NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Nature of operations
Carver Bancorp, Inc. (on a stand-alone basis, the “Company” or “Registrant”), was incorporated in May 1996 and its principal wholly-owned subsidiaries are Carver Federal Savings Bank (the “Bank” or “Carver Federal”) and Alhambra Holding Corp., an inactive Delaware corporation. Carver Federal's wholly-owned subsidiaries are CFSB Realty Corp., Carver Community Development Corporation (“CCDC”) and CFSB Credit Corp., which is currently inactive. The Bank has a real estate investment trust, Carver Asset Corporation ("CAC"), that was formed in February 2004.
“Carver,” the “Company,” “we,” “us” or “our” refers to the Company along with its consolidated subsidiaries. The Bank was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally-chartered mutual savings and loan association. The Bank converted to a federal savings bank in 1986. On October 24, 1994, the Bank converted from a mutual holding company structure to stock form and issued 2,314,375 shares of its common stock, par value $0.01 per share. On October 17, 1996, the Bank completed its reorganization into a holding company structure (the “Reorganization”) and became a wholly-owned subsidiary of the Company.
Carver Federal’s principal business consists of attracting deposit accounts through its branches and investing those funds in mortgage loans and other investments permitted by federal savings banks. The Bank has seven branches located throughout the City of New York that primarily serve the communities in which they operate.
In September 2003, the Company formed Carver Statutory Trust I (the “Trust”) for the sole purpose of issuing trust preferred securities and investing the proceeds in an equivalent amount of floating rate junior subordinated debentures of the Company. In accordance with Accounting Standards Codification (“ASC”) 810, “Consolidation,” Carver Statutory Trust I is unconsolidated for financial reporting purposes. On September 17, 2003, Carver Statutory Trust I issued 13,000 shares, liquidation amount $1,000 per share, of floating rate capital securities. Gross proceeds from the sale of these trust preferred debt securities of $13 million, and proceeds from the sale of the trust's common securities of $0.4 million, were used to purchase approximately $13.4 million aggregate principal amount of the Company's floating rate junior subordinated debt securities due 2033. The trust preferred debt securities are redeemable at par quarterly at the option of the Company beginning on or after September 17, 2008, and have a mandatory redemption date of September 17, 2033. Cash distributions on the trust preferred debt securities are cumulative and payable at a floating rate per annum resetting quarterly with a margin of 3.05% over the three-month LIBOR. During the second quarter of fiscal year 2017, the Company applied for and was granted regulatory approval to settle all outstanding debenture interest payments through September 2016. Such payments were made in September 2016. Interest on the debentures had been deferred beginning with the December 2016 payment, per the terms of the agreement, which permit such deferral for up to twenty consecutive quarters, as the Company is prohibited from making payments without prior regulatory approval. During the fourth quarter of fiscal year 2021, the Company applied for and was granted regulatory approval to settle all outstanding debenture interest payments through June 2021. Full payment was made on June 16, 2021. The Company deferred the September 17, 2021 interest payment, but has since had discussions with the Federal Reserve Bank of Philadelphia regarding future quarterly payments. A streamlined process has been developed for the Company to request regulatory approval to make debenture interest payments. On December 16, 2021, the Company paid the deferred interest that was due on September 17, 2021 and the regular quarterly interest payment due on December 17, 2021. All quarterly interest payments subsequent to the June 2021 payment up to and including the June 2023 payment have been made. The interest rate was 7.96% and the total amount of deferred interest was $44 thousand at March 31, 2023.
Carver may rely on dividends from Carver Federal to pay cash dividends to its stockholders and to engage in share repurchase programs. In recent years, Carver has been successful in obtaining cash independently through its capital raising efforts, which may include cash from government grants or below market-rate loans. Under the prior Formal Agreement, the OCC regulated all capital distributions, including dividend payments, by Carver Federal to Carver, and the FRB regulates dividends paid by Carver. As the subsidiary of a savings and loan association holding company, Carver Federal must file a notice or an application (depending on the proposed dividend amount) with the OCC (and a notice with the FRB) prior to the declaration of each capital distribution. The OCC will disallow any proposed dividend that, among other reasons, would result in Carver Federal’s failure to meet the OCC minimum capital requirements. Carver has suspended Carver’s regular quarterly cash dividend on its common stock.
Regulation
On October 23, 2015, the Board of Directors of the Company adopted resolutions requiring, among other things, written approval from the Federal Reserve Bank of Philadelphia prior to the declaration or payment of dividends, any increase in debt by the Company, or the redemption of Company common stock.
On May 24, 2016, the Bank entered into a Formal Agreement ("the Agreement") with the OCC to undertake certain compliance-related and other actions. As a result of the Agreement, the Bank was required to obtain the approval of the OCC prior to effecting any change in its directors or senior executive officers, paying dividends and entering into any "golden parachute payments" as that term is defined under 12 U.S.C. § 1828(k) and 12 C.F.R. Part 359. As a result of the Formal Agreement, Carver was issued an Individual Minimum Capital Ratio ("IMCR") letter by the OCC, which requires the Bank to maintain minimum regulatory capital levels of 9% for its Tier 1 leverage ratio and 12% for its total risk-based capital ratio. The Agreement was terminated on January 18, 2023. The IMCR remains in effect.
The Company continues to be subject to similar requirements that the Bank was subject to under the Agreement. The Company must provide notice to the FRB prior to effecting any change in its directors or senior executive officers. The Company is also subject to restrictions on golden parachute and indemnification payments, as set forth in 12 C.F.R. Part 359. Written approval of the Federal Reserve Bank is required prior to (1) the declaration or payment of dividends by the Company to its stockholders, (2) the declaration or payment of dividends by the Bank to the Company, (3) any distributions of interest or principal by the Company on subordinated debentures or trust preferred securities, (4) any purchases or redemptions of the Company's stock and (5) the Company incurring, increasing or guaranteeing certain long-term debt outside the ordinary course of business. These limitations could affect our operations and financial performance.
NOTE 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidated financial statement presentation
The consolidated financial statements include the accounts of the Company, the Bank and the Bank's wholly-owned or majority-owned subsidiaries, Carver Asset Corporation, CFSB Realty Corp., CCDC, and CFSB Credit Corp., which is currently inactive. All significant intercompany accounts and transactions have been eliminated in consolidation.
The Company's subsidiary, Carver Statutory Trust I, is not consolidated with Carver Bancorp, Inc. for financial reporting purposes. Carver Statutory Trust I was formed in 2003 for the purpose of issuing $13 million aggregate liquidation amount of floating rate Capital Securities due September 17, 2033 (“Capital Securities”) and $0.4 million of common securities (which are the only voting securities of Carver Statutory Trust I), which are 100% owned by Carver Bancorp, Inc., and using the proceeds to acquire Junior Subordinated Debentures issued by Carver Bancorp, Inc. Carver Bancorp, Inc. has fully and unconditionally guaranteed the Capital Securities along with all obligations of Carver Statutory Trust I under the trust agreement relating to the Capital Securities.
Variable interest entities (“VIEs”) are consolidated, as required, when Carver has controlling financial interest in these entities and is deemed to be the primary beneficiary. Carver is normally deemed to have a controlling financial interest and be the primary beneficiary if it has both (a) the power to direct activities of a VIE that most significantly impact the entities economic performance; and (b) the obligation to absorb losses of the entity that could benefit from the activities that could potentially be significant to the VIE.
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP). In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the period then ended. Amounts subject to significant estimates and assumptions are items such as the allowance for loan losses, realization of deferred tax assets, assessment of other-than-temporary impairment of securities, and the fair value of financial instruments. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses or future write-downs of real estate owned may be necessary based on changes in economic conditions in the areas where Carver Federal has extended mortgages and other credit instruments. Actual results could differ significantly from those assumptions. Current market conditions increase the risk and complexity of the judgments in these estimates.
Recent Events
The business climate continues to present significant challenges as banks continue to absorb heightened regulatory costs and compete for limited loan demand. Significant increases in food and energy prices resulted from swift increases in the rate of inflation. Additionally, the Federal Reserve has increased the federal funds rate at each of its meetings since March 2022, and while the rate was held steady at the most recent meeting in June 2023, it has indicated that it will likely increase again later this year. For Carver, the economic climate of New York City (“the City”), in particular, impacts our business as the City lags behind the rest of New York State and the nation both in restoring pandemic job losses and in rebounding to pre-pandemic levels of unemployment. The City's unemployment rate remains high at 5.4%, exceeding the national average, as employment in the arts and entertainment, food and hospitality sectors continue to remain below their pre-pandemic highs.
In March 2023, the FDIC was appointed as receiver for Silicon Valley Bank and Signature Bank after they experienced runs on deposits and other liquidity constraints. At the time, Silicon Valley Bank and Signature Bank were the 16th and 29th largest banks in the United States, respectively, as measured by total assets as of December 31, 2022. Following the failures of Silicon Valley Bank and Signature Bank, on May 1, 2023, First Republic Bank was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. The closures of those banks led to industry-wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding confidence in the banking system. In response to these recent developments, the Company took a number of preemptive actions, which included proactive outreach to clients and steps to maximize its funding sources. As a result, the Company's liquidity position remains adequate. The impact of market volatility from the adverse developments in the banking industry along with continued high inflation and rising interest rates, will depend on future developments, which are highly uncertain and difficult to predict.
The Company is closely monitoring its asset quality, liquidity, and capital positions, as well as the credit risk in its loan portfolio. Management is actively working to minimize the current and future impact of this unusual situation, and is continuing to make adjustments to operations where appropriate or necessary to mitigate risk. However, these factors and events may have negative effects on the business, financial condition, and results of operations of the Company and its customers.
Cash and cash equivalents
For the purpose of reporting cash flows, cash and cash equivalents include cash, amounts due from depository institutions and other short-term instruments with an original maturity of three months or less. The amounts due from depository institutions include an interest-bearing account held at the Federal Reserve Bank where any additional cash reserve required on demand deposits would be maintained. Currently, this reserve requirement is zero since the Bank's vault cash satisfies cash reserve requirements for deposits.
Investment Securities
When purchased, debt securities are designated as either investment securities held-to-maturity, available-for-sale or trading.
Securities are classified as held-to-maturity and carried at amortized cost only if the Bank has a positive intent and ability to hold such securities to maturity. Securities held-to-maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using the level-yield method over the remaining period until maturity.
If not classified as held-to-maturity or trading, securities are classified as available-for-sale based upon management's ability to sell in response to actual or anticipated changes in interest rates, resulting prepayment risk or any other factors. Available-for-sale securities are reported at fair value. Estimated fair values of securities are based on either published or security dealers' market value if available. If quoted or dealer prices are not available, fair value is estimated using quoted or dealer prices for similar securities.
Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value with unrealized gains and losses included in earnings.
The Company conducts periodic reviews to identify and evaluate each investment that has an unrealized holding loss. Unrealized holding gains or losses for securities available-for-sale are excluded from earnings and reported net of deferred income taxes in accumulated other comprehensive loss, a component of Stockholders' Equity. The amount of an other-than-temporary impairment when there are credit and non-credit losses on a debt security that 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. The remaining difference between the debt security's amortized cost basis and its fair value would be included in other
comprehensive income (loss). There were no other-than-temporary impairment charges recorded during the fiscal year ended March 31, 2023. Gains or losses on sales of securities of all classifications are recognized based on the specific identification method.
Loans Held-for-Sale
Loans are only transferred to held-for-sale classification upon the determination by Carver to sell a loan. Held-for-sale loans are carried at the lower of cost or fair value. The initial charge-off, if any is required, will be taken upon the transfer to held-for-sale and absorbed through Carver's loan loss reserve. Subsequent changes in fair value are recognized in earnings as a valuation allowance. The valuation methodology for loans held-for-sale varies based upon the circumstances. Held-for-sale values may be based upon accepted offer amounts, appraised value of underlying mortgaged premises, prior loan loss experience of Carver in connection with recent loan sales for the loan type in question, and/or other acceptable valuation methods.
Loans Receivable
Loans receivable are carried at unpaid principal balances plus unamortized premiums, certain deferred direct loan origination costs and deferred loan origination fees and discounts, less the allowance for loan losses and charge-offs.
The Bank defers loan origination fees and certain direct loan origination costs and amortizes or accretes such amounts as an adjustment of yield over the contractual lives of the related loans using methodologies which approximate the interest method. Premiums and discounts on loans purchased are amortized or accreted as an adjustment of yield over the contractual lives of the related loans, adjusted for prepayments when applicable, using methodologies which approximate the interest method.
Loans are placed on nonaccrual status when they are past due 90 days or more as to contractual obligations or when other circumstances indicate that collection is not probable. When a loan is placed on nonaccrual status, any interest accrued but not received is reversed against interest income. Payments received on a nonaccrual loan are either applied to protective advances, the outstanding principal balance or recorded as interest income, depending on an assessment of the ability to collect the loan. A nonaccrual loan may be restored to accrual status when principal and interest payments have been brought current and the loan has performed in accordance with its contractual terms for a reasonable period (generally six months).
If the Bank determines, after considering factors such as payment status and collateral value, that a loan is impaired, the Bank next determines the amount of the impairment. The amount of impairment on collateral dependent loans is charged off within the given fiscal quarter. Generally the amount of the loan and negative escrow in excess of the appraised value less estimated selling costs, for the fair value of collateral valuation method, is charged off. For all other loans, impairment is measured as described below in Allowance for Loan and Lease Losses.
