of the
recoverability of the deferred tax asset, and the fair value of financial
instruments involve a high degree of complexity and require 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 cause reported results to differ materially. The following
description of these policies should be read in conjunction with the
corresponding section of the Company's fiscal 2019 Form 10-K.

Allowance for Loan and Lease Losses

The adequacy of the Bank's ALLL is determined, in accordance 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 and in
accordance with ASC Subtopics 450-20 "Loss Contingencies" and 310-10 "Accounting
by Creditors for Impairment of a Loan."  Compliance with the Interagency Policy
Statement includes management's 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.  In addition, 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 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. Further, any change in the size of the loan portfolio or
any of its components could necessitate an increase in the ALLL even though
there may not be a decline in credit quality or an increase in potential problem
loans. As such, there can never be assurance that the ALLL accurately reflects
the actual loss potential inherent in a loan portfolio.

General Reserve Allowance

Carver's maintenance of a general reserve allowance in accordance with ASC
Subtopic 450-20 includes the Bank's evaluating the risk to loss potential 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

• Construction

• 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, 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 &

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.

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.

Criticized and classified loans with at risk balances of $500,000 or more and
loans below $500,000 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. Carver also performs impairment analysis for all TDRs.


it is determined that it is probable the Bank will be unable to collect all amounts due according with the contractual terms of the loan agreement, the loan is categorized as impaired.

If the loan is determined to not be impaired, it is then placed in the
appropriate pool of criticized and classified loans to be evaluated collectively
for impairment.  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.

Troubled Debt Restructured Loans

TDRs are those loans whose terms have been modified because of deterioration in
the financial condition of the borrower and a concession is made. Modifications
could include extension of the terms of the loan, reduced interest rates,
capitalization of interest and forgiveness of accrued interest and/or principal.
Once an obligation has been restructured because of such credit problems, it
continues to be considered a TDR until paid in full. For cash flow dependent
loans, the Bank records a specific valuation allowance reserve equal to the
difference between the present value of estimated future cash flows under the
restructured terms discounted at the loan's original effective interest rate,
and the loan's original carrying value. For a collateral dependent loan, the
Bank records an impairment charge when the current estimated fair value of the
property that collateralizes the impaired loan, if any, is less than the
recorded investment in the loan. TDR loans remain on nonaccrual status until
they have performed in accordance with the restructured terms for a period of at
least six months.

Securities Impairment

The Bank's available-for-sale securities portfolio is carried at estimated fair
value, with any unrealized gains and losses, net of taxes, reported as
accumulated other comprehensive (loss) income. Securities that the Bank has the
intent and ability to hold to maturity are classified as held-to-maturity and
are carried at amortized cost. The fair values of securities in the Bank's
portfolio are based on published or securities dealers' market values and are
affected by changes in interest rates. On a quarterly basis, the Bank reviews
and evaluates the securities portfolio to determine if the decline in the fair
value of any security below its cost basis is other-than-temporary. The Bank
generally views changes in fair value caused by changes in interest rates as
temporary, which is consistent with its experience. The amount of an
other-than-temporary impairment, when there are credit and non-credit losses on
a debt security which management does not intend to sell, and for which it is
more likely than not that the Bank will not be required to sell the security
prior to the recovery of the non-credit impairment, the portion of the total
impairment that is attributable to the credit loss would be recognized in
earnings, and the remaining difference between the debt security's amortized
cost basis and its fair value would be included in other comprehensive (loss)
income. This guidance also requires additional disclosures about investments in
an unrealized loss position and the methodology and significant inputs used in
determining the recognition of other-than-temporary impairment. The Bank does
not have any other securities that are classified as having other-than-temporary
impairment in its investment portfolio at June 30, 2019.

Deferred Tax Assets

The Company records income taxes in accordance with ASC 740 Topic "Income
Taxes," as amended, using the asset and liability method. Income tax expense
(benefit) consists of income taxes currently payable/(receivable) and deferred
income taxes. Temporary differences between the basis of assets and liabilities
for financial reporting and tax purposes are measured as of the balance sheet
date. Deferred tax liabilities or recognizable deferred tax assets are
calculated on such differences, using current statutory rates, which result in
future taxable or deductible amounts. The effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes the enactment
date. Where applicable, deferred tax assets are reduced by a valuation allowance
for any portion determined not likely to be realized. Management is continually
reviewing the operation of the Company with a view to the future. Based on
management's current analysis and the appropriate accounting literature,
management is of the opinion that a full valuation allowance is appropriate.
This valuation allowance could subsequently be adjusted, by a charge or credit
to income tax expense, as changes in facts and circumstances warrant. On
December 22, 2017, the Tax Cuts and Jobs Act was signed into law, reducing the
corporate income tax rate from a 35% maximum rate to 21% effective January 1,
2018. Given that the Company has fully reserved all but $148 thousand of its
deferred tax asset, there is minimal impact to the financial statements.

