CARVER BANCORP, INC. Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 which may be identified by the use of such words as "may," "believe," "expect," "anticipate," "should," "plan," "estimate," "predict," "continue," and "potential" or the negative of these terms or other comparable terminology. Examples of forward-looking statements include, but are not limited to, estimates with respect to the Company's financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates. These factors include but are not limited to the following: •the effects of COVID-19, which includes, but is not limited to, the length of time that the pandemic continues, the duration of restrictive orders and the imposition of restrictions on businesses and travel, the remedial actions and stimulus measures adopted by federal, state, and local governments, the health of our employees and the inability of employees to work due to illness, quarantine, or government mandates, the business continuity plans of our customers and our vendors, the increased likelihood of cybersecurity risk, data breaches, or fraud due to employees working from home, the ability of our borrowers to continue to repay their loan obligations, and the effect of the pandemic on the general economy and the business of our borrowers;
•the ability of the Bank to comply with the Formal Agreement ("Agreement")
between the Bank and the
•the ability of the Company to obtain approval from theFederal 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 by board resolutions which require, among other things, written approval of theFederal 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; •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);
•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 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;
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--------------------------------------------------------------------------------•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 theFinancial 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 forCarver Federal Savings Bank , a federally chartered savings bank. The Company is headquartered inNew 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 serveAfrican-American communities whose residents, businesses and institutions had limited access to mainstream financial services. The Bank remains headquartered inHarlem , 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 largestAfrican-American operated banks inthe 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 inJanuary 2019 . The OCC found that a substantial majority 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$722.8 million in assets and 97 employees as ofDecember 31, 2021 . 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 withinNew 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, 29 -------------------------------------------------------------------------------- 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 inU.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 theBrooklyn ,Manhattan andQueens boroughs ofNew 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 includesKings, New York ,Bronx andQueens Counties inNew York City , and lowerWestchester 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 theNew 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
Involvement with SPE (000's) Funded Exposure Unfunded Exposure Total
Significant
Recognized Gain Total Rights unconsolidated VIE Total Involvement Equity Maximum exposure to
$ in thousands (Loss) (000's) transferred assets with SPE asset Debt Investments Investments Funding Commitments loss
Carver Statutory
Trust 1 (1) $ - $ - $ 13,400 $ 13,400 $ 13,018 $ 400 $ - $ - $ 13,418 (1) Carver Statutory Trust I debt investment includes deferred interest of
COVID-19 has impacted businesses inNew York more severely than in the rest of the nation, according to a report from theOffice of the New York State Comptroller . Since theU.S. Census Bureau began collecting and reporting data through theSmall Business Pulse Survey ,New York's small businesses have consistently reported experiencing a negative effect from the pandemic at rates that exceed the national average. Despite the fact that one in fiveNew York small businesses reported a return to normal operations inOctober 2021 , the negative impacts on small businesses with less than 500 employees persist. Small businesses account for the overwhelming majority of firms in most industry sectors inNew York . They also employ the majority of workers in industry sectors such as accommodation and food services; wholesale trade; real estate; construction; professional, scientific and technical services; and arts, entertainment and recreation. WhileNew York State went through a phased reopening upon expiration of an earlier executive order to shelter in place, maintain social distancing and close all non-essential businesses statewide, there remains a significant amount of uncertainty as certain geographic areas continue to experience surges in COVID-19 cases and governments at all levels continue to react to changes in circumstances. The impact of new restrictive measures and mandates taken or issued by governments, businesses and individuals have caused uncertainty in the financial markets. The prolonged pandemic, or any other epidemic of this sort that ultimately harms the global economy, theU.S. economy or the markets in which we operate could adversely affect Carver's operations. The long-term effects of COVID-19 on the Company's business cannot be ascertained as there remains significant uncertainty regarding the breadth and duration of business disruptions related to the 30 -------------------------------------------------------------------------------- virus. In addition, new information may emerge regarding the severity of COVID-19 or the effectiveness of the vaccines developed, causing federal, state and local governments to take additional actions to contain COVID-19 or to treat the impact. Even after formal restrictions have been lifted, changes in the behavior of customers, businesses and their employees - including social distancing - as a result of the pandemic, are unknown. The Company is closely monitoring its asset quality, liquidity, and capital positions. Management is actively working to minimize the current and future impact of this unprecedented situation, and is continuing to make adjustments to operations where appropriate or necessary to help slow the spread of the virus. In addition, as a result of further actions that may be taken to contain or reduce the impact of the COVID-19 pandemic, the Company may experience changes in the value of collateral securing outstanding loans, reductions in the credit quality of borrowers and the inability of borrowers to repay loans in accordance with their terms. The Company is actively managing the credit risk in its loan portfolio. These and similar factors and events may have substantial negative effects on the business, financial condition, and results of operations of the Company and its customers. As part of the CARES Act, the SBA is authorized to temporarily guarantee loans under a new 7(a) loan program called the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank participated as a lender in the first round of the PPP, originating approximately 203 loans totaling$34.7 million . InJanuary 2021 , the SBA reopened the PPP and began accepting applications again from participating lenders. The Bank approved and funded approximately 217 loans totaling$22.4 million in the second round of the PPP program.