Allowance for Loan and Lease Losses ("ALLL")
The adequacy of the Bank's ALLL is determined in accordance with ASC Subtopics 450-20 "Loss Contingencies" and 310-10 "Accounting by Creditors for Impairment of a Loan." Management reviews the Bank's loan portfolio to identify and review 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 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.
The Bank utilizes an internal loan classification system as a means of reporting problem loans within its loan categories. Loans may be classified as "Pass," “Special Mention,” “Substandard,” “Doubtful,” and “Loss.” Loans rated Pass have demonstrated satisfactory asset quality, earning history, liquidity, and other adequate margins of creditor protection. They represent a moderate credit risk and some degree of financial stability. Loans are considered collectible in full, but perhaps require greater than average amount of loan officer attention. Borrowers are capable of absorbing normal setbacks without failure. Loans rated Special Mention have potential weaknesses that deserve management's close attention. If left uncorrected,
these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank's credit position at some future date. Loans rated Substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans rated Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable. Loans classified as Loss are those considered uncollectible with insignificant value and are charged off immediately to the allowance for loan losses.
One-to-four family residential loans and consumer and other loans are rated non-performing if they are delinquent in payments ninety or more days, a troubled debt restructuring with less than six months contractual performance or past maturity. All other one-to-four family residential loans and consumer and other loans are performing loans.
General Reserve Allowance
Carver's maintenance of a general reserve allowance includes the Bank's evaluation of the risk to potential loss on homogeneous pools of loans based upon historical loss factors and a review of nine different environmental factors that are then applied to each pool. The pools of loans (“Loan Type”) are:
•One-to-four family
•Multifamily
•Commercial Real Estate
•Business Loans
•Consumer (including Overdraft Accounts)
The Bank next applies to each pool a risk factor that determines the level of general reserves for that specific pool. The Bank estimates its historical charge-offs via a lookback analysis. The actual historical loss experience by major loan category is expressed as a percentage of the outstanding balance of all loans within the category. As the loss experience for a particular loan category increases or decreases, the level of reserves required for that particular loan category also increases or decreases. The Bank’s historical charge-off rate reflects the period over which the charge-offs were confirmed and recognized, not the period over which the earlier losses occurred. That is, the charge-off rate measures the confirmation of losses over a period that occurs after the earlier actual losses. During the period between the loss-causing events and the eventual confirmations of losses, conditions may have changed. There is always a time lag between the period over which average charge-off rates are calculated and the date of the financial statements. During that period, conditions may have changed. Another factor influencing the General Reserve is the Bank’s loss emergence period ("LEP") assumptions which represent the Bank’s estimate of the average amount of time from the point at which a loss is incurred to the point at which the loss is confirmed, either through the identification of the loss or a charge-off. Based upon adequate management information systems and effective methodologies for estimating losses, management has established a LEP floor of one year on all pools. In some pools, such as Commercial Real Estate, Multifamily and Business pools, the Bank demonstrates a LEP in excess of 12 months.
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).
The following discussion describes the general risks associated with the Bank’s lending activities:
•One-to-four family - Carver Federal purchases first mortgage loans secured by one-to-four family properties that serve as the primary residence of the owner. The loans are underwritten in accordance with applicable secondary market underwriting guidelines and requirements for sale. These loans present a moderate level of risk due primarily to general economic conditions. During fiscal year 2021, the Bank also started purchasing non-qualified mortgages for one-to-four family residential loans. The Bank has approved guidelines for these loans.
•Multifamily - Carver Federal originates and purchases recourse and non-recourse multifamily loans. These loans can be affected by economic conditions and the value of the underlying properties. The Bank primarily considers the property's ability to generate net operating income sufficient to support the debt service, the financial resources, income level and managerial expertise of the borrower, the marketability of the property and the Bank's lending experience with the owner/guarantor.
•Commercial - Commercial real estate ("CRE") lending consists predominantly of originating loans for the purpose of purchasing or refinancing office, mixed-use properties, retail and church buildings in the Bank's market area. Mixed-use loans are secured by properties that are intended for both commercial and residential use, but predominantly commercial, and are classified as CRE. In originating CRE loans, the Bank primarily considers the ability of the net operating income generated by the real estate to support the debt service, the financial resources, income level and managerial expertise of the borrower, the marketability of the property and the Bank's lending experience with the owner/guarantor. The Bank also requires the assignment of rents of all tenants' leases in the mortgaged property and personal guarantees may be obtained for additional security from these borrowers. CRE loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the complexities involved in valuing the underlying collateral.
•Business - The Bank originates and purchases business and SBA loans primarily to businesses located in its primary market area and surrounding areas. Business loans are typically personally guaranteed by the owners and may also be secured by additional collateral, including real estate, equipment and inventory. Business loans are also subject to increased risk from the effect of general economic conditions. SBA loans are guaranteed by the U.S. government based on the percentage of each individual program.
•Consumer - The Consumer portfolio includes student loans to medical students enrolled in several Caribbean schools, as well as unsecured consumer loans purchased from or originated through strategic partnerships with Bankers Healthcare Group, LLC and Upstart Holdings, Inc..
Specific Reserve Allowance
Carver also maintains a specific reserve allowance for criticized and classified loans individually reviewed for impairment. The amount assigned to the specific reserve allowance is individually determined based upon the loan. Carver uses one of three 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 method on a loan-by-loan basis for an individually impaired loan, except for an impaired collateral dependent loan. Impairment of a collateral dependent loan is 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. Carver also performs impairment analysis for all troubled debt restructurings (“TDRs”). All TDRs are classified as impaired. For non-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 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 where the borrower is experiencing financial difficulty and a concession is made. A concession could include extension of the terms of the loan, reduced interest rates, capitalization of interest, a significant delay in payment terms 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 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. For all other TDRs, 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 recorded investment. TDR loans remain on nonaccrual status until they have performed in accordance with the restructured terms for a period of at least six months.
Representation and Warranty Reserve
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.
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 calculation of the reserve is based on estimates, which are uncertain, and require the application of judgment. In establishing the reserves, we consider a variety of factors, including those loans that are under review by FNMA that have not yet received a repurchase request. The Bank tracks the FNMA claims monthly and evaluates the reserve on a quarterly basis.
Segment Reporting
The Company has determined that all of its activities constitute one reportable operating segment.
Concentration of Risk
The Bank's principal lending activities are concentrated in loans secured by real estate, a substantial portion of which are located in New York City. Accordingly, the ultimate collectability of a substantial portion of the Company's loan portfolio is susceptible to changes in New York's real estate market conditions. Qualitative factors in the ALLL calculation considers the Bank's concentration risk.
Premises and Equipment
Premises and equipment are comprised of land, at cost, and buildings, building improvements, furnishings and equipment and leasehold improvements, at cost less accumulated depreciation and amortization. Depreciation and amortization charges are included in Non-Interest Expense in the consolidated statements of operations and are computed using the straight-line method over the following estimated useful lives:
| | | | | |
Buildings and improvements | 10 to 25 years |
Furnishings and equipment | 3 to 5 years |
Leasehold improvements | Lesser of useful life or remaining term of lease |
Maintenance, repairs and minor improvements are charged to non-interest expense in the period incurred.
Leases
Leases are classified as operating or finance leases at the lease commencement date. The Company includes lease renewal options in the lease term if it is reasonably certain the option will be exercised. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term. The Company uses its incremental borrowing rate, which is the rate for a fully collateralized and fully amortizing loan with a maturity date that is similar to the lease term, at lease commencement to calculate the present value of lease payments when the implicit rate in a lease is not readily determinable.
Federal Home Loan Bank Stock
The FHLB-NY has assigned to the Bank a mandated membership stock purchase, based on the Bank's asset size. In addition, for all borrowing activity, the Bank is required to purchase shares of FHLB-NY non-marketable capital stock at par. Such shares are redeemed by FHLB-NY at par with reductions in the Bank's borrowing levels. FHLB stock does not have a readily determinable fair value and we do not consider these shares to be other-than-temporarily impaired at March 31, 2023. The Bank carries this investment at historical cost.
Mortgage Servicing Rights
All separately recognized servicing assets totaled $152 thousand and $162 thousand, respectively, at March 31, 2023 and 2022, and are included in Other Assets in the consolidated statements of financial condition and measured at fair value. Changes in fair value is included in Non-Interest Income in the consolidated statements of operations. Servicing fee income of $44 thousand and $41 thousand, respectively, was recognized during the years ended March 31, 2023 and 2022, and is included in Non-Interest Income in the consolidated statements of operations.
Other Real Estate Owned
Real estate acquired by foreclosure or deed-in-lieu of foreclosure is recorded at fair value at the date of acquisition less estimated selling costs. Any subsequent adjustments will be to the lower of cost or fair value and included in Non-Interest Expense in the consolidated statements of operations. The fair value of such assets is determined based primarily upon independent appraisals and other relevant factors. The amounts ultimately recoverable from real estate owned could differ from the net carrying value of these properties because of economic conditions. Costs incurred to improve properties or prepare them for sale are capitalized. Revenues and expenses related to the holding and operating of properties are recognized in operations as earned or incurred. Gains or losses on sale of properties are recognized as incurred and are included in Non-Interest Expense in the consolidated statements of operations. As of March 31, 2023, the Bank held $60 thousand in a foreclosed residential real estate property as a result of obtaining physical possession. In addition, as of March 31, 2023 and 2022, we had residential loans with a carrying value of $3.2 million and $3.1 million, respectively, collateralized by residential real estate property for which formal foreclosure proceedings were in process.
Income Taxes
The Company records income taxes 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 more likely than not to be realized. This valuation allowance would subsequently be adjusted by a charge or credit to income tax expense as changes in facts and circumstances warrant. A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Any interest expense or penalties would be recorded as interest expense.
Earnings (Loss) per Common Share
The Company has preferred stock which are entitled to receive dividends if declared on the Company's common stock and are therefore considered to be participating securities. Basic earnings (loss) per share (“EPS”) is computed using the two class method. This calculation divides net income (loss) available to common stockholders after the allocation of undistributed
earnings to the participating securities by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. These potentially dilutive shares are then included in the weighted average number of shares outstanding for the period. Dilution calculations are not applicable to net loss periods.
Preferred and Common Dividends
The Company is prohibited from paying any dividends without prior regulatory approval pursuant to the terms of the Formal Agreement and Resolution to which it is subject, and is generally subject to regulations governing the payment of dividends. There are no assurances that the payments of common stock dividends will resume.
Treasury Stock
Treasury stock is recorded at cost and is presented as a reduction of stockholders' equity.
Stock Compensation Plans
The Company currently has multiple stock plans in place for employees and directors of the Company. The compensation cost related to share-based payment transactions is included in Employee Compensation and Benefits in the consolidated statements of operations. Compensation cost for all stock awards is calculated and recognized over a defined vesting period. Forfeitures are accounted for as they occur. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite vesting period for the entire award. The Black-Scholes model is used to estimate the fair value of stock options, while the market price of the Company's common stock at the date of grant is used for restricted stock awards.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the consolidated statements of condition when they are funded. Reserves for unfunded lending commitments are included in Other Liabilities in the consolidated statements of financial condition.
Grant Income
Designated as a Community Development Financial Institution ("CDFI") by the U.S. Department of the Treasury, the Bank is eligible for, and on occasion receives, assistance from the government and other financial institutions in the form of grants. The Company earns these grants through compliance with their conditions and by meeting the stated obligations. The Company therefore recognizes the grant income over the periods that bear the cost of meeting the obligations.
Advertising Costs
The Company follows the policy of charging the costs of advertising to expense as incurred.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Recent Accounting Standards
Accounting Standards Recently Adopted
On April 1, 2021, the Company adopted ASU No. 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which was part of the FASB's simplification initiative to reduce complexity, while maintaining or improving the usefulness of information provided to users of financial statements. The amendments in this update simplified the accounting for income taxes and improved consistent application of GAAP by removing certain exceptions and clarifying
and amending existing guidance for areas of Topic 740. The adoption of the standard did not have a material impact on the Company's financial statements.
In November 2021, the FASB issued ASU No. 2021-10 "Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance," to improve the financial reporting of government assistance received by business entities by requiring the disclosure of (1) the types of assistance received, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. ASU 2021-10 is effective for all entities for financial statements issued for annual periods beginning after December 15, 2021 (for the Company, the fiscal year ending March 31, 2023). Early application of the guidance is permitted. The adoption of the standard did not have a material impact on the Company's financial statements.
Accounting Standards Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Loss," which replaces the guidance on recognition and measurement of credit losses for financial assets. The new requirements, known as the current expected credit loss model ("CECL") will require entities to adopt an impairment model based on expected losses rather than incurred losses. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019 (for the Company, the fiscal year ending March 31, 2021), including interim periods within those fiscal years. In May 2019, the FASB issued ASU No. 2019-05, "Financial Instruments - Credit Losses (Topic 326): Target Transition Relief," to provide transition relief by giving entities an option to irrevocably elect the fair value option for certain financial assets measured at amortized cost upon adoption of ASU 2016-13. In November 2019, the FASB issued ASU No. 2019-10, which extended the CECL implementation date for smaller reporting companies, as defined by the SEC. The new effective date is for fiscal years beginning after December 15, 2022 (for the Company, the fiscal year ending March 31, 2024), including interim periods within those fiscal years. In November 2019, the FASB issued ASU No. 2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses," to amend or clarify guidance regarding expected recoveries for purchased financial assets with credit deterioration, transition relief for troubled debt restructurings, disclosures related to accrued interest receivables, and financial assets secured by collateral maintenance provisions. The Company has conducted testing of the ASU 2016-13 method utilizing historical financial analysis and has engaged a vendor as an additional resource to examine and reaffirm the models as it relates to the implementation of the new methodology utilizing the current expected credit loss model, which will replace our current incurred loss approach. Based on the Company's current CECL model results that it has performed alongside the current process, the adoption of the new guidance will result in an increase of approximately $0.7 million to the allowance for credit loss, including the reserve for off-balance sheet credit exposure recorded in other liabilities. There is no material impact for other assets within the scope of the new CECL guidance, such as held-to-maturity debt securities and other receivables. The Company will adopt ASU 2016-13 effective April 1, 2023. As the Company finalizes the CECL implementation, final decisions made by management may result in a different impact than that stated above for financial statement disclosure purposes.