On June 29, 2011, the Company raised $55 million of capital, which resulted in a
$51.4 million increase in equity after considering the effect of various
expenses associated with the capital raise. The capital raise triggered a change
in control under Section 382 of the Internal Revenue Code. Generally, Section
382 limits the utilization of an entity's net operating loss carryforwards,
general business credits, and recognized built-in losses, upon a change in
ownership. The Company is currently subject to an annual limitation of
approximately $900 thousand. A valuation allowance for net deferred tax asset of
$23.7 million


has been recorded as of June 30, 2019. The valuation allowance was initially
recorded during fiscal year 2011, and has remained through June 30, 2019, as
management concluded and continues to conclude that it is "more likely than not"
that the Company will not be able to fully realize the benefit of its deferred
tax assets. However, tax legislation passed during the Company's fiscal year
2018 now permits a corporation to received refunds for AMT credits even if there
is no taxable income As a result, at March 31, 2018, the valuation allowance was
reduced by $340 thousand, the amount of the Company's AMT credits. The amount of
the AMT credits was $148 thousand at June 30, 2019, as discussed above, and $170
thousand at March 31, 2019.

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,
2019, 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). The Company reissued
shares as restricted stock in accordance with their management recognition plan.
No shares were repurchased during the three months ended June 30, 2019. As a
result of the Company's participation in the TARP CDCI, the U.S.Treasury's
prior approval is required to make further repurchases. On October 28, 2011, the
U.S.Treasury converted its preferred stock into common stock, which the U.S.Treasury continues to hold. The Company continues to be bound by the TARP CDCI
restrictions so long as the U.S.Treasury is a common stockholder.

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 regulatory 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.  The Bank was in compliance with this policy as of June 30,

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 decreased $6.0 million, or 28.0%, to
$15.4 million at June 30, 2019, compared to $21.4 million at March 31, 2019 as
the Bank repaid short-term borrowings from the FHLB during the quarter. The Bank
secured a $2 million FHLB overnight advance at June 30, 2019. Due to the late
filing of Carver's 2016 Form 10-K (as filed with the Securities and Exchange
Commission on August 12, 2016), and the going concern language contained
therein, the FHLB-NY notified Carver on July 1, 2016 that it would be
restricting Carver's borrowings to 30-day terms. At June 30, 2019, based on
available collateral held at the FHLB-NY, Carver Federal had the ability to
borrow from the FHLB-NY an additional $54.9 million on a secured basis,
utilizing mortgage-related loans and securities as collateral.

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, 2019 and March 31, 2019, assets
qualifying for short-term liquidity, including cash and cash equivalents,
totaled $32.6 million and $31.2 million, respectively.

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

The Consolidated Statements of Cash Flows present the change in cash from
operating, investing and financing activities. During the three months ended
June 30, 2019, total cash and cash equivalents increased $1.4 million to $32.6
million at June 30, 2019, compared to $31.2 million at March 31, 2019,
reflecting cash provided by investing activities of $9.1 million and cash
provided by operating activities of $4.1 million, offset by cash used in
financing activities of $11.9 million. Net cash provided by investing activities
of $9.1 million was primarily attributable to net loan principal repayments and
investment paydowns. Net cash used in financing activities of $11.9 million
resulted from net decreases in deposits of $5.9 million and repayment of $6.0


million FHLB short-term borrowings during the first quarter. The net decrease in
deposits was primarily due to a strategic decision to not renew non-relationship
institutional certificates of deposit as loan demand was weak and renewal rates
exceeded the earnings rate on the Bank's cash deposit at the Federal Reserve.
Net cash used in operating activities totaled $4.1 million.

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'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, 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.