Critical Accounting Policies
Note 2 to the Company's audited Consolidated Financial Statements for the year endedMarch 31, 2021 included in its Form 10-K for the year endedMarch 31, 2021 , 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, and assessment of the recoverability of the deferred tax asset 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 Form 10-K for the year endedMarch 31, 2021 .
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 onDecember 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 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
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•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.
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. 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 with the
contractual terms of the loan agreement, the loan is categorized as impaired.
Loans determined to be
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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.
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 (less estimated costs of disposal) 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. OnMarch 22, 2020 , the federal banking agencies issued an interagency statement to provide additional guidance to financial institutions who are working with borrowers affected by COVID-19. The statement provided that agencies will not criticize institutions for working with borrowers and will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings ("TDRs"). The agencies have confirmed with staff of theFinancial Accounting Standards Board that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. The statement further provided that working with borrowers that are current on existing loans, either individually or as part of a program for creditworthy borrowers who are experiencing short-term financial or operational problems as a result of COVID-19, generally would not be considered TDRs. For modification programs designed to provide temporary relief for current borrowers affected by COVID-19, financial institutions may presume that borrowers that are current on payments are not experiencing financial difficulties at the time of the modification for purposes of determining TDR status, and thus no further TDR analysis is required for each loan modification in the program.
The statement indicated that the agencies' examiners will exercise judgment in reviewing loan modifications, including TDRs, and will not automatically adversely risk rate credits that are affected by COVID-19, including those considered TDRs.
In addition, the statement noted that efforts to work with borrowers of one-to-four family residential mortgages, where the loans are prudently underwritten, and not past due or carried on nonaccrual status, will not result in the loans being considered restructured or modified for the purposes of their risk-based capital rules. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral.
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
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methodology and significant inputs used in determining the recognition of
other-than-temporary impairment. The Bank does not have any securities that are
classified as having other-than-temporary impairment in its investment portfolio
at December 31, 2021 .
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 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 $870 thousand . A valuation allowance for the net deferred tax
asset of $23.8 million has been recorded as of December 31, 2021 . The valuation
allowance was initially recorded during fiscal year 2011, and has remained
through December 31, 2021 , 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 receive
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 AMT credit was $143 thousand as of March 31,
2020 , all of which was requested to be refunded to the Company upon filing of
the fiscal year 2020 federal tax return.
Stock Repurchase Program
OnAugust 6, 2002 , the Company announced a stock repurchase program to repurchase up to 15,442 shares of its outstanding common stock. As ofDecember 31, 2021 , 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 onOctober 27, 2011 ). As a result of the Company's participation in the TARP CDCI, theTreasury Department's prior approval was required to make further repurchases. OnOctober 28, 2011 , theTreasury Department converted its preferred stock into common stock, which it continued to hold. OnAugust 6, 2020 , the Company repurchased all 2,321,286 shares of its common stock held by theTreasury Department for an aggregate purchase price of$2.5 million . The purchase price was funded by a third party grant. As ofAugust 6, 2020 , the Company is no longer bound by the TARP CDCI restrictions as theU.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 theFederal 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$20.8 34 -------------------------------------------------------------------------------- million, or 55.9%, to$16.4 million atDecember 31, 2021 , compared to$37.2 million atMarch 31, 2021 as the Bank paid down$23.3 million of its PPP liquidity facility ("PPPLF") at theFederal Reserve . AtDecember 31, 2021 , based on available collateral held at the FHLB-NY, Carver Federal had the ability to borrow from the FHLB-NY an additional$35.0 million on a secured basis, utilizing mortgage-related loans and securities as collateral. The Company also had$13.4 million in subordinated debt securities and added$2.5 million in low interest loans during the nine months endedDecember 31, 2021 . 