In March 2022, the FASB issued ASU No. 2022-02, "Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures," which eliminates the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. The amendments also require disclosure of current period gross writeoffs by year of origination. The effective dates for the amendments in ASU 2022-02 are the same as the effective dates in ASU 2016-13. The Company does not expect the adoption of this ASU to have a material impact on the consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. In December 2022, the FASB issued ASU No. 2022-06 "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848," which defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply for
relief in Topic 848. We anticipate this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2024 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. The Company is evaluating the impacts of this ASU and has not yet determined whether LIBOR transition and this ASU will have a material impact on the Company's consolidated statements of financial condition and results of operations.
NOTE 3.INVESTMENT SECURITIES
The Bank utilizes mortgage-backed and other investment securities in its asset/liability management strategy. In making investment decisions, the Bank considers, among other things, its yield and interest rate objectives, its interest rate and credit risk position, and its liquidity and cash flow.
Generally, the investment policy of the Bank is to invest funds among categories of investments and maturities based upon the Bank’s asset/liability management policies, investment quality, loan and deposit volume and collateral requirements, liquidity needs and performance objectives. Debt securities are classified into three categories: trading, held-to-maturity, and available-for-sale. At March 31, 2023, securities with fair value of $53.8 million, or 95.9%, of the Bank’s total securities were classified as available-for-sale, and the remaining securities with amortized cost of $2.3 million, or 4.1%, were classified as held-to-maturity, compared to $67.6 million and $5.3 million at March 31, 2022, respectively. The Bank had no securities classified as trading at March 31, 2023 and March 31, 2022.
Other investments as of March 31, 2023 primarily consists of the Bank's investment in a limited partnership Community Capital Fund and a $5.1 million bank-owned life insurance policy ("BOLI") that was purchased during the first quarter of fiscal year 2023 as a channel to add to the Company's non-interest income revenue by means of an investment considered safe and sound by the Company's regulators. The investment in the limited partnership is measured using the equity method. The BOLI is carried at the cash surrender value of the underlying policies. Income generated from the investment and the increase in the cash surrender value of the BOLI is included in other non-interest income on the Statements of Operations. Other investments totaled $6.1 million at March 31, 2023 and are included in Other Assets on the Statements of Financial Condition.
The following tables set forth the amortized cost and fair value of securities available-for-sale and held-to-maturity at March 31, 2023 and March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2023 |
| Amortized | | Gross Unrealized | | |
$ in thousands | Cost | | Gains | | Losses | | Fair Value |
Available-for-Sale: | | | | | | | |
Mortgage-backed securities: | | | | | | | |
Government National Mortgage Association | $ | 341 | | | $ | 1 | | | $ | 1 | | | $ | 341 | |
Federal Home Loan Mortgage Corporation | 21,651 | | | — | | | 4,051 | | | 17,600 | |
Federal National Mortgage Association | 11,714 | | | — | | | 2,212 | | | 9,502 | |
| | | | | | | |
Total mortgage-backed securities | 33,706 | | | 1 | | | 6,264 | | | 27,443 | |
U.S. Government Agency Securities | 9,364 | | | — | | | 38 | | | 9,326 | |
Corporate Bonds | 5,269 | | | — | | | 2,177 | | | 3,092 | |
Muni Securities | 17,719 | | | — | | | 3,737 | | | 13,982 | |
| | | | | | | |
| | | | | | | |
Total available-for-sale | $ | 66,058 | | | $ | 1 | | | $ | 12,216 | | | $ | 53,843 | |
| | | | | | | |
Held-to-Maturity: | | | | | | | |
Mortgage-backed securities: | | | | | | | |
Government National Mortgage Association | $ | 366 | | | $ | — | | | $ | 3 | | | $ | 363 | |
Federal National Mortgage Association | 1,952 | | | — | | | 94 | | | 1,858 | |
| | | | | | | |
| | | | | | | |
Total held-to-maturity | $ | 2,318 | | | $ | — | | | $ | 97 | | | $ | 2,221 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2022 |
| Amortized | | Gross Unrealized | | |
$ in thousands | Cost | | Gains | | Losses | | Fair Value |
Available-for-Sale: | | | | | | | |
Mortgage-backed securities: | | | | | | | |
Government National Mortgage Association | $ | 439 | | | $ | 9 | | | $ | — | | | $ | 448 | |
Federal Home Loan Mortgage Corporation | 23,744 | | | — | | | 2,197 | | | 21,547 | |
Federal National Mortgage Association | 12,852 | | | — | | | 1,268 | | | 11,584 | |
| | | | | | | |
Total mortgage-backed securities | 37,035 | | | 9 | | | 3,465 | | | 33,579 | |
U.S. Government Agency Securities | 13,864 | | | — | | | 79 | | | 13,785 | |
Corporate Bonds | 5,271 | | | — | | | 1,150 | | | 4,121 | |
Muni Securities | 17,741 | | | — | | | 1,973 | | | 15,768 | |
Asset-backed Securities | 347 | | | — | | | 4 | | | 343 | |
Total available-for-sale | $ | 74,258 | | | $ | 9 | | | $ | 6,671 | | | $ | 67,596 | |
| | | | | | | |
Held-to-Maturity: | | | | | | | |
Mortgage-backed securities: | | | | | | | |
Government National Mortgage Association | $ | 481 | | | $ | 27 | | | $ | — | | | $ | 508 | |
Federal National Mortgage Association | 4,773 | | | 9 | | | 14 | | | 4,768 | |
| | | | | | | |
| | | | | | | |
Total held-to-maturity | $ | 5,254 | | | $ | 36 | | | $ | 14 | | | $ | 5,276 | |
| | | | | | | |
There were no sales of available-for-sale securities and held-to-maturity securities for the year ended March 31, 2023 and March 31, 2022.
Carver maintains a portfolio of mortgage-backed securities in the form of Government National Mortgage Association (“GNMA”) pass-through certificates, Federal National Mortgage Association (“FNMA”) mortgage-backed securities and Federal Home Loan Mortgage Corporation (“FHLMC”) mortgage-backed securities. GNMA pass-through certificates are guaranteed as to the payment of principal and interest by the full faith and credit of the United States Government, while FNMA and FHLMC securities are each guaranteed by their respective agencies as to principal and interest. Based on the high quality of the Bank's investment portfolio, current market conditions have not significantly impacted the pricing of the portfolio or the Bank's ability to obtain reliable prices.
At March 31, 2023, the Bank pledged mortgage-backed and asset-backed securities of $2.5 million as collateral for advances from the FHLB-NY.
The following tables set forth the unrealized losses and fair value of securities in an unrealized loss position at March 31, 2023 and March 31, 2022 for less than 12 months and 12 months or longer:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2023 |
| Less than 12 months | | 12 months or longer | | Total |
$ in thousands | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value |
Available-for-Sale: | | | | | | | | | | | |
Mortgage-backed securities | $ | — | | | $ | — | | | $ | 6,264 | | | $ | 27,146 | | | $ | 6,264 | | | $ | 27,146 | |
U.S. Government Agency Securities | 13 | | | 4,075 | | | 25 | | | 5,251 | | | 38 | | | 9,326 | |
Corporate bonds | — | | | — | | | 2,177 | | | 3,092 | | | 2,177 | | | 3,092 | |
Muni securities | — | | | — | | | 3,737 | | | 13,982 | | | 3,737 | | | 13,982 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total available-for-sale securities | $ | 13 | | | $ | 4,075 | | | $ | 12,203 | | | $ | 49,471 | | | $ | 12,216 | | | $ | 53,546 | |
Held-to-Maturity: | | | | | | | | | | | |
Mortgage-backed securities | $ | 3 | | | $ | 363 | | | $ | 94 | | | $ | 1,822 | | | $ | 97 | | | $ | 2,185 | |
| | | | | | | | | | | |
Total held-to-maturity securities | $ | 3 | | | $ | 363 | | | $ | 94 | | | $ | 1,822 | | | $ | 97 | | | $ | 2,185 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2022 |
| Less than 12 months | | 12 months or longer | | Total |
$ in thousands | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value |
Available-for-Sale: | | | | | | | | | | | |
Mortgage-backed securities | $ | 519 | | | $ | 7,057 | | | $ | 2,946 | | | $ | 26,128 | | | $ | 3,465 | | | $ | 33,185 | |
U.S. Government Agency Securities | — | | | — | | | 79 | | | 13,785 | | | 79 | | | 13,785 | |
Corporate bonds | — | | | — | | | 1,150 | | | 4,121 | | | 1,150 | | | 4,121 | |
Muni securities | 1,640 | | | 13,512 | | | 333 | | | 2,256 | | | 1,973 | | | 15,768 | |
Asset-backed securities | 4 | | | 343 | | | — | | | — | | | 4 | | | 343 | |
| | | | | | | | | | | |
Total available-for-sale securities | $ | 2,163 | | | $ | 20,912 | | | $ | 4,508 | | | $ | 46,290 | | | $ | 6,671 | | | $ | 67,202 | |
Held-to-Maturity: | | | | | | | | | | | |
Mortgage-backed securities | $ | 14 | | | $ | 2,204 | | | $ | — | | | $ | — | | | $ | 14 | | | $ | 2,204 | |
| | | | | | | | | | | |
Total held-to-maturity securities | $ | 14 | | | $ | 2,204 | | | $ | — | | | $ | — | | | $ | 14 | | | $ | 2,204 | |
| | | | | | | | | | | |
A total of 24 securities had an unrealized loss at March 31, 2023, compared to 23 at March 31, 2022. Mortgage-backed securities, U.S. government agency securities, municipal securities and a corporate bond security represented 50.7%, 17.4%, 26.1% and 5.8%, respectively, of total available-for-sale securities in an unrealized loss position at March 31, 2023. There were eight mortgage-backed securities, two U.S. government agency securities, one corporate bond and six municipal securities that had an unrealized loss position for more than 12 months at March 31, 2023. The cause of the temporary impairment is directly related to changes in interest rates. In general, as interest rates decline, the fair value of securities will rise, and conversely as interest rates rise, the fair value of securities will decline. Management considers fluctuations in fair value as a result of interest rate changes to be temporary, which is consistent with the Bank's experience. The impairments are deemed temporary based on the direct relationship of the change in fair value to movements in interest rates, the life of the investments and their high credit quality. Given the high credit quality of the mortgage-backed securities which are backed by the U.S. government's guarantees, the high credit quality and strong financial performance of the U.S. Government Agency and the results of the individual analyses performed for and continuous surveillance on the municipal securities, as well as the corporate security that is a reputable institution in good financial standing, the risk of credit loss is minimal. Management believes that these unrealized losses are a direct result of the current rate environment and the Company has the ability and intent to hold the securities until maturity or the valuation recovers. The Bank did not have any securities that were classified as having other-than-temporary impairment in its investment portfolio at March 31, 2023.
The following is a summary of the amortized cost and fair value of debt securities at March 31, 2023, by remaining period to contractual maturity (ignoring earlier call dates, if any). Actual maturities may differ from contractual maturities because certain security issuers have the right to call or prepay their obligations. The table below does not consider the effects of possible prepayments or unscheduled repayments.
| | | | | | | | | | | | | | | | | |
$ in thousands | Amortized Cost | | Fair Value | | Weighted Average Yield |
Available-for-Sale: | | | | | |
| | | | | |
| | | | | |
Five through ten years | 5,679 | | | 5,330 | | | 4.34 | % |
After ten years | 26,673 | | | 21,070 | | | 3.33 | % |
Mortgage-backed securities | 33,706 | | | 27,443 | | | 1.63 | % |
| $ | 66,058 | | | $ | 53,843 | | | 2.56 | % |
Held-to-maturity: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Mortgage-backed securities | $ | 2,318 | | | $ | 2,221 | | | 2.78 | % |
| | | | | |
NOTE 4.LOANS RECEIVABLE, NET
The following is a summary of loans receivable, net of allowance for loan losses at March 31: | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | March 31, 2022 |
$ in thousands | Amount | | % | | Amount | | % |
Gross loans receivable: | | | | | | | |
One-to-four family | $ | 64,971 | | | 10.9 | % | | $ | 69,297 | | | 12.0 | % |
Multifamily | 177,995 | | | 29.9 | % | | 160,800 | | | 27.9 | % |
Commercial real estate | 177,714 | | | 29.9 | % | | 174,270 | | | 30.2 | % |
| | | | | | | |
Business (1) | 166,940 | | | 28.0 | % | | 170,497 | | | 29.6 | % |
Consumer (2) | 7,513 | | | 1.3 | % | | 1,623 | | | 0.3 | % |
Total loans receivable | 595,133 | | | 100.0 | % | | 576,487 | | | 100.0 | % |
| | | | | | | |
| | | | | | | |
Unamortized premiums, deferred costs and fees, net | 2,763 | | | | | 3,017 | | | |
| | | | | | | |
Allowance for loan losses | (5,229) | | | | | (5,624) | | | |
Total loans receivable, net | $ | 592,667 | | | | | $ | 573,880 | | | |
| | | | | | | |
| | | | | | | |
(1) Includes business overdrafts of $11 thousand and $5 thousand as of March 31, 2023 and 2022, respectively
(2) Includes consumer overdrafts of $19 thousand and $31 thousand as of March 31, 2023 and 2022, respectively
During fiscal year 2023, the Bank purchased $14.3 million loans at par, comprised of $4.0 million one-to-four family, $5.8 million commercial real estate, $613 thousand business and $3.9 million consumer loans. The Bank purchased $50.1 million loans at par during fiscal year 2022, comprised of $11.3 million one-to-four family, $15.1 million multifamily, $18.2 million commercial real estate and $5.6 million business loans.