The table below presents the capital position of the Bank at June 30, 2019:

                                                        June 30, 2019
($ in thousands)                                      Amount      Ratio
Tier 1 leverage capital
Regulatory capital                                   $ 67,313    11.70 %
Individual minimum capital requirement                 51,800     9.00 %
Minimum capital requirement                            23,022     4.00 %

Excess over individual minimum capital requirement 15,513 2.70 %

Common equity Tier 1
Regulatory capital                                   $ 67,313    16.07 %
Minimum capital requirement                            29,326     7.00 %
Excess                                                 37,987     9.07 %

Tier 1 risk-based capital
Regulatory capital                                   $ 67,313    16.07 %
Minimum capital requirement                            35,610     8.50 %
Excess                                                 31,703     7.57 %

Total risk-based capital
Regulatory capital                                   $ 72,219    17.24 %
Individual minimum capital requirement                 50,273    12.00 %
Minimum capital requirement                            43,989    10.50 %

Excess over individual minimum capital requirement 21,946 5.24 %

Bank Regulatory Matters

On October 23, 2015, the Board of Directors of Carver Bancorp, Inc., in response
to the FRB's Bank Holding Company Report of Inspection issued on April 14, 2015,
adopted a Board Resolution ("the Resolution") as a commitment by the Company's
Board to address certain supervisory concerns noted in the Reserve Bank's
Report. The supervisory concerns are related to the Company's leverage, cash
flow and accumulated deferred interest. As a result of those concerns, the
Company is prohibited from paying any dividends without the prior written
approval of the Reserve Bank.

On May 24, 2016, the Bank entered into a Formal Agreement with the OCC to
undertake certain compliance-related and other actions as further described in
the Company's Current Report on Form 8-K as filed with the Securities and
Exchange Commission ("SEC") on May 27, 2016. 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


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

At June 30, 2019, the Bank's capital level exceeded the regulatory requirements
and its IMCR requirements with a Tier 1 leverage capital ratio of 11.70%, Common
Equity Tier 1 capital ratio of 16.07%, Tier 1 risk-based capital ratio of
16.07%, and a total risk-based capital ratio of 17.24%.

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.

Through fiscal 2011 none of the loans sold to FNMA were repurchased by the
Bank.  During fiscal 2012, 2013, 2014 and 2015 three, ten, six and one loan,
respectively, that had been sold to FNMA were repurchased by the Bank.  No loans
have been repurchased by the Bank subsequent to fiscal 2015. At June 30, 2019,
the Bank continues to service 108 loans with a principal balance of $18.6
million for FNMA that had been sold with standard representations and

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, 2019 (1)         $           1,982
Gross new demands received                                   -
Loans repurchased/made whole                                 -
Demands rescinded                                            -
Advances on open claims                                      -
Principal payments received on open claims                  (7 )
Open claims as of June 30, 2019 (1)          $           1,975

(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 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. The reserves totaled
$218 thousand as of June 30, 2019. The table below summarizes changes in our
representation and warranty reserves during the three months ended June 30,
$ in thousands                                                        June 

30, 2019 Representation and warranty repurchase reserve, March 31, 2019 (1)



Net adjustment to reserve for repurchase losses (2)                         

(8 ) Representation and warranty repurchase reserve, June 30, 2019 (1)



(1) Reported in our consolidated statements of financial condition as a component of other liabilities. (2) Component of other non-interest expense.


     Comparison of Financial Condition at June 30, 2019 and March 31, 2019


At June 30, 2019, total assets were $572.1 million, reflecting an increase of
$8.4 million, or 1.5%, from total assets of $563.7 million at March 31, 2019.
The increase is attributible to the adoption of ASU 2016-02 "Leases (Topic
842)," a new accounting standard which requires lessees to establish a
right-of-use ("ROU") asset and a lease liability on the balance sheet for all
leases with terms longer than 12 months. For the Company, this applied only to
property leases and a ROU asset totaling $20 million was established on April 1,
2019. This was partially offset by a $6.9 million decrease in the loan
portfolio, net of the allowance for loan losses, and a $1.7 million decrease in
the Bank's investment portfolio.