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. AtDecember 31, 2021 andMarch 31, 2021 , assets qualifying for short-term liquidity, including cash and cash equivalents, totaled$65.7 million and$75.6 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 environment. The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During the nine months endedDecember 31, 2021 , total cash and cash equivalents decreased$9.9 million to$65.7 million atDecember 31, 2021 , compared to$75.6 million atMarch 31, 2021 , reflecting cash used in investing activities of$55.1 million and cash used in operating activities of$4.4 million , partially offset by cash provided by financing activities of$49.7 million . Net cash used in investing activities of$55.1 million was attributable to loan originations and purchases, net of principal repayments and payoffs, offset by investment paydowns. Net cash used in operating activities included a payment of approximately$3.2 million to settle the deferred interest on the Company's subordinated debt associated with its trust preferred securities during the first quarter. Net cash provided by financing activities of$49.7 million resulted from net increases in deposits of$65.5 million , partially offset by a decrease of$20.8 million in FHLB-NY advances and other borrowings. The net increase in deposits was primarily due to PPP loan funds deposited by the program borrowers into their accounts at the Bank and new deposit account relationships established as the Bank continues to expand its digital online account openings into nine states across the Northeast. The$20.8 million decrease in other borrowings was attributable to$23.3 million paydowns on the Bank's PPP liquidity facility at theFederal Reserve , offset by$2.5 million in unsecured low interest loans provided by third parties to finance eligible loans offered through the Bank's community investment initiatives loan program. In addition, cash provided by financing activities included$4.0 million capital raised from the issuance of preferred stock during the second quarter. OnDecember 14, 2021 , the Company entered into a Sales Agreement withPiper Sandler & Co. 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 through an "at-the-market" offering program "ATM Offering"). For the three months endedDecember 31, 2021 , the Company completed the sale of 100,401 shares of common stock at an average price of$9.84 under the ATM offering program. The transactions resulted in net proceeds to the Company of$1.0 million after deducting commissions and expenses. As ofFebruary 14, 2022 , the ATM Offering has a remaining availability of approximately$19.0 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 allU.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 onJanuary 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 beginningJanuary 1, 2016 . OnJanuary 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, effectiveJanuary 1, 2020 , a final rule whereby financial institutions and financial institution holding companies that have less than$10 billion in total consolidated assets and meet other qualifying criteria, 35 -------------------------------------------------------------------------------- including a leverage ratio of greater than 9%, will be eligible to opt into a "Community Bank Leverage Ratio" framework. Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies' capital rules and will be considered to have met the "well capitalized" ratio requirements under the Prompt Corrective Action statutes. The CARES Act and implementing rules temporarily reduced theCommunity Bank Leverage Ratio to 8%, to be gradually increased back to 9% by 2022. The CARES Act also provides that, during the same time period, if a qualifying community banking organization falls no more than 1% below the community bank leverage ratio, it will have a two quarter grace period to satisfy the community bank leverage ratio. The agencies reserved the authority to disallow the use of the Community Bank Leverage Ratio by a financial institution or holding company based on the risk profile of the organization. The table below presents the capital position of the Bank atDecember 31, 2021 : December 31, 2021 ($ in thousands) Amount Ratio Tier 1 leverage capital Regulatory capital $ 73,396 10.32 % Individual minimum capital requirement 64,026 9.00 % Minimum capital requirement 28,456 4.00 % Excess over individual minimum capital requirement 9,370 1.32 % Common equity Tier 1 Regulatory capital $ 73,396 13.75 % Minimum capital requirement 37,361 7.00 % Excess 36,035 6.75 % Tier 1 risk-based capital Regulatory capital $ 73,396 13.75 % Minimum capital requirement 45,367 8.50 % Excess 28,029 5.25 % Total risk-based capital Regulatory capital $ 79,070 14.81 % Individual minimum capital requirement 64,047 12.00 % Minimum capital requirement 56,041 10.50 % Excess over individual minimum capital requirement 15,023 2.81 % Bank Regulatory Matters OnOctober 23, 2015 , the Board of Directors ofCarver Bancorp, Inc. , in response to the FRB's Bank Holding Company Report of Inspection issued onApril 14, 2015 , adopted a Board Resolution (the "Resolution") as a commitment by the Company's Board to address certain supervisory concerns noted in theReserve 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 theReserve Bank . OnMay 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 theSecurities and Exchange Commission ("SEC") onMay 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 prior approval of the OCC. Furthermore, the Bank must seek the OCC's written approval and theFDIC's written concurrence before entering into any "golden parachute payments" as that term is defined under 12 U.S.C. § 1828(k) and 12C.F.R. Part 359. AtDecember 31, 2021 , the Bank's capital level exceeded the regulatory requirements and its IMCR requirements with a Tier 1 leverage capital ratio of 10.32%, Common Equity Tier 1 capital ratio of 13.75%, Tier 1 risk-based capital ratio of 13.75%, and a total risk-based capital ratio of 14.81%. 36 --------------------------------------------------------------------------------
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 December 31, 2021 , the Bank
continues to service 92 loans with a principal balance of $14.7 million for FNMA
that had been sold with standard representations and warranties.