Substantially all of the Bank's real estate loans receivable are principally secured by properties located in New York City. Accordingly, as with most financial institutions in the market area, the ultimate collectability of a substantial portion of the Company's loan portfolio is susceptible to changes in market conditions in this area.
Real estate mortgage loan portfolios (one-to-four family) serviced for Federal National Mortgage Association (“FNMA”) and other third parties are not included in the accompanying consolidated financial statements. The unpaid principal balances of these loans aggregated $12.6 million and $14.5 million at March 31, 2023 and 2022, respectively.
At March 31, 2023 the Bank pledged $53.5 million in total real estate mortgage loans as collateral for advances from the FHLB-NY.
The Bank participated as a lender in the Paycheck Protection Program ("PPP"), which opened on April 3, 2020. As part of the CARES Act, the Small Business Administration ("SBA") was authorized to temporarily guarantee loans under this new 7(a) loan program. Under the PPP, small businesses and other entities and individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. Since the PPP loans are fully guaranteed by the SBA, there are no additional ALLL reserves required. As of March 31, 2023, the Bank had approved and funded approximately 420 applications totaling $57.1 million of loans under the PPP. Business loans included PPP loans outstanding totaling $568 thousand as of March 31, 2023. The net loan origination fees on these loans totaled approximately $4 thousand and are being recognized into interest income on loans over the 2-year and 5-year stated maturity terms of the PPP loans using the straight-line deferral method. The Bank continues to receive debt forgiveness payments on PPP loans closed during the first and second rounds of the program. As the loans are paid off, the remaining net deferred origination fees are accelerated into income.
Consistent with regulatory guidance and the provisions of the CARES Act, loans less than 30 days past due at December 31, 2019 that were granted COVID-19 related payment deferrals continued to be considered current and not reported as TDRs. For the fiscal year ended March 31, 2021, the Bank received 83 applications for payment deferrals on approximately $90.4 million of loans. The Bank has been working with the borrowers to determine if there is a risk of any losses associated with repayment and if any additional reserves would have to be allocated to this portfolio. At March 31, 2023, no loans were on COVID-related deferrals as the remaining 90-day loan deferments expired and borrowers became current.
The following is an analysis of the allowance for loan losses based upon the method of evaluating loan impairment for the fiscal year ended March 31, 2023: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ in thousands | | One-to-four family | | Multifamily | | Commercial Real Estate | | | | Business | | Consumer | | Unallocated | | Total |
Allowance for loan losses: | | | | | | | | | | | | | | |
Beginning Balance | | $ | 731 | | | $ | 1,114 | | | $ | 1,157 | | | | | $ | 2,497 | | | $ | 123 | | | $ | 2 | | | $ | 5,624 | |
Charge-offs | | — | | | — | | | (586) | | | | | — | | | (141) | | | — | | | (727) | |
Recoveries | | 90 | | | — | | | 10 | | | | | 127 | | | 5 | | | — | | | 232 | |
Provision for (Recovery of) Loan Losses | | (105) | | | (5) | | | 1,233 | | | | | (1,485) | | | 462 | | | — | | | 100 | |
Ending Balance | | $ | 716 | | | $ | 1,109 | | | $ | 1,814 | | | | | $ | 1,139 | | | $ | 449 | | | $ | 2 | | | $ | 5,229 | |
| | | | | | | | | | | | | | | | |
Allowance for Loan Losses Ending Balance: collectively evaluated for impairment | | $ | 607 | | | $ | 1,109 | | | $ | 1,814 | | | | | $ | 937 | | | $ | 449 | | | $ | 2 | | | $ | 4,918 | |
Allowance for Loan Losses Ending Balance: individually evaluated for impairment | | 109 | | | — | | | — | | | | | 202 | | | — | | | — | | | 311 | |
| | | | | | | | | | | | | | | | |
Loan Receivables Ending Balance | | $ | 65,808 | | | $ | 179,117 | | | $ | 178,424 | | | | | $ | 166,908 | | | $ | 7,639 | | | $ | — | | | $ | 597,896 | |
Ending Balance: collectively evaluated for impairment | | 60,805 | | | 179,046 | | | 171,234 | | | | | 160,985 | | | 7,638 | | | — | | | 579,708 | |
Ending Balance: individually evaluated for impairment | | 5,003 | | | 71 | | | 7,190 | | | | | 5,923 | | | 1 | | | — | | | 18,188 | |
The following is an analysis of the allowance for loan losses based upon the method of evaluating loan impairment for the fiscal year ended March 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ in thousands | | One-to-four family | | Multifamily | | Commercial Real Estate | | | | Business | | Consumer | | Unallocated | | Total |
Allowance for loan losses: | | | | | | | | | | | | | | |
Beginning Balance | | $ | 1,058 | | | $ | 880 | | | $ | 907 | | | | | $ | 1,855 | | | $ | 165 | | | $ | 275 | | | $ | 5,140 | |
Charge-offs | | — | | | — | | | — | | | | | — | | | (257) | | | — | | | (257) | |
Recoveries | | 13 | | | — | | | — | | | | | 102 | | | 23 | | | — | | | 138 | |
Provision for (Recovery of) Loan Losses | | (340) | | | 234 | | | 250 | | | | | 540 | | | 192 | | | (273) | | | 603 | |
Ending Balance | | $ | 731 | | | $ | 1,114 | | | $ | 1,157 | | | | | $ | 2,497 | | | $ | 123 | | | $ | 2 | | | $ | 5,624 | |
| | | | | | | | | | | | | | | | |
Allowance for Loan Losses Ending Balance: collectively evaluated for impairment | | $ | 731 | | | $ | 1,114 | | | $ | 1,157 | | | | | $ | 2,428 | | | $ | 123 | | | $ | 2 | | | $ | 5,555 | |
Allowance for Loan Losses Ending Balance: individually evaluated for impairment | | — | | | — | | | — | | | | | 69 | | | — | | | — | | | 69 | |
| | | | | | | | | | | | | | | | |
Loan Receivables Ending Balance | | $ | 70,261 | | | $ | 162,261 | | | $ | 175,313 | | | | | $ | 170,031 | | | $ | 1,638 | | | $ | — | | | $ | 579,504 | |
Ending Balance: collectively evaluated for impairment | | 65,369 | | | 161,746 | | | 175,313 | | | | | 163,991 | | | 1,638 | | | — | | | 568,057 | |
Ending Balance: individually evaluated for impairment | | 4,892 | | | 515 | | | — | | | | | 6,040 | | | — | | | — | | | 11,447 | |
The following is a summary of nonaccrual loans at March 31, 2023 and 2022.
| | | | | | | | | | | |
$ in thousands | March 31, 2023 | | March 31, 2022 |
Loans accounted for on a nonaccrual basis: | | | |
Gross loans receivable: | | | |
One-to-four family | $ | 4,001 | | | $ | 4,892 | |
Multifamily | 71 | | | 515 | |
Commercial real estate | 7,190 | | | 4,601 | |
| | | |
Business | 998 | | | 1,448 | |
Consumer | 1 | | | 25 | |
Total nonaccrual loans | $ | 12,261 | | | $ | 11,481 | |
Nonaccrual loans generally consist of loans for which the accrual of interest has been discontinued as a result of such loans becoming 90 days or more delinquent as to principal and/or interest payments. Interest income on nonaccrual loans is recorded when received based upon the collectability of the loan. TDR loans consist of modified loans where borrowers have been granted concessions in regards to the terms of their loans due to financial or other difficulties, which rendered them unable to repay their loans under the original contractual terms.
At March 31, 2023 and March 31, 2022, other non-performing assets totaled $60 thousand, which consisted of other real estate owned comprised of one foreclosed residential property. Other real estate loans are included in other assets in the consolidated statements of financial condition. There were no held-for-sale loans at March 31, 2023 and March 31, 2022.
One-to-four family residential loans and consumer and other loans are rated non-performing if they are delinquent in payments ninety or more days, a troubled debt restructuring with less than six months contractual performance or past maturity. All other one-to-four family residential loans and consumer and other loans are performing loans.
At March 31, 2023, and based on the most recent analysis performed in the current quarter, the risk category by class of loans is as follows:
| | | | | | | | | | | | | | | | | | | |
$ in thousands | Multifamily | | Commercial Real Estate | | | | Business |
Credit Risk Profile by Internally Assigned Grade: | | | | | | |
Pass | $ | 175,981 | | | $ | 170,534 | | | | | $ | 154,056 | |
Special Mention | 771 | | | 701 | | | | | 5,719 | |
Substandard | 2,365 | | | 7,189 | | | | | 7,133 | |
| | | | | | | |
| | | | | | | |
Total | $ | 179,117 | | | $ | 178,424 | | | | | $ | 166,908 | |
| | | | | | | |
| One-to-four family | | Consumer | | | | |
Credit Risk Profile Based on Payment Activity: | | | | | | |
Performing | $ | 60,629 | | | $ | 7,639 | | | | | |
Non-Performing | 5,179 | | | — | | | | | |
Total | $ | 65,808 | | | $ | 7,639 | | | | | |
At March 31, 2022, the risk category by class of loans was as follows:
| | | | | | | | | | | | | | | | | | | |
$ in thousands | Multifamily | | Commercial Real Estate | | | | Business |
Credit Risk Profile by Internally Assigned Grade: | | | | | | |
Pass | $ | 155,274 | | | $ | 164,543 | | | | | $ | 155,196 | |
Special Mention | 897 | | | 8,157 | | | | | 6,302 | |
Substandard | 6,090 | | | 2,613 | | | | | 8,533 | |
| | | | | | | |
| | | | | | | |
Total | $ | 162,261 | | | $ | 175,313 | | | | | $ | 170,031 | |
| | | | | | | |
| One-to-four family | | Consumer | | | | |
Credit Risk Profile Based on Payment Activity: | | | | | | |
Performing | $ | 65,369 | | | $ | 1,613 | | | | | |
Non-Performing | 4,892 | | | 25 | | | | | |
Total | $ | 70,261 | | | $ | 1,638 | | | | | |
The following tables present an aging analysis of the recorded investment of past due loans receivable at March 31, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2023 | | | | | | | | | | | | | | | | | |
$ in thousands | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 or More Days Past Due | | Total Past Due | | | | | | | | Current | | Total Loans Receivable |
One-to-four family | $ | 1,207 | | | $ | 185 | | | $ | 2,475 | | | $ | 3,867 | | | | | | | | | $ | 61,941 | | | $ | 65,808 | |
Multifamily | 1,458 | | | — | | | 71 | | | 1,529 | | | | | | | | | 177,588 | | | 179,117 | |
Commercial real estate | 1,370 | | | — | | | — | | | 1,370 | | | | | | | | | 177,054 | | | 178,424 | |
| | | | | | | | | | | | | | | | | |
Business | 11,006 | | | — | | | 5,014 | | | 16,020 | | | | | | | | | 150,888 | | | 166,908 | |
Consumer | 99 | | | 26 | | | 34 | | | 159 | | | | | | | | | 7,480 | | | 7,639 | |
Total | $ | 15,140 | | | $ | 211 | | | $ | 7,594 | | | $ | 22,945 | | | | | | | | | $ | 574,951 | | | $ | 597,896 | |
| | | | | | | | | | | | | | | | | |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2022 | | | | | | | | | | | | | | | | | |
$ in thousands | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 or More Days Past Due | | Total Past Due | | | | | | | | Current | | Total Loans Receivable |
One-to-four family | $ | 1,943 | | | $ | — | | | $ | 5,229 | | | $ | 7,172 | | | | | | | | | $ | 63,089 | | | $ | 70,261 | |
Multifamily | 4,435 | | | 115 | | | 515 | | | 5,065 | | | | | | | | | 157,196 | | | 162,261 | |
Commercial real estate | 4,010 | | | — | | | 4,601 | | | 8,611 | | | | | | | | | 166,702 | | | 175,313 | |
| | | | | | | | | | | | | | | | | |
Business | 923 | | | 40 | | | 664 | | | 1,627 | | | | | | | | | 168,404 | | | 170,031 | |
Consumer | 84 | | | 45 | | | 25 | | | 154 | | | | | | | | | 1,484 | | | 1,638 | |
Total | $ | 11,395 | | | $ | 200 | | | $ | 11,034 | | | $ | 22,629 | | | | | | | | | $ | 556,875 | | | $ | 579,504 | |
| | | | | | | | | | | | | | | | | |
|
|
At March 31, 2023 and 2022, there were no loans 90 or more days past due and accruing interest.