Total cash and cash equivalents increased $1.4 million, or 4.4%, from $31.2
million at March 31, 2019 to $32.6 million at June 30, 2019. The quarterly
increase in cash from approximately $9.1 million in scheduled loan and
securities paydowns and payoffs was partially offset by the strategic management
of intended non-relationship deposit outflows during the period, as the decline
in loan demand no longer warranted the maintenance of certain higher cost time

Total investment securities decreased $1.7 million, or 1.9%, to $89.3 million at June 30, 2019, compared to $91.0 million at March 31, 2019 due to scheduled principal payments received.

Gross portfolio loans decreased $6.9 million, or 1.6%, to $421.9 million at
June 30, 2019, compared to $428.8 million at March 31, 2019, due primarily to
attrition and payoffs of non-owner occupied commercial real estate mortgage
loans. The Bank has achieved its goal of maintaining a concentration level of
commercial real estate loans commensurate with its risk perspective.

Liabilities and Equity

Total liabilities increased $3.3 million, or 0.6%, to $519.9 million at June 30,
2019, compared to $516.6 million at March 31, 2019, primarily due to the initial
recognition of the $20 million operating lease liabilities as a result of the
adoption of ASU 2016-02. This increase was partially offset by the Bank's
managed decline in deposits and the repayment of borrowed funds.

Deposits decreased $5.9 million, or 1.2%, to $474.3 million at June 30, 2019,
compared to $480.2 million at March 31, 2019, due primarily to declines in
brokered certificate of deposit accounts. The Company did not actively pursue
the retention of certain non-relationship deposits as it has been seeking to
reduce its overall level of brokered deposits. Also, balance sheet management
called for a lower level of deposits due to weaker loan demand.

Advances from the Federal Home Loan Bank of New York and other borrowed money
decreased $6.0 million, or 28.0%, to $15.4 million at June 30, 2019, compared to
$21.4 million at March 31, 2019 as the Bank repaid FHLB short-term borrowings
during the period. The Bank secured a $2 million FHLB overnight advance at June
28, 2019.

Other liabilities decreased $4.6 million, or 30.9%, to $10.3 million at June 30,
2019, compared to $15.0 million at March 31, 2019, due primarily to the $5.3
million deferred gain on sale/leaseback of buildings recognized as a cumulative
effect adjustment to equity as a result of the adoption of ASU 2016-02.

Total equity increased $5.1 million, or 10.8%, to $52.2 million at June 30,
2019, compared to $47.1 million at March 31, 2019. The increase was primarily
due to the $5.3 million deferred gain on sale/leaseback of buildings recognized,
as discussed above. In addition, a decrease of $879 thousand in unrealized
losses on securities available-for-sale was partially offset by a net loss of
$1.1 million for the three month period.

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


The economic environment is uncertain regarding future interest rate
trends. Management monitors the Company's cumulative gap position, which is the
difference between the sensitivity to rate changes on the Company's
interest-earning assets and interest-bearing liabilities. In addition, the
Company uses various tools to monitor and manage interest rate risk, such as a
model that projects net interest income based on increasing or decreasing
interest rates.

Off-Balance Sheet Arrangements and Contractual Obligations

The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and in
connection with its overall investment strategy. These instruments involve, to
varying degrees, elements of credit, interest rate and liquidity risk. In
accordance with GAAP, these instruments are not recorded in the consolidated
financial statements. Such instruments primarily include lending obligations,
including commitments to originate mortgage and consumer loans and to fund
unused lines of credit.
The following table reflects the Bank's outstanding lending commitments and
contractual obligations as of June 30, 2019:
$ in thousands
Commitments to fund commercial and consumer loans $ 1,105
Lines of credit                                     2,291

Commitment to fund private equity investment 640 Total

                                             $ 4,036

Comparison of Operating Results for the Three Months Ended June 30, 2019 and



The Company reported a net loss of $1,139 thousand for the three months ended
June 30, 2019, compared to a net loss of $1.0 million for the comparable prior
year quarter. The change in our results was primarily driven by a decrease in
non-interest expense, offset by lower net interest income in the current period
compared to the prior year period.