The following table presents information on open requests from
Loans sold to FNMA
Open claims as of March 31, 2021 (1) $ 1,687
Gross new demands received -
Loans repurchased/made whole -
Demands rescinded -
Advances on open claims -
Principal payments received on open claims (314)
Open claims as of December 31, 2021 (1) $ 1,373
(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 nine months ended December 31, 2021 :
$ in thousands December 31, 2021
Representation and warranty repurchase reserve, March 31, 2021 (1) $ 181
Net adjustment to reserve for repurchase losses (2) (19)
Representation and warranty repurchase reserve,
$ 162
(1) Reported in our consolidated statements of financial condition as a component of other liabilities. (2) Component of other non-interest expense.
37
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Comparison of Financial Condition at
Assets
AtDecember 31, 2021 , total assets were$722.8 million , reflecting an increase of$46.1 million , or 6.8%, from total assets of$676.7 million atMarch 31, 2021 . The increase was primarily attributable to an increase of$69.0 million in the Bank's net loan portfolio, partially offset by decreases of$13.6 million in the investment portfolio and$9.9 million in cash and cash equivalents. Total cash and cash equivalents decreased$9.9 million , or 13.1%, from$75.6 million atMarch 31, 2021 to$65.7 million atDecember 31, 2021 . The decrease in cash was primarily due to the funding of net loan activity and repayment of advances on the PPPLF. In addition, the Company made a payment of approximately$3.2 million to settle deferred interest on the subordinated debt associated with its trust preferred securities during the first quarter of the current fiscal year. These cash outflows were partially offset by an increase in total deposits of$65.5 million and paydowns received on investment securities.
Total investment securities decreased
Gross portfolio loans increased$69.4 million , or 14.4%, to$552.9 million atDecember 31, 2021 , compared to$483.5 million atMarch 31, 2021 primarily due to loan pool purchases of$44.4 million and new loan originations of$115.0 million , of which$14.9 million were part of the SBA's PPP. The new volume was partially offset by attrition and payoffs of$84.4 million and loans participated of$6.1 million .
Liabilities and Equity
Total liabilities increased$40.7 million , or 6.5%, to$665.1 million atDecember 31, 2021 , compared to$624.4 million atMarch 31, 2021 , primarily due to increases in total deposits partially offset by decreases in other borrowings related to the PPP. Deposits increased$65.5 million , or 11.8%, to$622.1 million atDecember 31, 2021 , compared to$556.6 million atMarch 31, 2021 , due primarily to PPP loan funds deposited by the program borrowers into their accounts at the Bank and new deposit account relationships established as the Bank continued to expand its digital online account openings into nine states across the Northeast. Advances from the FHLB-NY and other borrowed money decreased$20.8 million to$16.4 million atDecember 31, 2021 , compared to$37.2 million atMarch 31, 2021 . The Bank paid down$23.3 million of its PPPLF at theFederal Reserve as it continued to receive forgiveness payments on the PPP loan portfolio. The Company borrowed$2.5 million in unsecured loans from third parties to finance eligible loans offered through the Bank's community investment initiatives loan program. Total equity increased$5.4 million , or 10.3%, to$57.7 million atDecember 31, 2021 , compared to$52.3 million atMarch 31, 2021 . The increase was primarily due to the$4.0 million raised in net proceeds from the issuance of preferred stock during the second quarter. The Company also raised approximately$1.0 million in net proceeds through the sale of common stock under the ATM offering during the third quarter of fiscal year 2022. In addition, a decrease of$1.3 million in unrealized losses on securities available-for-sale was partially offset by a net loss of$1.0 million for the nine month period endedDecember 31, 2021 . 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
38
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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 ofDecember 31, 2021 : $ in thousands Commitments to fund mortgage loans$ 21,780 Lines of credit 3,235
Commitment to fund private equity investment 253 Total
$ 25,268
Comparison of Operating Results for the Three and Nine Months Ended
2021 and 2020
Overview
The Company reported net income of $0.7 million for the three months ended
December 31, 2021 , compared to a net loss of $1.3 million for the comparable
prior year quarter. The change in our results was primarily driven by increases
in net interest income and non-interest income and a decrease in non-interest
expense. These were partially offset by an increase in the provision for loan
losses compared to the prior year quarter. For the nine months ended
December 31, 2021 , the Company reported a net loss of $1.0 million , compared to
a net loss of $2.9 million for the prior year period. The change in our results
was primarily driven by increases in net interest income and non-interest
income, partially offset by an increase in non-interest expense and a provision
for loan loss compared to a recovery of loan loss in the prior year period.