The following tables present information on impaired loans with the associated allowance amount, if applicable, at March 31, 2023 and 2022. Management determined the specific allowance based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling costs was used to determine the specific allowance recorded. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received under the cash basis method. Interest income of $189 thousand and $266 thousand for fiscal years 2023 and 2022 respectively, would have been recorded on impaired loans had they performed in accordance with their original terms.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired Loans by Class |
| At March 31, |
| 2023 | | 2022 |
$ in thousands | Recorded Investment | | Unpaid Principal Balance | | Associated Allowance | | Recorded Investment | | Unpaid Principal Balance | | Associated Allowance |
With no specific allowance recorded: | | | | | | | | | | | |
One-to-four family | $ | 3,972 | | | $ | 4,567 | | | $ | — | | | $ | 4,892 | | | $ | 5,576 | | | $ | — | |
Multifamily | 71 | | | 71 | | | — | | | 515 | | | 515 | | | — | |
Commercial real estate | 7,190 | | | 7,378 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
Business | 1,114 | | | 1,146 | | | — | | | 837 | | | 909 | | | — | |
Consumer | 1 | | | 1 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | |
One-to-four family | 1,031 | | | 1,031 | | | 109 | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Business | 4,809 | | | 4,820 | | | 202 | | | 5,203 | | | 5,203 | | | 69 | |
| | | | | | | | | | | |
Total | $ | 18,188 | | | $ | 19,014 | | | $ | 311 | | | $ | 11,447 | | | $ | 12,203 | | | $ | 69 | |
The following table presents information on average balances on impaired loans and the interest income recognized for the years ended March 31, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the years ended March 31, | | | | |
| 2023 | | 2022 | | |
$ in thousands | Average Balance | | Interest Income recognized | | Average Balance | | Interest Income recognized | | | | |
With no specific allowance recorded: | | | | | | | | | | | |
One-to-four family | $ | 3,861 | | | $ | 111 | | | $ | 4,321 | | | $ | 50 | | | | | |
Multifamily | 220 | | | — | | | 442 | | | 16 | | | | | |
Commercial real estate | 4,054 | | | 36 | | | 459 | | | 7 | | | | | |
| | | | | | | | | | | |
Business | 1,723 | | | — | | | 1,585 | | | 33 | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | |
One-to-four family | 554 | | | 41 | | | 38 | | | — | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Business | 5,116 | | | 316 | | | 5,313 | | | 217 | | | | | |
| | | | | | | | | | | |
Total | $ | 15,528 | | | $ | 504 | | | $ | 12,158 | | | $ | 323 | | | | | |
In certain circumstances, loan modifications involve a troubled borrower to whom the Bank may grant a concession. In cases where the Bank grants any significant concessions to a troubled borrower, the Bank accounts for the modification as a TDR. Situations around these modifications may include extension of maturity date, reduction in the stated interest rate, rescheduling of future cash flows, reduction in the face amount of the debt or reduction of past accrued interest. Loans modified in TDRs are placed on nonaccrual status until the Company determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate performance according to the restructured terms for a period of at least six months. There were three loan modifications made during the twelve months ended March 31, 2023. There was no loan modification made during the twelve months ended March 31, 2022. The following table presents an analysis of the loan modifications that were classified as TDRs during the twelve months ended March 31, 2023,
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loan Modifications for the year ended March 31, 2023 | | | | | | | | | | |
| | | | |
$ in thousands | | Number of loans | | | | Recorded Investment at time of modification | | | | | | | | | | | | | | | | |
One-to-four family | | 3 | | | | | $ | 1,357 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
In an effort to proactively resolve delinquent loans, Carver has selectively extended to certain borrowers concessions such as extensions, rate reductions or forbearance agreements. For the fiscal years ended March 31, 2023 and 2022, there were no modified loans that defaulted within the last 12 months of modification. Total TDR loans at March 31, 2023 were $7.6 million, $1.6 million of which were non-performing as they were either not consistently performing in accordance with their modified terms or not performing in accordance with their modified terms for at least six months. At March 31, 2022, total TDR loans were $6.9 million, of which $1.7 million were non-performing.
Transactions With Certain Related Persons
Federal law requires that all loans or extensions of credit to executive officers and directors must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with the general public and must not involve more than the normal risk of repayment or present other unfavorable features.
The aggregate amount of loans outstanding to related parties was $30 thousand at March 31, 2023 and March 31, 2022. There were no advances and principal repayments during the twelve months ended March 31, 2023.
Furthermore, loans above the greater of $25,000, or 5% of Carver Federal’s capital and surplus (up to $500,000), to Carver Federal’s directors and executive officers must be approved in advance by a majority of the disinterested members of Carver Federal’s Board of Directors.
NOTE 5.PREMISES AND EQUIPMENT, NET
The details of premises and equipment as of March 31 are as follows: | | | | | | | | | | | |
$ in thousands | 2023 | | 2022 |
| | | |
| | | |
Leasehold improvements | $ | 6,986 | | | $ | 6,940 | |
Furniture, equipment, and other | 14,850 | | | 14,439 | |
| 21,836 | | | 21,379 | |
Less accumulated depreciation and amortization | (18,662) | | | (17,604) | |
Premises and equipment, net | $ | 3,174 | | | $ | 3,775 | |
Depreciation and amortization charged to operations was $1.1 million and $1.0 million for fiscal years 2023 and 2022, respectively.
NOTE 6.LEASES
The Company applies Accounting Standards Codification ("ASC") Topic 842, Leases ("ASC 842") to its leases. The Company has operating leases related to its administrative offices, seven retail branches and four ATM centers. Two of the operating leases are for branch locations where the Company had entered into a sale and leaseback transaction. The gain had been calculated utilizing the profit on sale in excess of the present value of the minimum lease payments, and the profit on the sale was deferred from gain recognition to be amortized into income over the terms of the leases in accordance with ASC Topic 840, Leases ("ASC 840"). ASC 842 does not require previous sale and leaseback transactions accounted for under ASC 840 to be reassessed.
As the implicit rates of the Company's existing leases are not readily determinable, the incremental borrowing rate used in determining the lease liability obligation for each individual lease was the FHLB-NY fixed-rate advance rates based on the remaining lease terms as of April 1, 2019.
As of March 31, 2023, the Company had $199 thousand and $187 thousand of ROU asset and lease liability, respectively, for finance leases related to equipment. The ROU asset is included in Premises and Equipment, net, and the lease liability is included in Advances from the FHLB-NY and Other Borrowed Money on the statements of financial condition.
The following tables present information about the Company's leases and the related lease costs as of and for the year ended March 31, 2023:
| | | | | | | | |
| | March 31, 2023 |
Weighted-average remaining lease term | | |
Operating leases | | 5.2 years |
Finance lease | | 2.5 years |
| | |
Weighted-average discount rate | | |
Operating leases | | 3.03 | % |
Finance lease | | 4.11 | % |
| | | | | | | | | | | | | | |
$ in thousands | | March 31, 2023 | | March 31, 2022 |
Operating lease expense | | $ | 2,860 | | | $ | 2,871 | |
| | | | |
Finance lease cost | | | | |
Amortization of right-of use asset | | 84 | | | 70 |
Interest on lease liability | | 5 | | | 1 |
| | | | |
Cash paid for amounts included in the measurement of lease liabilities |
Operating leases | | 2,779 | | | 2,765 | |
Finance lease | | 96 | | | 77 | |
Maturities of lease liabilities at March 31, 2023 are as follows:
| | | | | | | | | | | | | | |
$ in thousands | | Operating Leases | | Finance Leases |
Year ending March 31, | | | | |
2024 | | $ | 2,921 | | | $ | 87 | |
2025 | | 2,705 | | | 63 | |
2026 | | 2,687 | | | 42 | |
2027 | | 2,441 | | | 5 | |
2028 | | 2,259 | | | — | |
Thereafter | | 1,276 | | | — | |
Total lease payments | | 14,289 | | | 197 | |
Interest | | (1,116) | | | (10) | |
Lease liability | | $ | 13,173 | | | $ | 187 | |
NOTE 7.ACCRUED INTEREST RECEIVABLE
The details of accrued interest receivable as of March 31 are as follows:
| | | | | | | | | | | |
$ in thousands | 2023 | | 2022 |
Loans receivable | $ | 1,629 | | | $ | 2,166 | |
Mortgage-backed securities | 60 | | | 72 | |
Investments and other interest-bearing assets | 222 | | | 176 | |
Total accrued interest receivable | $ | 1,911 | | | $ | 2,414 | |
NOTE 8.DEPOSITS
Deposit balances and weighted average interest rates as of March 31 are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
$ in thousands | Amount | | Percent of Total Deposits | | Weighted Average Rate | | Amount | | Percent of Total Deposits | | Weighted Average Rate |
Non-interest-bearing demand | $ | 109,401 | | | 18.22 | % | | — | % | | $ | 107,472 | | | 17.11 | % | | — | % |
Interest-bearing checking | 49,473 | | | 8.24 | | | 0.39 | | | 57,985 | | | 9.23 | | | 0.06 | |
Savings | 109,210 | | | 18.19 | | | 0.60 | | | 112,305 | | | 17.88 | | | 0.11 | |
Money market savings account | 150,348 | | | 25.04 | | | 3.73 | | | 208,122 | | | 33.14 | | | 0.24 | |
Certificates of deposit | 178,694 | | | 29.76 | | | 5.03 | | | 139,255 | | | 22.17 | | | 0.88 | |
Loan escrow deposits | 3,303 | | | 0.55 | | | 0.45 | | | 2,978 | | | 0.47 | | | 0.36 | |
Total | $ | 600,429 | | | 100.00 | % | | 2.58 | % | | $ | 628,117 | | | 100.00 | % | | 0.30 | % |
Scheduled maturities of certificates of deposit for the year ended March 31, 2023 are as follows: | | | | | | | | |
$ in thousands | | Amount |
Maturing years ending March 31: | | |
2024 | | $ | 133,017 | |
2025 | | 32,768 | |
2026 | | 8,040 | |
2027 | | 1,726 | |
2028 | | 2,157 | |
2029 and beyond | | 986 | |
Total | | $ | 178,694 | |
The following table represents the amount of certificates of deposit of $250,000 or more at March 31, 2023 maturing during the periods indicated:
| | | | | |
$ in thousands | |
Maturing: | |
April 1, 2023 to June 30, 2023 | $ | 18,009 | |
July 1, 2023 to September 30, 2023 | 11,236 | |
October 1, 2023 to March 31, 2024 | 1,762 | |
April 1, 2024 and beyond | 4,758 | |
Total | $ | 35,765 | |
Interest expense on deposits is as follows for the years ended March 31: | | | | | | | | | | | | | |
$ in thousands | 2023 | | 2022 | | |
Interest-bearing checking | $ | 55 | | | $ | 30 | | | |
Savings and clubs | 166 | | | 123 | | | |
Money market savings | 1,728 | | | 378 | | | |
Certificates of deposit | 1,756 | | | 1,349 | | | |
Loan escrow deposits | 3 | | | 10 | | | |
Total interest expense | $ | 3,708 | | | $ | 1,890 | | | |
| | | | | |
| | | | | |
The following table presents additional information about our year-end deposits: | | | | | | | | | | | | | | |
$ in thousands | | 2023 | | 2022 |
Deposits from the Certificate of Deposit Account Registry Service (CDARS) | | $ | 84,389 | | | $ | 46,421 | |
Deposits from brokers | | 17,638 | | | 17,788 | |
Certificates of deposit individually greater than $250,000 | | 25,765 | | | 36,919 | |
Deposits from certain directors, executive officers and their affiliates | | 4,885 | | | 432 | |
NOTE 9.ADVANCES FROM THE FHLB-NY AND OTHER BORROWED MONEY
Federal Home Loan Bank Advances. At March 31, 2023, the Bank had a $10.0 million overnight borrowing with a fixed rate of 4.99% and a $25.0 million advance with a fixed rate of 4.5% maturing in March 2025 outstanding from the FHLB-NY. As a member of the FHLB-NY, the Bank may have outstanding FHLB-NY borrowings in a combination of term advances and overnight funds of up to 30% of its total assets, or approximately $217.0 million at March 31, 2023. Borrowings are secured by the Bank's investment in FHLB-NY stock and by a blanket security agreement. This agreement requires the Bank to maintain as collateral certain qualifying assets (principally mortgage loans and securities) not otherwise pledged. At March 31, 2023, advances were all fixed-rate and secured by pledges of the Bank's investment in FHLB-NY capital stock totaling $2.3 million, and a blanket assignment of pledged qualifying mortgage loans of $53.5 million and mortgage-backed and investment securities with a market value of $2.5 million. The Bank has sufficient collateral at the FHLB-NY to be able to borrow $6.3 million from the FHLB-NY at March 31, 2023. The accrued interest payable on FHLB advances was $14 thousand and interest expense was $359 thousand for the year ended March 31, 2023.