The following table reflects selected operating ratios for the three months ended June 30, 2019 and 2018 (unaudited):

                                                         Three Months Ended June 30,
Selected Financial Data:                                   2019                2018
Return on average assets (1)                                (0.79 )%             (0.61 )%
Return on average stockholders' equity (2) (8)              (8.61 )%             (8.14 )%
Return on average stockholders' equity, excluding
AOCI (2) (8)                                                (8.53 )%             (7.68 )%
Net interest margin (3)                                      3.07  %              2.72  %
Interest rate spread (4)                                     2.80  %              2.50  %
Efficiency ratio (5)                                       122.17  %            117.67  %
Operating expenses to average assets (6)                     4.37  %        

4.07 % Average stockholders' equity to average assets (7) (8)

                                                          9.22  %              7.54  %
Average stockholders' equity, excluding AOCI, to
average assets (7) (8)                                       9.32  %              8.00  %
Average interest-earning assets to average
interest-bearing liabilities                                      1.26 x    

1.22 x

(1)Net income (loss), annualized, divided by average total assets.
(2)Net income (loss), annualized, divided by average total stockholders' equity.
(3)Net interest income, annualized, divided by average interest-earning assets.
(4)Combined weighted average interest rate earned less combined weighted average interest
rate cost.
(5)Operating expense divided by sum of net interest income and non-interest income.
(6)Non-interest expense, annualized, divided by average total assets.
(7)Total average stockholders' equity divided by total average assets for the period.
(8)See Non-GAAP Financial Measures disclosure for comparable GAAP measures.


Non-GAAP Financial Measures

In addition to evaluating the Company's results of operations in accordance with
U.S. generally accepted accounting principles ("GAAP"), management routinely
supplements their evaluation with an analysis of certain non-GAAP financial
measures, such as the return on average stockholders' equity excluding average
accumulated other comprehensive income (loss) ("AOCI"), and average
stockholders' equity excluding AOCI to average assets. Management believes these
non-GAAP financial measures provide information that is useful to investors in
understanding the Company's underlying operating performance and trends, and
facilitates comparisons with the performance of other banks and thrifts.
Further, the efficiency ratio is used by management in its assessment of
financial performance, including non-interest expense control.

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                                              2019            


Average Stockholders' Equity
Average Stockholders' Equity                         $        52,885$        50,633
Average AOCI                                                    (531 )      

(3,034 ) Average Stockholders' Equity, excluding AOCI $ 53,416$ 53,667

Return on Average Stockholders' Equity                         (8.61 )%               (8.14 )%
Return on Average Stockholders' Equity, excluding
AOCI                                                           (8.53 )%     

(7.68 )%

Average Stockholders' Equity to Average Assets                  9.22  %                7.54  %
Average Stockholders' Equity, excluding AOCI, to
Average Assets                                                  9.32  %                8.00  %

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 decreased $326 thousand, or 7.2%, to $4.2 million for the
three months ended June 30, 2019, compared to $4.5 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, 2019
and 2018. 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 adjustments to yield.


                                                       For the Three Months Ended June 30,
                                                 2019                                       2018
                                 Average                      Average       Average                      Average
$ in thousands                   Balance       Interest     Yield/Cost      Balance       Interest     Yield/Cost
Interest-Earning Assets:
Loans (1)                      $ 419,887$    4,823         4.59 %    $ 468,071$    5,186         4.43 %
Mortgage-backed securities        51,749            313         2.42 %       42,269            230         2.18 %
Investment securities(2)          39,920            282         2.83 %       45,690            264         2.31 %
Money market investments          31,620            167         2.12 %      106,398            443         1.67 %
Total interest-earning
assets                           543,176          5,585         4.11 %      662,428          6,123         3.70 %
Non-interest-earning assets       30,165                                      8,711
Total assets                   $ 573,341$ 671,139

Interest-bearing checking      $  24,463$        8         0.13 %    $  24,129$        8         0.13 %
Savings and clubs                 98,779             64         0.26 %      103,206             67         0.26 %
Money market                      98,550            153         0.62 %      101,817            117         0.46 %
Certificates of deposit          194,011            969         2.00 %      281,845          1,147         1.63 %
Mortgagors deposits                2,514             11         1.76 %        2,646              9         1.36 %
Total deposits                   418,317          1,205         1.16 %      513,643          1,348         1.05 %
Borrowed money                    13,469            208         6.19 %       29,612            277         3.75 %
Total interest-bearing
liabilities                      431,786          1,413         1.31 %      543,255          1,625         1.20 %
Demand deposits                   59,562                                     60,244
Other liabilities                 29,108                                     17,007
Total liabilities                520,456                                    620,506
Stockholders' equity              52,885                                     50,633
Total liabilities and equity   $ 573,341$ 671,139
Net interest income                          $    4,172$    4,498