The following table reflects selected operating ratios for the three and nine
months ended
Nine Months Ended
Three Months Ended December 31, December 31,
Selected Financial Data: 2021 2020 2021 2020
Return on average assets (1) 0.39 % (0.78) % (0.19) % (0.59) %
Return on average stockholders' equity (2) 4.86 % (11.21) % (2.40) % (8.23) %
Return on average stockholders' equity, excluding
AOCI (2) (8) 4.72 % (11.15) % (2.34) % (8.26) %
Net interest margin (3) 2.95 % 2.56 % 2.96 % 2.45 %
Interest rate spread (4) 2.82 % 2.37 % 2.82 % 2.24 %
Efficiency ratio (5) 87.14 % 125.92 % 102.36 % 118.80 %
Operating expenses to average assets (6) 3.38 % 3.76 % 4.22 % 3.88 %
Average stockholders' equity to average assets
(7) 8.05 % 6.93 % 7.78 % 7.22 %
Average stockholders' equity, excluding AOCI, to
average assets (7) (8) 8.28 % 6.97 % 8.01 % 7.20 %
Average interest-earning assets to average
interest-bearing liabilities 1.40 x 1.28 x 1.37 x 1.28 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.
39
--------------------------------------------------------------------------------Non-GAAP Financial Measures
In addition to evaluating the Company's results of operations in accordance withU.S. generally accepted accounting principles ("GAAP"), management routinely supplements their evaluation with an analysis of certain non-GAAP financial measures, such as the return on average stockholders' equity excluding average accumulated other comprehensive income (loss) ("AOCI"), and average stockholders' equity excluding AOCI to average assets. Management believes these non-GAAP financial measures provide information that is useful to investors in understanding the Company's underlying operating performance and trends, and facilitates comparisons with the performance of other banks and thrifts. Return on equity measures how efficiently we generate profits from the resources provided by our net assets. Return on average stockholders' equity is calculated by dividing annualized net income (loss) attributable to Carver by average stockholders' equity, excluding AOCI. Management believes that this performance measure explains the results of the Company's ongoing businesses in a manner that allows for a better understanding of the underlying trends in the Company's current businesses. For purposes of the Company's presentation, AOCI includes the changes in the market or fair value of its investment portfolio. These fluctuations have been excluded due to the unpredictable nature of this item and is not necessarily indicative of current operating or future performance. Nine Months Ended Three Months Ended December 31, December 31, $ in thousands 2021 2020 2021 2020 Average Stockholders' Equity Average Stockholders' Equity$ 57,305 $ 46,762 $ 54,131 $ 47,485 Average AOCI (1,638) (232) (1,562) 171 Average Stockholders' Equity, excluding AOCI$ 58,943 $
46,994
Return on Average Stockholders' Equity 4.86 % (11.21) % (2.40) % (8.23) % Return on Average Stockholders' Equity, excluding AOCI 4.72 %
(11.15) % (2.34) % (8.26) %
Average Stockholders' Equity to Average Assets 8.05 % 6.93 % 7.78 % 7.22 % Average Stockholders' Equity, excluding AOCI, to Average Assets 8.28 % 6.97 % 8.01 % 7.20 %
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$1.0 million , or 24.4%, to$5.1 million for the three months endedDecember 31, 2021 , compared to$4.1 million for the same quarter last year. Net interest income increased$3.3 million , or 28.4%, to$14.9 million for the nine months endedDecember 31, 2021 , compared to$11.6 million for the prior year period. The following table sets forth certain information relating to the Company's average interest-earning assets and average interest-bearing liabilities, and their related average yields and costs for the three and nine months endedDecember 31, 2021 and 2020. 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. 