Subordinated Debt Securities. On September 17, 2003, Carver Statutory Trust I issued 13,000 shares, liquidation amount $1,000 per share, of floating rate capital securities. Gross proceeds from the sale of these trust preferred debt securities of $13 million, and proceeds from the sale of the trust's common securities of $0.4 million, were used to purchase approximately $13.4 million aggregate principal amount of the Company's floating rate junior subordinated debt securities due 2033. The trust preferred debt securities are redeemable at par quarterly at the option of the Company beginning on or after September 17, 2008, and have a mandatory redemption date of September 17, 2033. Cash distributions on the trust preferred debt securities are cumulative and payable at a floating rate per annum resetting quarterly with a margin of 3.05% over the three-month LIBOR. During the second quarter of fiscal year 2017, the Company applied for and was granted regulatory approval to settle all outstanding debenture interest payments through September 2016. Such payments totaling $2.5 million were made in September 2016. Interest on the debentures had been deferred beginning with the December 2016 payment, per the terms of the agreement, which permit such deferral for up to twenty consecutive quarters, as the Company is prohibited from making payments without prior regulatory approval. During the fourth quarter of fiscal year 2021, the Company applied for and was granted regulatory approval to settle all outstanding debenture interest payments through June 2021. Full payment was made on June 16, 2021. The Company has since had discussions with the Federal Reserve Bank of Philadelphia regarding future quarterly payments. A streamlined process has been developed for the Company to request regulatory approval to make debenture interest payments. All quarterly interest payments subsequent to the June 2021 payment up to and including the March 2023 payment have been made.
The accrued interest payable on subordinated debt securities was $44 thousand and the interest expense was $814 thousand for the year ended March 31, 2023. The accrued interest payable on subordinated debt securities was $22 thousand and the interest expense was $462 thousand for the year ended March 31, 2022.
Paycheck Protection Program Liquidity Facility (PPPLF). The Federal Reserve established the PPPLF to support the PPP program by extending credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. The interest rate on PPPLF advances is fixed at 0.35% and the maturity date is equal to the maturity date of the PPP loans pledged to secure the extension of credit. During the twelve months ended March 31, 2023, the Bank repaid its remaining $3 thousand outstanding advance under its PPPLF. Interest expense on PPPLF advances was zero and $27 thousand for the years ended March 31, 2023 and 2022, respectively.
Other Borrowings. During fiscal year 2022, the Company entered into two 5-year long-term unsecured low interest loans totaling $2.5 million provided by third parties. The $1.5 million and $1.0 million notes have a fixed interest rate of 1.0%, payable annually, and will mature in 2026. Based on the covenants of these notes, the proceeds will be used to finance eligible loans offered through the Bank's community investment initiatives loan program. The accrued interest payable and interest expense on these notes was $3 thousand and $25 thousand, respectively, for the year ended March 31, 2023. The accrued interest payable and interest expense was $19 thousand for the year ended March 31, 2022.
The following table presents expected maturities of the Company's long-term borrowings at March 31, 2023:
| | | | | | | | |
$ in thousands | | |
Year ending March 31, | | |
2024 | | $ | — | |
2025 | | 25,000 | |
2026 | | — | |
2027 | | 2,500 | |
2028 | | — | |
Thereafter | | 13,403 | |
Total | | $ | 40,903 | |
The following table sets forth certain information regarding Carver Federal's borrowings as of and for the years ended March 31: | | | | | | | | | | | | | |
$ in thousands | 2023 | | 2022 | | |
Amounts outstanding at the end of year: | | | | | |
FHLB advances | $ | 35,000 | | | $ | — | | | |
Subordinated debt securities | 13,403 | | | 13,403 | | | |
PPPLF | — | | | 3 | | | |
Other | 2,500 | | | 2,500 | | | |
| | | | | |
| | | | | |
Rate paid at year end: | | | | | |
FHLB advances | 4.99 | % | | — | % | | |
Subordinated debt securities | 7.96 | % | | 3.97 | % | | |
PPPLF | — | % | | 0.35 | % | | |
Other | 1.00 | % | | 1.00 | % | | |
| | | | | |
| | | | | |
Maximum amount of borrowing outstanding at any month end: | | | | | |
FHLB advances | $ | 40,000 | | | $ | 2,000 | | | |
Subordinated debt securities | 13,403 | | | 13,403 | | | |
PPPLF | 3 | | | 23,705 | | | |
Other | 2,500 | | | 2,500 | | | |
| | | | | |
| | | | | |
Approximate average amounts outstanding for year: | | | | | |
FHLB advances | $ | 11,776 | | | $ | 22 | | | |
Subordinated debt securities | 13,403 | | | 13,403 | | | |
PPPLF | — | | | 7,647 | | | |
Other | 2,500 | | | 1,757 | | | |
| | | | | |
| | | | | |
Approximate weighted average rate paid during year: | | | | | |
FHLB advances | 3.04 | % | | 0.09 | % | | |
Subordinated debt securities | 6.07 | % | | 3.45 | % | | |
PPPLF | 0.14 | % | | 0.35 | % | | |
Other | 1.01 | % | | 1.06 | % | | |
| | | | | |
NOTE 10.INCOME TAXES
The following is a reconciliation of the expected Federal income tax rate to the consolidated effective tax rate for the years ended March 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | |
$ in thousands | Amount | | Percent | | Amount | | Percent | | | | |
Statutory Federal income tax expense (benefit) | $ | (924) | | | 21.0 | % | | $ | (177) | | | 21.0 | % | | | | |
State and local income tax, net of Federal tax benefit | — | | | — | | | — | | | — | | | | | |
Impact of income tax rate changes | — | | | — | | | — | | | — | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Change in valuation allowance | 953 | | | (21.7) | | | 174 | | | (20.7) | | | | | |
Other | (29) | | | 0.7 | | | 3 | | | (0.3) | | | | | |
Total income tax expense (benefit) | $ | — | | | — | % | | $ | — | | | — | % | | | | |
Tax effects of existing temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are included in other assets at March 31 as follows:
| | | | | | | | | | | |
$ in thousands | 2023 | | 2022 |
Deferred Tax Assets: | | | |
Allowance for loan losses | $ | 1,742 | | | $ | 1,874 | |
| | | |
Compensation and benefits | 39 | | | 39 | |
Nonaccrual loan interest | 63 | | | 89 | |
| | | |
Net operating loss carryforward | 19,191 | | | 17,692 | |
New markets tax credit | 3,434 | | | 3,434 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Unrealized loss on available-for-sale securities | 2,565 | | | 1,399 | |
Lease liability | 4,452 | | | 4,811 | |
Other | 33 | | | 41 | |
Total Deferred Tax Assets | 31,519 | | | 29,379 | |
Deferred Tax Liabilities: | | | |
| | | |
Depreciation | 671 | | | 815 | |
| | | |
ROU asset | 4,169 | | | 4,561 | |
Other | 52 | | | 94 | |
Total Deferred Tax Liabilities | 4,892 | | | 5,470 | |
Deferred Tax Assets, net | 26,627 | | | 23,909 | |
Valuation Allowance | (26,627) | | | (23,909) | |
Deferred Tax Assets, net of valuation allowance | $ | — | | | $ | — | |
At March 31, 2023, the Company had net operating loss carryforwards for federal purposes of approximately $50.4 million, for state purposes of approximately $76.0 million and for city purposes of approximately $63.5 million which are available to offset future federal, state and city income and which expire over varying periods from March 2030 through March 2040. Federal net operating loss carryforwards of $21.1 million do not expire, as such losses were incurred after the enactment of the Tax Cuts and Jobs Act, which provides for an unlimited loss carryforward period..
The Company has no uncertain tax positions. The Company and its subsidiaries are subject to federal, New York State and New York City income taxation. The Company is no longer subject to examination by taxing authorities for years before March 31, 2018. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination; with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
NOTE 11.LOSS PER COMMON SHARE
The following table reconciles the loss available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted loss per share for the years ended March 31: | | | | | | | | | | | | | |
$ in thousands except per share data | 2023 | | 2022 | | |
Net loss attributable to Carver Bancorp, Inc. | $ | (4,401) | | | $ | (847) | | | |
| | | | | |
| | | | | |
| | | | | |
Weighted average common shares outstanding – basic | 4,277,709 | | | 3,588,523 | | | |
| | | | | |
Weighted average common shares outstanding – diluted | 4,277,709 | | | 3,588,523 | | | |
| | | | | |
Basic loss per common share | $ | (1.03) | | | $ | (0.24) | | | |
Diluted loss per common share | $ | (1.03) | | | $ | (0.24) | | | |
For the years ended March 31, 2023 and March 31, 2022, all restricted shares and outstanding stock options were anti-dilutive. For details of restricted shares and stock options, please refer to Note 14. "Employee Benefit and Stock Compensation Plans."
NOTE 12.STOCKHOLDERS' EQUITY
Conversion and Stock Offering. On October 24, 1994, the Bank issued in an initial public offering 2,314,375 shares of common stock, par value $0.01 (the “Common Stock”), at a price of $10 per share resulting in net proceeds of $21.5 million. As part of the initial public offering, the Bank established a liquidation account at the time of conversion, in an amount equal to the surplus and reserves of the Bank at September 30, 1994. In the unlikely event of a complete liquidation of the Bank (and only in such event), eligible depositors who continue to maintain accounts shall be entitled to receive a distribution from the liquidation account. The total amount of the liquidation account may be decreased if the balances of eligible deposits decreased as measured on the annual determination dates. The Bank is not permitted to pay dividends to the Company on its capital stock if the effect thereof would cause its net worth to be reduced below either: (i) the amount required for the liquidation account, or (ii) the amount required for the Bank to comply with applicable minimum regulatory capital requirements. In 2011 the stockholders approved a 1-for-15 reverse stock split pursuant to which each 15 shares of the Company’s Common Stock would be converted into one share of Common Stock. The 1-for-15 reverse stock split was effective as of October 27, 2011, resulting in a reduction in the number of outstanding shares of the Company’s Common Stock from 2,492,415 to 166,161, an increase of the conversion price of the Series C Preferred Stock and the Series D Preferred Stock and the exchange ratio of the Series B Preferred Stock from $0.5451 to $8.1765, and a corresponding decrease in the number of shares of Common Stock issued to the Investors and Treasury. During the year ended March 31, 2012, all outstanding shares of Series B Preferred Stock were converted to Common Stock and all outstanding shares of Series C preferred Stock were converted to Series D Preferred Stock. As of March 31, 2023, there were 4,295,607 shares of Company common stock outstanding.
Series D Preferred Stock ranks senior to the Common Stock. The holders of Series D Preferred Stock are entitled to receive dividends, on an as-converted basis, simultaneously to the payment of any dividends on the Company's common stock. Dividends on the Series D Preferred Stock are not cumulative. If the Company's board of directors does not declare a dividend with respect to any dividend period, the holders of the Series D Preferred Stock will have no right to receive any dividend for that period. The Company may not declare, pay or set apart for payment any dividend or make any distribution on common stock, unless at the time of such dividend or distribution the Company simultaneously pays a non-cumulative dividend or makes a distribution on each outstanding share of Series D Preferred Stock on an as-converted basis. The holders of Series D preferred Stock are generally not entitled to vote, except with respect to amendments to the Company's certificate of incorporation that would change the rights and preferences of the Series D Preferred Stock, the creation or increase of any class of securities senior to the Series D Preferred Stock, the consummation of certain mergers, consolidations or other transactions where the holders of the Series D Preferred Stock are not converted into or exchanged for preference securities of the surviving entity, and as otherwise required by applicable law.
.
The Series D Preferred Stock shall automatically convert into shares of Common Stock only upon the following transfers to third parties (“Eligible Transfers”):
•a transfer in a widespread public distribution;
•a transfer in which no transferee (together with its affiliates and other transferees acting in concert with it) acquires more than 2% of the Company’s common stock or any other class or series of the Company’s voting stock; or
•a transfer to a transferee that (together with its affiliates and other transferees acting in concert with it) owns or controls more than 50% of the Company’s common stock, without regard to the transfer.
The conversion price of the Series D Preferred Stock is $8.1765, and is subject to adjustment in the event of stock splits, subdivisions or combinations, dividends and distributions, issuance of certain rights, spin-offs, self-tenders and exchange offers as set forth under the agreement. The Series D Preferred Stock is not convertible at the option of the holders. As of March 31, 2023, there were 13,201 shares of Series D Preferred Stock outstanding.
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 March 31, 2023, 11,744 shares of its common stock have been repurchased in open market transactions. As a result of the Company's participation in the TARP CDCI, the United States Department of the Treasury's (the "U.S. Treasury") prior approval was required to make further repurchases. On August 6, 2020, the Company entered into a Securities Purchase Agreement with the U.S. Treasury to repurchase 2,321,286 shares of the common stock of the Company, par value $0.01 per share, owned by the U.S. Treasury for an aggregate purchase price of $2.5 million. The stock repurchase provided for in the Securities Purchase Agreement was completed on August 6, 2020. Upon completion of the repurchase pursuant to the Securities Purchase Agreement, the U.S. Treasury was no longer a stockholder in the Company. In connection with the repurchase, Morgan Stanley provided a grant of $2.5 million that was considered contributed capital to the Company to fund the repurchase transaction.
In June 2020, The Goldman Sachs Group, Inc., an institutional investor, notified the Company of their intention to effect a series of transfers of up to all its holdings of Series D Preferred Stock. The conversion and subsequent sale of shares were completed on July 2, 2020: 13,519 Series D Preferred Stock shares were converted into 1,653,397 shares of Common Stock, which were subsequently sold in the open market. The conversion and sale had no impact on the Company's total capital.
On July 9, 2020, the Company received notice that Morgan Stanley International Holdings Inc., an institutional investor, relinquished its ownership of 180,573 shares of Company common stock and 13,523 shares of Company Preferred Series D Stock to the Company at no cost to the Company.