Average interest rate spread                                    2.80 %                                     2.50 %

Net interest margin                                             3.07 %                                     2.72 %

(1) Includes nonaccrual
(2) Includes FHLB-NY stock

Interest Income

Interest income decreased $538 thousand, or 8.8%, to $5.6 million for the three
months ended June 30, 2019, compared to $6.1 million for the prior year quarter.
Interest income on loans decreased $363 thousand, or 7.0%, for the three months
ended June 30, 2019, comprised of a decrease of $533 thousand in interest income
due to a decline in average balances in the current period of $48.2 million,
which was partially offset by a current period increase of $170 thousand in
interest income due to a 16 basis-point improvement in the overall yield. The
decrease in the average loans outstanding is a result of the Bank's focused
efforts to reduce the concentration level of commercial real estate loans during
the prior fiscal years. Interest income on money market investments decreased
$276 thousand, or 62.3%, primarily due to a decline in the Bank's
interest-bearing account at the Federal Reserve Bank.

Interest Expense

Interest expense decreased $212 thousand, or 13.0%, to $1.4 million for the
three months ended June 30, 2019, compared to $1.6 million for the prior year
quarter. Interest expense on deposits decreased $143 thousand, or 10.6%, for the
three months ended June 30, 2019, primarily due to an $87.8 million decrease in
the average balances of certificates of deposit. Interest expense on borrowings
decreased from the prior period despite an increase of 244 basis points in the
cost to borrow, due to a decrease of $16.1 million in average borrowings during
the current year-to-date period.


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 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.

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, 2019.

The following table summarizes the activity in the ALLL for the three month periods ended June 30, 2019 and 2018 and the fiscal year ended March 31, 2019:

                                       Three Months Ended June     Fiscal Year Ended    Three Months Ended June
$ in thousands                                 30, 2019             March 31, 2019              30, 2018
Beginning Balance                                   4,646         $          5,126      $            5,126
Less: Charge-offs                                     (67 )                 (1,298 )                  (110 )
Add: Recoveries                                        90                    1,088                     166
(Recovery of) provision for loan
losses                                                  1                     (270 )                     5
Ending Balance                         $            4,670         $          4,646      $            5,187

Net (charge-offs) recoveries to
average loans outstanding
(annualized)                                         0.02 %                  (0.05 )%                 0.05 %
Allowance to total loans                             1.11 %                   1.08  %                 1.15 %
Allowance to non-performing loans                   50.57 %                  45.13  %                52.54 %

The Company recorded a $1 thousand provision for loan loss for the three months
ended June 30, 2019, compared to a $5 thousand provision for loan loss for the
prior year quarter. Net recoveries of $23 thousand were recognized during the
first quarter, compared to net recoveries of $56 thousand for the prior year

At June 30, 2019, nonaccrual loans totaled $9.2 million, or 1.6% of total
assets, compared to $10.3 million, or 1.8% of total assets at March 31, 2019.
The ALLL was $4.7 million at June 30, 2019, which represents a ratio of the ALLL
to nonaccrual loans of 50.6% compared to a ratio of 45.1% at March 31, 2019. The
ratio of the allowance for loan losses to total loans was 1.11% at June 30,
2019, compared to 1.08% at March 31, 2019.

Non-performing Assets

Non-performing assets consist of nonaccrual loans, loans held-for-sale and
property acquired in settlement of loans, including foreclosure. When a borrower
fails to make a payment on a loan, the Bank and/or its loan servicers take
prompt steps to have the delinquency cured and the loan restored to current
status. This includes a series of actions such as phone calls, letters, customer
visits and, if necessary, legal action. In the event the loan has a guarantee,
the Bank may seek to recover on the guarantee, including, where applicable, from
the SBA. Loans that remain delinquent are reviewed for reserve provisions and
charge-off. The Bank's collection efforts continue after the loan is charged
off, except when a determination is made that collection efforts have been
exhausted or are not productive.