40 -------------------------------------------------------------------------------- For the Three Months Ended December 31, 2021 2020 Average Average Average Average $ in thousands Balance Interest Yield/Cost Balance Interest Yield/Cost Interest-Earning Assets: Loans (1)$ 527,924 $ 5,379 4.08 %$ 462,562 $ 4,749 4.11 % Mortgage-backed securities 44,067 150 1.36 % 55,048 192 1.40 % Investment securities(2) 41,644 109 1.05 % 57,290 277 1.93 % Money market investments 73,868 27 0.15 % 72,414 21 0.12 % Total interest-earning assets 687,503 5,665 3.30 % 647,314 5,239 3.24 % Non-interest-earning assets 24,556 27,230 Total assets$ 712,059 $ 674,544 Interest-Bearing Liabilities: Deposits Interest-bearing checking$ 52,646 $ 7 0.05 %$ 27,940 $ 8 0.11 % Savings and clubs 111,647 31 0.11 % 111,268 67 0.24 % Money market 151,372 94 0.25 % 131,284 152 0.46 % Certificates of deposit 156,379 342 0.87 % 190,902 709 1.47 % Mortgagors deposits 3,259 2 0.24 % 2,240 2 0.35 % Total deposits 475,303 476 0.40 % 463,634 938 0.80 % Borrowed money 16,902 117 2.75 % 41,822 162 1.54 % Total interest-bearing liabilities 492,205 593 0.48 % 505,456 1,100 0.86 % Non-interest-bearing liabilities Demand deposits 136,165 92,085 Other liabilities 26,384 30,241 Total liabilities 654,754 627,782 Stockholders' equity 57,305 46,762 Total liabilities and equity$ 712,059 $ 674,544 Net interest income$ 5,072 $ 4,139 Average interest rate spread
2.82 % 2.37 %
Net interest margin 2.95 % 2.56 %
(1) Includes nonaccrual loans
(2) Includes FHLB-NY stock
41
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For the Nine Months Ended December 31,
2021 2020
Average Average Average Average
$ in thousands Balance Interest Yield/Cost Balance Interest Yield/Cost
Interest-Earning Assets:
Loans (1) $ 503,782 $ 15,541 4.11 % $ 451,938 $ 13,804 4.07 %
Mortgage-backed securities 46,903 552 1.57 % 37,896 509 1.79 %
Investment securities(2) 43,668 543 1.66 % 50,234 716 1.90 %
Money market investments 75,412 76 0.13 % 88,422 70 0.11 % Total interest-earning assets 669,765 16,712 3.32 % 628,490 15,099 3.20 % Non-interest-earning assets 25,649 28,996 Total assets$ 695,414 $ 657,486 Interest-Bearing Liabilities: Deposits Interest-bearing checking$ 50,344 $ 21 0.06 %$ 27,134 $ 24 0.12 % Savings and clubs 111,865 93 0.11 % 107,041 205 0.25 % Money market 147,043 270 0.24 % 121,663 428 0.47 % Certificates of deposit 150,605 1,043 0.92 % 195,461 2,387 1.62 % Mortgagors deposits 2,834 8 0.37 % 2,333 4 0.23 % Total deposits 462,691 1,435 0.41 % 453,632 3,048 0.89 % Borrowed money 25,184 389 2.05 % 37,278 492 1.75 % Total interest-bearing liabilities 487,875 1,824 0.50 % 490,910 3,540 0.96 % Non-interest-bearing liabilities Demand deposits 125,806 89,330 Other liabilities 27,602 29,761 Total liabilities 641,283 610,001 Stockholders' equity 54,131 47,485 Total liabilities and equity$ 695,414 $ 657,486 Net interest income$ 14,888 $ 11,559 Average interest rate spread 2.82 % 2.24 % Net interest margin 2.96 % 2.45 % (1) Includes nonaccrual loans (2) Includes FHLB-NY stock Interest Income Interest income increased$0.5 million , or 9.6%, to$5.7 million for the three months endedDecember 31, 2021 , compared to$5.2 million for the prior year quarter. For the nine months endedDecember 31, 2021 , interest income increased$1.6 million , or 10.6%, to$16.7 million , compared to$15.1 million for the prior year period. Interest income on loans increased$0.7 million and$1.7 million for the three and nine months endedDecember 31, 2021 , respectively, primarily due to an increase in average loan balances for the two comparative periods of$65.4 million , or 14.1%, and$51.9 million , or 11.5%, respectively. The increase in the loan portfolio was driven by a restructured lending team, funded by an increase in total deposits and supported by an increase in the Bank's total risk-based capital for the three and nine months endedDecember 31, 2021 . Interest income on investment securities was lower due to a decrease in average balances and yields compared to the prior year periods.