On October 15, 2020, the Company entered into an agreement with Banc of America Strategic Investments Corporation, under which it issued and sold 147,227 shares of its common stock, par value $0.01, at a price of $6.62 per share. The shares were issued on October 15, 2020, in a private placement exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and Regulation D of the rules and regulations promulgated thereunder.
On January 22, 2021, Prudential Insurance Company of America ("Prudential"), an institutional investor, notified the Company of its intention to cancel 475 of its holdings of Series D Preferred Stock and convert them into 58,093 shares of Common Stock. During fiscal year 2022, Prudential donated a total of 3,850 shares of its holdings of Series D Preferred Stock to third parties. The third parties notified the Company of their intention to cancel the shares and convert them into 470,855 shares of Common Stock. During the twelve months ended March 31, 2023, Prudential donated a total of 550 shares of its holdings of Series D Preferred Stock to third parties. The third parties notified the Company of their intention to cancel the shares and convert them into 67,265 shares of Common Stock. The conversions had no impact on the Company's total capital.
On February 1, 2021, the Company entered into an agreement with Wells Fargo Central Pacific Holdings, Inc., under which it sold: (i) 157,806 shares of its common stock, par value $0.01 per share, at a purchase price of $7.75 per share, and (ii) 3,177 shares of a new series of preferred stock, Series E non-cumulative non-voting participating preferred stock, par value $0.01 per share, at a purchase price of $1,000 per share, in a private placement for gross proceeds of approximately $4.4 million. Upon the completion of certain eligible transfers of the Series E preferred stock by Wells Fargo Central Pacific Holdings, Inc., the Series E preferred stock would be convertible into common stock at a conversion price of $7.96 per share. The issuance of the shares is exempt from registration pursuant to the exemption provided under Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended. The offering was made only to accredited investors as that term is defined in Rule 501(a) of Regulation D under the Act.
Series E Preferred Stock is perpetual and has no maturity date. The Company may redeem the shares of Series E Preferred Stock, in whole or in part, on any date on or after February 1, 2026. The holders of Series E Preferred Stock will be entitled to receive, if declared by the Company's board of directors, noncumulative cash dividends on each date that dividends or other distributions are payable. The holders of the Series E Preferred Stock will not have voting rights except for any vote required by law or by the Company's Certificate of Incorporation, or for effecting or validating: (i) any increase or decrease in the authorized number of shares of Series E Preferred Stock or issuance of shares of Series E Preferred Stock after the original issue date; (ii) any amendment, alteration or repeal of any provision of the Certificate of Incorporation or Bylaws of the Company that would adversely affect the voting powers, preferences, privileges or special rights of the Series E Preferred Stock; (iii) any amendment or alteration of the Certificate of Incorporation or Bylaws of the Company to authorize or create, or increase the authorized amount of any shares of any class or series or any securities convertible into shares of any class or series of capital stock of the Company ranking senior to Series E Preferred Stock in the payment of dividends or in the distribution of assets on any liquidation, dissolution or winding up of the Company; or (iv) a merger or consolidation of the Company with another entity (whether or not a corporation), unless in each case (A) the shares of Series E Preferred Stock remain outstanding and (B) such shares remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, and limitations and restrictions, and limitations and restrictions thereof as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and restrictions and limitations thereof, of the Series E Preferred Stock immediately prior to such consummation.
On February 16, 2021, the Company entered into an agreement with J.P. Morgan Chase Community Development Corporation ("J.P. Morgan"), under which it sold: (i) 112,612 shares of its common stock, par value $0.01 per share, at a purchase price of $8.88 per share, and (ii) 5,000 shares of a new series of preferred stock, Series F non-cumulative non-voting non-convertible preferred stock, par value $0.01 per share, at a purchase price of $1,000 per share, in a private placement for gross proceeds of approximately $6.0 million. On September 27, 2021, the Company entered into an agreement with J.P. Morgan under which it sold an additional 4,000 shares of its Series F Preferred Stock, at a purchase price of $1,000 per share, in a private placement for gross proceeds of $4.0 million. The issuances of the shares were exempt from registration pursuant to the exemption provided under Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended. The offerings were made only to accredited investors as that term is defined in Rule 501(a) of Regulation D under the Act.
Series F Preferred Stock is perpetual and has no maturity date. The shares are not convertible. The Company may redeem the shares of Series F Preferred Stock, in whole or in part, on any date on or after February 16, 2026. The holders of Series F Preferred Stock will be entitled to receive, if declared by the Company's board of directors, noncumulative cash dividends on each date that dividends or other distributions are payable. The holders of the Series F Preferred Stock will not have voting rights except for any vote required by law or by the Company's Certificate of Incorporation, or for effecting or validating: (i) any amendment, alteration or repeal of any provision of the Certificate of Incorporation or Bylaws of the Company that would significantly and adversely affect the voting powers, preferences, privileges or special rights of the Series F Preferred Stock; (ii) any amendment or alteration of the Certificate of Incorporation or Bylaws of the Company to authorize or create, or increase the authorized amount of any shares of any class or series or any securities convertible into shares of any class or series of capital stock of the Company ranking senior to Series F Preferred Stock in the payment of dividends or in the distribution of assets on any liquidation, dissolution or winding up of the Company; or (iii) a merger or consolidation of the Company with another entity (whether or not a corporation), unless in each case (A) the shares of Series F Preferred Stock remain outstanding and (B) such shares remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers , and limitations and restrictions, and limitations and restrictions thereof as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and restrictions and limitations thereof, of the Series F Preferred Stock immediately prior to such consummation.
On December 14, 2021, the Company entered into a Sales Agreement (the "Sales Agreement") with Piper Sandler & Co. (“Piper Sandler”), as sales agent, pursuant to which the Company may offer and sell shares of our common stock, par value $0.01 per share, having an aggregate gross sales price of up to $20.0 million (the “ATM Shares”) from time to time. Any sales made under the Sales Agreement will be sales deemed to be "at-the-market (ATM) offerings," as defined in Rule 415 under the Securities Act of 1933, as amended. These sales will be made through ordinary broker transactions on the NASDAQ Capital Market stock exchange at market prices prevailing at the time, at prices related to the prevailing market prices, or at negotiated prices. The Company intends to use the net proceeds of these offerings for general corporate purposes, including support for organic loan growth and repayment of all or a portion of the outstanding principal amount of our outstanding subordinated debt securities. During fiscal year 2022, the Company sold an aggregate of 397,367 shares of common stock under the ATM offering program, resulting in gross proceeds of $3.1 million and net proceeds to the Company of $3.0 million after deducting commissions and expenses. There were no additional offerings during the twelve months ended March 31, 2023.
Regulatory Capital. The operations and profitability of the Bank are significantly affected by legislation and the policies of the various regulatory agencies. In July 2013, the FDIC and the other federal bank regulatory agencies issued a final rule that revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. 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%.
In accordance with the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies have adopted, effective January 1, 2020, a final rule whereby financial institutions and financial institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, will be eligible to opt into a “Community Bank Leverage Ratio” framework. Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules and will be considered to have met the “well capitalized” ratio requirements under
the Prompt Corrective Action statutes. The CARES Act and implementing rules temporarily reduced the Community Bank Leverage Ratio to 8%, to be gradually increased back to 9% by 2022. The CARES Act also provides that, during the same time period, if a qualifying community banking organization falls no more than 1% below the community bank leverage ratio, it will have a two quarter grace period to satisfy the community bank leverage ratio. The agencies reserved the authority to disallow the use of the Community Bank Leverage Ratio by a financial institution or holding company based on the risk profile of the organization.
Carver Federal, as a matter of prudent management, targets as its goal the maintenance of capital ratios which exceed these minimum requirements and that are consistent with Carver Federal's risk profile. In assessing an institution's capital adequacy, the OCC takes into consideration not only these numeric factors but also qualitative factors, and has the authority to establish higher capital requirements for individual institutions where necessary. Carver was issued an Individual Minimum Capital Ratio ("IMCR") letter by the OCC, which requires the Bank to maintain minimum regulatory capital levels of 9% for its Tier 1 leverage ratio and 12% for its total risk-based capital ratio. At March 31, 2023, the Bank's capital level exceeded the regulatory requirements and its IMCR requirements with a Tier 1 leverage ratio of 10.61%, Common Equity Tier 1 capital ratio of 12.47%, Tier 1 risk-based capital ratio of 12.47%, and a total risk-based capital ratio of 13.37%.
The table below presents the Bank's regulatory capital ratios at March 31, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | March 31, 2022 |
($ in thousands) | | Amount | | Ratio | | Amount | | Ratio |
Tier 1 leverage capital | | | | | | | | |
Regulatory capital | | $ | 74,265 | | | 10.61 | % | | $ | 76,906 | | | 10.45 | % |
Individual minimum capital requirement | | 63,005 | | | 9.00 | % | | 66,244 | | | 9.00 | % |
Minimum capital requirement | | 28,002 | | | 4.00 | % | | 29,442 | | | 4.00 | % |
Excess | | 46,263 | | | 6.61 | % | | 47,464 | | | 6.45 | % |
| | | | | | | | |
Common equity Tier 1 | | | | | | | | |
Regulatory capital | | $ | 74,265 | | | 12.47 | % | | $ | 76,906 | | | 13.75 | % |
Minimum capital requirement | | 41,679 | | | 7.00 | % | | 39,161 | | | 7.00 | % |
Excess | | 32,586 | | | 5.47 | % | | 37,745 | | | 6.75 | % |
| | | | | | | | |
Tier 1 risk-based capital | | | | | | | | |
Regulatory capital | | $ | 74,265 | | | 12.47 | % | | $ | 76,906 | | | 13.75 | % |
Minimum capital requirement | | 50,610 | | | 8.50 | % | | 47,553 | | | 8.50 | % |
Excess | | 23,655 | | | 3.97 | % | | 29,353 | | | 5.25 | % |
| | | | | | | | |
Total risk-based capital | | | | | | | | |
Regulatory capital | | $ | 79,599 | | | 13.37 | % | | $ | 82,672 | | | 14.78 | % |
Individual minimum capital requirement | | 71,450 | | | 12.00 | % | | 67,134 | | | 12.00 | % |
Minimum capital requirement | | 62,519 | | | 10.50 | % | | 58,742 | | | 10.50 | % |
Excess | | 17,080 | | | 2.87 | % | | 23,930 | | | 4.28 | % |
NOTE 13.OTHER COMPREHENSIVE INCOME (LOSS)
The following tables set forth changes in each component of accumulated other comprehensive income (loss), net of tax for the years ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | |
$ in thousands | | At March 31, 2022 | | | | Other Comprehensive Income | | At March 31, 2023 |
Net unrealized loss on securities available-for-sale | | $ | (6,662) | | | | | $ | (5,553) | | | $ | (12,215) | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
$ in thousands | | At March 31, 2021 | | | | Other Comprehensive Income | | At March 31, 2022 |
Net unrealized loss on securities available-for-sale | | $ | (3,175) | | | | | $ | (3,487) | | | $ | (6,662) | |
| | | | | | | | |
There were no reclassifications out of accumulated other comprehensive loss to the consolidated statement of operations for the twelve months ended March 31, 2023 and 2022.
Comprehensive Income (Loss). Comprehensive income (loss) represents net income (loss) and certain amounts reported directly in stockholders' equity, such as net unrealized gain or loss on securities available-for-sale. The balance at March 31, 2023 included $5.6 million change in unrealized losses for the year ended March 31, 2023. The balance at March 31, 2022 included $3.5 million change in unrealized losses for the year ended March 31, 2022.
NOTE 14.EMPLOYEE BENEFIT AND STOCK COMPENSATION PLANS
Savings Incentive Plan. Carver has a savings incentive plan, pursuant to Section 401(k) of the Code, for all eligible employees of the Bank. The Bank matches contributions to the 401(k) Plan equal to 100% of pre-tax contributions made by each employee up to a maximum of 4% of their pay, subject to IRS limitations. All such matching contributions are fully vested and non-forfeitable at all times regardless of the years of service with the Bank. The Bank reinstated the 401(k) match in January 2022, which had been suspended since October 2020. Compensation expense recognized for the 401(k) matching contributions was $376 thousand and $88 thousand, respectively, for fiscal 2023 and 2022.
Stock Option Plans. In September 2006, Carver stockholders approved the 2006 Stock Incentive Plan (the "2006 Incentive Plan") which provides for the grant of stock options, stock appreciation rights and restricted stock to employees and directors who are selected to receive awards by the Committee. The 2006 Incentive Plan authorizes Carver to grant awards with respect to 20,000 shares, but no more than 10,000 shares of restricted stock may be granted. Options are granted at a price not less than fair market value of Carver common stock at the time of the grant for a period not to exceed 10 years. Shares generally vest in 20% increments over 5 years, however, the Committee may specify a different vesting schedule. At March 31, 2023, there were 3,600 options outstanding under the 2006 Incentive Plan and 3,600 were exercisable. All options are exercisable immediately upon a participant's disability, death or a change in control, as defined in the 2006 Incentive Plan, if the person is employed on that date. If the person is terminated (voluntary or involuntarily) from the Bank, all unvested shares are forfeited. Pursuant to the plan, the Bank recognized no expense for fiscal years 2023 and 2022.