The Bank may from time to time agree to modify the contractual terms of a
borrower's loan. In cases where such modifications represent a concession to a
borrower experiencing financial difficulty, the modification is considered a
troubled debt restructuring ("TDR"). Loans modified in a TDR are placed on
nonaccrual status until the Bank determines that future


collection of principal and interest is reasonably assured, which generally
requires that the borrower demonstrate a period of performance according to the
restructured terms for a period of at least six months. At June 30, 2019, loans
classified as TDR totaled $5.3 million, of which $2.4 million were classified as
performing. At March 31, 2019, loans classified as TDR totaled $5.4 million, of
which $2.2 million were classified as performing.

At June 30, 2019, non-performing assets totaled $9.5 million, or 1.7% of total
assets compared to $10.7 million, or 1.9% of total assets at March 31, 2019. The
following table sets forth information with respect to the Bank's non-performing
assets at the dates indicated:

Performing Assets

                                                                                              September 30,          June 30,
$ in thousands            June 30, 2019        March 31, 2019       December 31, 2018             2018                 2018
Loans accounted for on a nonaccrual
basis (1):
Gross loans
One-to-four family       $    4,132$     4,488$       4,508           $         4,709        $    4,809
Multifamily                   3,144                 3,214                   2,708                     2,328             2,436
Commercial real
estate                            -                   476                   1,233                       489               495
Business                      1,958                 2,051                   1,467                     1,819             2,132
Consumer                          -                    65                       -                         -                 -
Total nonaccrual
loans                         9,234                10,294                   9,916                     9,345             9,872
assets (2):
Real estate owned               311                   404                     453                       262               552
Loans held-for-sale               -                     -                       -                         -                 -
Total other
assets                          311                   404                     453                       262               552
assets (3)               $    9,545$    10,698$      10,369           $         9,607        $   10,424

Accruing loans
contractually past
maturity >
90 days (4)                      35                     -                       -                         -                 -

loans to total
loans                          2.19 %                2.40 %                  2.32 %                    2.17 %            2.18 %
assets to total
assets                         1.67 %                1.90 %                  1.76 %                    1.56 %            1.63 %
Allowance to total
loans                          1.11 %                1.08 %                  1.12 %                    1.11 %            1.15 %
Allowance to
loans                         50.57 %               45.13 %                 48.43 %                   51.28 %           52.54 %

(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
(2) Other non-performing assets generally represent loans that the Bank is in the process of selling and has designated
held-for-sale or property acquired by the Bank in settlement of loans less costs to sell (i.e., through foreclosure,
repossession or as an in-substance foreclosure). These assets are recorded at the lower of their cost or fair value.
(3) Troubled debt restructured loans performing in accordance with their modified terms for less than six months and those not
performing in accordance with their modified terms are considered nonaccrual and are included in the nonaccrual category in the
table above. At June 30, 2019, there were $2.4 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
(4) Loans 90 days or more past maturity and still accruing, which were not included in the non-performing category, are
presented in the above table.

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, 2019, the Bank had
$5.4 million in subprime loans, or 1.3% of its total loan portfolio, of which
$1.6 million are non-performing loans.

Non-Interest Income

Non-interest income decreased $344 thousand, or 26.4%, to $1.0 million for the
three months ended June 30, 2019, compared to $1.3 million for the prior year
quarter. Other non-interest income decreased from the prior year due to the
completion of NMTC projects and lower gains recognized on sales of real estate
owned. In addition, non-interest income in the prior year included $154 thousand
gain on sale of building. The total deferred gain on sale/leaseback of buildings
was recognized as a cumulative effect adjustment to equity effective April 1,
2019 with the transition to ASU 2016-02.


Non-Interest Expense

Non-interest expense decreased $557 thousand, or 8.2%, to $6.3 million for the
three months ended June 30, 2019, compared to $6.8 million for the prior year
quarter. The Company's employee compensation and benefits expense decreased $450
thousand compared to the prior year period due to a strategic reduction in
force. In addition, FDIC premiums were significantly lower as a result of the
Bank's commitment to improving its regulatory position. For the same reason, the
Bank's regulatory assessment was reduced by $33 thousand for the current
quarterly period. Operating efficiencies and improvement in the control
environment and in the regulatory infrastructure created additional
year-over-year quarterly savings in audit expense ($62 thousand), legal fees
($43 thousand), security services ($33 thousand), insurance ($21 thousand) and
various others. These decreases were partially offset by higher net occupancy
expense as the Company began making lease payments on its Main Office branch in
conjunction with the sale/leaseback of its administrative headquarters in
February 2018.

© Edgar Online, source Glimpses

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