Interest Expense
Interest expense decreased$0.5 million , or 45.5%, to$0.6 million for the three months endedDecember 31, 2021 , compared to$1.1 million for the prior year quarter. For the nine months endedDecember 31, 2021 , interest expense decreased$1.7 million , or 48.6%, to$1.8 million , compared to$3.5 million for the prior year period. Interest expense on deposits decreased$0.4 million and$1.6 million for the three and nine months endedDecember 31, 2021 , respectively, primarily due to a decrease in the average balances and rates paid on certificates of deposit. Interest expense on borrowings decreased$0.1 42 --------------------------------------------------------------------------------
million for the three and nine months ended
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 the fourth quarter of fiscal 2020, we changed the impact rating of the economic factors (related to unemployment and inflation rate) and collateral factors from moderate to high across all loan categories. Additionally, the factors related to problem loans (including delinquency and credit quality) in the commercial real estate category were increased from moderate to high. These changes were made as a response to the ongoing and expected stressed economic environment resulting from the COVID-19 pandemic. During fiscal year 2021, we increased our qualitative factors due to the ongoing pandemic. In fiscal year 2022, we continue to maintain qualitative reserves at previous levels and lowered our risk from high to medium for improving economic factors, such as unemployment. The increase in the overall qualitative reserves quarter over quarter is related to the increase in our loan portfolio. These increases in reserves were offset by decreases in our quantitative reserve analysis as the rolling 20 quarter historical loss look back period has improved for most of our loan categories. The Bank continues to maintain a$131 thousand unallocated reserve, or 2.4% of ALLL as ofDecember 31, 2021 . 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 onDecember 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 endedMarch 31, 2021 . The following table summarizes the activity in the ALLL for the nine month periods endedDecember 31, 2021 and 2020 and the fiscal year endedMarch 31, 2021 : Nine Months Ended Fiscal Year Ended Nine Months Ended $ in thousands December 31, 2021 March 31, 2021 December 31, 2020 Beginning Balance 5,140$ 4,946 $ 4,946 Less: Charge-offs (223) (78) (76) Add: Recoveries 103 372 367 Provision for (recovery of) loan losses 468 (100) (99) Ending Balance $ 5,488$ 5,140 $ 5,138 Ratios: Net (charge-offs) recoveries to average loans outstanding (annualized) (0.03) % 0.06 % 0.09 % Allowance to total loans 0.99 % 1.06 % 1.10 % Allowance to non-performing loans 70.65 % 71.48 % 68.72 % 43
-------------------------------------------------------------------------------- The Company recorded a$192 thousand provision for loan loss for the three months endedDecember 31, 2021 , compared to a$4 thousand provision for loan loss for the prior year quarter. Net charge-offs of$219 thousand were recognized during the third quarter, compared to net recoveries of$218 thousand for the prior year quarter. For the nine months endedDecember 31, 2021 , the Company recorded a$468 thousand provision for loan loss, compared to a$99 thousand recovery of loan loss for the prior year period. Net charge-offs of$120 thousand were recognized for the nine months endedDecember 31, 2021 , compared to net recoveries of$291 thousand in the prior year period. AtDecember 31, 2021 , nonaccrual loans totaled$7.8 million , or 1.1% of total assets, compared to$7.2 million , or 1.1% of total assets atMarch 31, 2021 . The ALLL was$5.5 million atDecember 31, 2021 , which represents a ratio of the ALLL to nonaccrual loans of 70.6% compared to a ratio of 71.5% atMarch 31, 2021 . The ratio of the allowance for loan losses to total loans was 0.99% atDecember 31, 2021 , compared to 1.06% atMarch 31, 2021 . The Bank has received requests to modify loan terms to defer principal and/or interest payments from borrowers who are experiencing financial challenges due to the effects of COVID-19. The Bank has accommodated borrowers with short-term deferments for up to 3 or 4 months as requested or needed. Outside of borrowers with short-term deferments, the delinquency and non-performing assets have increased due to various reasons such as prolonged vacancy or inadequate cash flow that for some may have existed prior to COVID-19. Consistent with regulatory guidance and the provisions of the CARES Act, loans less than 30 days past due atDecember 31, 2019 that were granted COVID-19 related payment deferrals will continue to be considered current and not be reported as TDRs. As ofDecember 31, 2021 , the Bank had received a total of 71 applications for payment deferrals on approximately$72.6 million of loans. This total included 53 commercial loans totaling$66.8 million and 18 residential loans totaling$5.8 million . As ofDecember 31, 2021 , there were 6 loans remaining on deferment with outstanding principal balances totaling$7.8 million . The Bank has been working with the borrowers to determine if there is a risk of any losses associated with repayment and if any additional reserves would have to be allocated to this portfolio.
Non-performing Assets
Non-performing assets consist of nonaccrual loans, loans held-for-sale and
property acquired in settlement of loans, which is known as other real estate
owned (OREO), including foreclosure. When a borrower fails to make a payment on
a loan, the Bank and/or its loan servicers take prompt steps to have the
delinquency cured and the loan restored to current status. This includes a
series of actions such as phone calls, letters, customer visits and, if
necessary, legal action. In the event the loan has a guarantee, the Bank may
seek to recover on the guarantee, including, where applicable, from the SBA.
Loans that remain delinquent are reviewed for reserve provisions and charge-off.
The Bank's collection efforts continue after the loan is charged off, except
when a determination is made that collection efforts have been exhausted or are
not productive.
The Bank may from time to time agree to modify the contractual terms of a
borrower's loan. In cases where such modifications represent a concession to a
borrower experiencing financial difficulty, the modification is considered a
troubled debt restructuring ("TDR"). Loans modified in a TDR are placed on
nonaccrual status until the Bank determines that future collection of principal
and interest is reasonably assured, which generally requires that the borrower
demonstrate performance according to the restructured terms for a period of at
least six months. At December 31, 2021 , loans classified as TDR totaled $7.3
million , of which $5.5 million were classified as performing. At March 31, 2021 ,
loans classified as TDR totaled $7.5 million , of which $5.8 million were
classified as performing.
At
44
--------------------------------------------------------------------------------The following table sets forth information with respect to the Bank's non-performing assets at the dates indicated:
Non Performing Assets
$ in thousands December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020
Loans accounted for on a nonaccrual basis (1):
Gross loans receivable:
One-to-four family $ 4,919 $ 3,500 $ 3,511 $ 3,524 $ 3,532
Multifamily 516 882 885 369 372
Commercial real estate 185 192 192 918 1,160
Business 2,091 2,148 2,211 2,290 2,413
Consumer 57 - - 90 -
Total nonaccrual loans 7,768 6,722 6,799 7,191 7,477
Other non-performing assets (2): Real estate owned 60 60 60 60 60 Total non-performing assets (3) $ 7,828 $
6,782
Non-performing loans to total loans 1.41 % 1.29 % 1.39 % 1.49 % 1.60
%
Non-performing assets to total assets 1.08 % 0.96 % 1.00 % 1.07 % 1.10
%
Allowance to total loans 0.99 % 1.06 % 1.07 % 1.06 % 1.10
%
Allowance to non-performing loans 70.65 % 82.04 % 76.69 % 71.48 %
68.72 %
(1) Nonaccrual status denotes any loan where the delinquency exceeds 90 days past due, or in the opinion of management, the collection of contractual interest and/or principal is doubtful. Payments received on a nonaccrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on assessment of the ability to collect on the loan. (2) Other non-performing assets generally represent loans that the Bank is in the process of selling and has designated held-for-sale or property acquired by the Bank in settlement of loans less costs to sell (i.e., through foreclosure, repossession or as an in-substance foreclosure). These assets are recorded at the lower of their cost or fair value. (3) Troubled debt restructured loans performing in accordance with their modified terms for less than six months and those not performing in accordance with their modified terms are considered nonaccrual and are included in the nonaccrual category in the table above. AtDecember 31, 2021 , there were$5.5 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). AtDecember 31, 2021 , the Bank had$3.6 million in subprime loans, or 0.7% of its total loan portfolio, of which$1.0 million are non-performing loans.
Non-Interest Income
Non-interest income increased$0.9 million to$1.8 million for the three months endedDecember 31, 2021 , compared to$0.9 million for the prior year quarter. For the nine months endedDecember 31, 2021 , non-interest income increased$2.0 million , or 43.5%, to$6.6 million , compared to$4.6 million for the prior year period. Other non-interest income for the current three month and nine months endedDecember 31, 2021 included$0.2 million and$1.8 million grant income recognized from the Bank's awards through theCDFI Fund's Bank Enterprise Award and Rapid Response Program, respectively. In addition, correspondent banking fees were$1.0 million and$1.8 million higher for the three and nine months endedDecember 31, 2021 compared to the prior year periods, respectively. The prior year period included$0.9 million gains recognized from the sales of securities as management restructured the Bank's investment portfolio to improve the overall yield. Non-Interest Expense Non-interest expense decreased$0.3 million , or 4.8%, to$6.0 million for the three months endedDecember 31, 2021 , compared to$6.3 million for the prior year quarter. Data processing costs were lower compared to the prior year periods as the Company was able to utilize flex credits received from conversion costs associated with the Bank's upgrade to a new core banking system. For the nine months endedDecember 31, 2021 , non-interest expense increased$2.9 million , or 15.2%, to$22.0 million , compared to$19.1 million for the prior year period. Other non-interest expense for the current nine month period included a$2.1 million loss contingency accrual, and additional audit and legal fees related to a wire fraud matter that 45
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occurred during the first quarter of fiscal year 2022. The Bank has recovered approximately$896 thousand related to the wire fraud matter and issued a check to the depositor during the third quarter to return the funds recovered.
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