In September 2014, Carver stockholders approved the Carver Bancorp, Inc. 2014 Equity Incentive Plan (the "2014 Incentive Plan") which provides for the grant of stock options, stock appreciation rights and restricted stock to executive officers and directors who are selected to receive awards by the Committee. The 2014 Incentive Plan authorizes Carver to grant awards with respect to 250,000 shares. All of the shares may be issued pursuant to stock options (all of which may be incentive stock options) or all of which may be issued pursuant to restricted stock awards or restricted stock units. Unless the Committee determines otherwise, the award agreements will specify that no award will vest more rapidly than 25% per year over a four-year period, with the first installment vesting one year after the date of grant, subject to acceleration upon the occurrence of specific events. During fiscal year 2023, 44,500 restricted stock awards were issued. There were no restricted stock awards issued in fiscal 2022. At March 31, 2023, there were 2,667 options outstanding under the 2014 Incentive Plan and 2,333 were exercisable. All options are exercisable immediately upon a participant's disability, death or change in control, as defined in the 2014 Incentive Plan, if the person is employed on that date. If the person is terminated (voluntary or involuntarily) from the Bank, all unvested shares are forfeited. Pursuant to the plan, the Bank recognized $247 thousand as expense for fiscal year 2023 and $101 thousand in fiscal year 2022.
Information regarding nonvested shares of restricted stock awards outstanding for the years ended March 31 is as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| Shares | | Weighted Average Grant Price | | Shares | | Weighted Average Grant Price |
Outstanding, beginning of year | 38,833 | | | $ | 5.15 | | | 72,750 | | | $ | 5.00 | |
Granted | 44,500 | | | 6.84 | | | — | | | — | |
Vested | (20,667) | | | 4.82 | | | (24,917) | | | 4.73 | |
Forfeited | (4,833) | | | 6.53 | | | (9,000) | | | 5.11 | |
Outstanding, end of year | 57,833 | | | $ | 6.45 | | | 38,833 | | | $ | 5.15 | |
Unrecognized compensation expense on unvested restricted shares as of March 31, 2023 totaled $140 thousand. This amount will be recognized over the remaining vesting period of 1.11 years (weighted average). The vesting of the grants totaled $91 thousand and $122 thousand for fiscal years 2023 and 2022, respectively.
Information regarding stock options as of and for the years ended March 31 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| Options | | Weighted Average Exercise Price | | Options | | Weighted Average Exercise Price |
Outstanding, beginning of year | 6,600 | | | $ | 5.29 | | | 6,600 | | | $ | 5.42 | |
Granted | — | | | — | | | — | | | — | |
Exercised | — | | | — | | | — | | | — | |
Expired/Forfeited | 333 | | | 5.70 | | | — | | | — | |
Outstanding, end of year | 6,267 | | | $ | 5.27 | | | 6,600 | | | $ | 5.29 | |
Exercisable, at year end | 5,933 | | | | | 5,267 | | | |
Information regarding stock options as of March 31, 2023 is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
Range of Exercise Prices | | Shares | | Weighted Average Remaining Life | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
$ | 3.00 | | $ | 5.00 | | | 1,000 | | | 4.70 | | $ | 3.48 | | | 1,000 | | | $ | 3.48 | |
5.00 | | $ | 5.59 | | | 3,600 | | | 2.23 | | 5.56 | | | 3,600 | | | 5.56 | |
5.60 | | $ | 5.99 | | | 1,667 | | | 7.33 | | 5.70 | | | 1,333 | | | 5.70 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total | | | 6,267 | | | | | | | 5,933 | | | |
As of March 31, 2023, unrecognized compensation expense on unvested stock options totaled $1 thousand. This amount will be recognized over the remaining vesting period of 0.33 years (weighted average). There were no stock options awarded to employees or directors during the year ended March 31, 2023. At March 31, 2023, all outstanding options had no intrinsic value. The Company recorded stock compensation expense of $2 thousand and $3 thousand in fiscal 2023 and 2022, respectively.
NOTE 15.COMMITMENTS AND CONTINGENCIES
Credit Related Commitments. 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. 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 Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments.
The following table reflects the Bank's outstanding commitments as of March 31: | | | | | | | | | | | |
$ in thousands | 2023 | | 2022 |
Commitments to fund mortgage loans | $ | — | | | $ | 12,135 | |
| | | |
Lines of credit | 3,837 | | | 2,986 | |
| | | |
Commitment to fund private equity investment | 253 | | | 253 | |
| $ | 4,090 | | | $ | 15,374 | |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty.
Mortgage Representation & 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 (GSE's). 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.
The following table presents information on open requests from FNMA. The amounts presented are based on outstanding loan principal balances.
| | | | | | | | |
$ in thousands | | Loans sold to FNMA |
Open claims as of March 31, 2022 (1) | | $ | 1,363 | |
Gross new demands received | | — | |
Loans repurchased/made whole | | — | |
Demands rescinded | | — | |
Advances on open claims | | — | |
Principal payments received on open claims | | 22 | |
Open claims as of March 31, 2023 (1) | | $ | 1,385 | |
(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.
The table below summarizes changes in our representation and warranty reserves during fiscal 2023. | | | | | | | | |
$ in thousands | | March 31, 2023 |
Representation and warranty repurchase reserve, March 31, 2022 (1) | | $ | 123 | |
Net adjustment to reserve for repurchase losses (2) | | (28) | |
| | |
Representation and warranty repurchase reserve, March 31, 2023 (1) | | $ | 95 | |
(1) Reported in consolidated statements of financial condition as a component of other liabilities.
(2) Component of other non-interest expense.
The Bank also has, in the normal course of business, commitments for services and supplies.
Legal Proceedings. From time to time, the Company and the Bank or one of its wholly-owned subsidiaries are parties to various legal proceedings incident to their business. At March 31, 2023, certain claims, suits, complaints and investigations (collectively “proceedings”) involving the Company and the Bank or a subsidiary, arising in the ordinary course of business, have been filed or are pending. The Company is unable at this time to determine the ultimate outcome of each proceeding, but believes, after discussions with legal counsel representing the Company and the Bank or the subsidiary in these proceedings, that it has meritorious defenses to each proceeding and appropriate measures have been taken to defend the interests of the Company, Bank or subsidiary. There were no legal proceedings pending or known to be contemplated against us that in the opinion of management, would be expected to have a material adverse effect on the financial condition or results of operations of the Company or the Bank.
NOTE 16.FAIR VALUE MEASUREMENTS
Fair value is an “exit” price, representing the amount that would be received when selling an asset, or paid when transferring a liability, in an orderly transaction between market participants. Fair value is thus a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Fair value measurements are categorized in a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
•Level 1— Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2— Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•Level 3— Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s categorization within this valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following table presents, by valuation hierarchy, assets that are measured at fair value on a recurring basis as of March 31, 2023 and 2022, and that are included in the Company's Consolidated Statements of Financial Condition at these dates: | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at March 31, 2023, Using |
$ in thousands | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
Mortgage servicing rights | $ | — | | | $ | — | | | $ | 152 | | | $ | 152 | |
Investment securities | | | | | | | |
Available-for-sale: | | | | | | | |
Mortgage-backed securities: | | | | | | | |
Government National Mortgage Association | — | | | 341 | | | — | | | 341 | |
Federal Home Loan Mortgage Corporation | — | | | 17,600 | | | — | | | 17,600 | |
Federal National Mortgage Association | — | | | 9,502 | | | — | | | 9,502 | |
| | | | | | | |
U.S. Government Agency securities | — | | | 9,326 | | | — | | | 9,326 | |
Corporate bonds | — | | | 3,092 | | | — | | | 3,092 | |
Muni securities | — | | | 13,982 | | | — | | | 13,982 | |
Asset-backed securities | — | | | — | | | — | | | — | |
| | | | | | | |
Total available-for-sale securities | — | | | 53,843 | | | — | | | 53,843 | |
| | | | | | | |
Total assets | $ | — | | | $ | 53,843 | | | $ | 152 | | | $ | 53,995 | |
| | | | | | | |
| Fair Value Measurements at March 31, 2022, Using |
$ in thousands | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
Mortgage servicing rights | $ | — | | | $ | — | | | $ | 162 | | | $ | 162 | |
Investment securities | | | | | | | |
Available-for-sale: | | | | | | | |
Mortgage-backed securities: | | | | | | | |
Government National Mortgage Association | — | | | 448 | | | — | | | 448 | |
Federal Home Loan Mortgage Corporation | — | | | 21,547 | | | — | | | 21,547 | |
Federal National Mortgage Association | — | | | 11,584 | | | — | | | 11,584 | |
| | | | | | | |
U.S. Government Agency securities | — | | | 13,785 | | | — | | | 13,785 | |
Corporate bonds | — | | | 4,121 | | | — | | | 4,121 | |
Muni securities | — | | | 15,768 | | | — | | | 15,768 | |
Asset-backed securities | — | | | 343 | | | — | | | 343 | |
| | | | | | | |
Total available-for-sale securities | — | | | 67,596 | | | — | | | 67,596 | |
Total assets | $ | — | | | $ | 67,596 | | | $ | 162 | | | $ | 67,758 | |
Instruments for which unobservable inputs are significant to their fair value measurement (i.e., Level 3) include mortgage servicing rights ("MSR"). Level 3 assets accounted for 0.02% of the Company's total assets measured at fair value at March 31, 2023 and 2022.
The Company reviews and updates the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next that are related to the observable inputs to a fair value measurement may result in a reclassification from one hierarchy level to another.
Below is a description of the methods and significant assumptions utilized in estimating the fair value of available-for-sale securities and MSR:
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.
If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to market information, models also incorporate transaction details, such as maturity and cash flow assumptions. Securities valued in this manner would generally be classified within Level 2 of the valuation hierarchy and primarily include such instruments as mortgage-related securities and corporate debt.
During the fiscal year ended March 31, 2023, there were no transfers of investments into or out of each level of the fair value hierarchy.
In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. In valuing certain securities, the determination of fair value may require benchmarking to similar instruments or analyzing default and recovery rates. Quoted price information for the MSRs is not available. Therefore, MSRs are valued using market-standard models to model the specific cash flow structure. Key inputs to the model consist of principal balance of loans being serviced, servicing fees and discount and prepayment rates.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The following table includes a rollforward of assets classified by the Company within Level 3 of the valuation hierarchy for the years ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ in thousands | Beginning balance, April 1, 2022 | | Total Realized/Unrealized Gains/(Losses) Recorded in Income (1) | | Issuances / (Settlements) | | Transfers to/(from) Level 3 | | Ending balance, March 31, 2023 | | Change in Unrealized Gains/(Losses) Related to Instruments Held at March 31, 2023 |
| | | | | | | | | | | |
| | | | | | | | | | | |
Mortgage Servicing Rights | 162 | | | (10) | | | — | | | — | | | 152 | | | (9) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ in thousands | Beginning balance, April 1, 2021 | | Total Realized/Unrealized Gains/(Losses) Recorded in Income (1) | | Issuances / (Settlements) | | Transfers to/(from) Level 3 | | Ending balance, March 31, 2022 | | Change in Unrealized Gains/(Losses) Related to Instruments Held at March 31, 2022 |
| | | | | | | | | | | |
| | | | | | | | | | | |
Mortgage Servicing Rights | 147 | | | 15 | | | — | | | — | | | 162 | | | 15 | |
(1) Includes net servicing cash flows and the passage of time.
For Level 3 assets measured at fair value on a recurring basis as of March 31, 2023 and 2022, the significant unobservable inputs used in the fair value measurements were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
$ in thousands | | Fair Value at March 31, 2023 | | Valuation Technique | | Significant Unobservable Inputs | | Significant Unobservable Input Value |
| | | | | | | | |
| | | | | | | | |
Mortgage Servicing Rights | | 152 | | | Discounted Cash Flow | | Weighted Average Constant Prepayment Rate (1) | | 4.01 | % |
| | | | | | Option Adjusted Spread ("OAS") applied to Treasury curve | | 1000 basis points |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
$ in thousands | | Fair Value at March 31, 2022 | | Valuation Technique | | Significant Unobservable Inputs | | Significant Unobservable Input Value |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Mortgage Servicing Rights | | 162 | | | Discounted Cash Flow | | Weighted Average Constant Prepayment Rate (1) | | 6.70 | % |
| | | | | | Option Adjusted Spread ("OAS") applied to Treasury curve | | 1000 basis points |
(1) Represents annualized loan repayment rate assumptions
Certain assets are measured at fair value on a non-recurring basis. Such instruments are subject to fair value adjustments under certain circumstances (e.g. when there is evidence of impairment). The following table presents assets and liabilities that were measured at fair value on a non-recurring basis as of March 31, 2023 and 2022, and that are included in the Company's Consolidated Statements of Financial Condition at these dates:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at March 31, 2023, Using |
$ in thousands | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
| | | | | | | |
Impaired loans | $ | — | | | $ | — | | | $ | 5,529 | | | $ | 5,529 | |
Other real estate owned | $ | — | | | $ | — | | | $ | 60 | | | $ | 60 | |
| | | | | | | |
| | | | | | | |
| Fair Value Measurements at March 31, 2022, Using |
$ in thousands | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
| | | | | | | |
Impaired loans | $ | — | | | $ | — | | | $ | 5,134 | | | $ | 5,134 | |
Other real estate owned | $ | — | | | $ | — | | | $ | 60 | | | $ | 60 | |
For Level 3 assets measured at fair value on a non-recurring basis as of March 31, 2023 and 2022, the significant unobservable inputs used in the fair value measurements were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
$ in thousands | | Fair Value at March 31, 2023 | | Valuation Technique | | Significant Unobservable Inputs | | Significant Unobservable Input Value |
Impaired loans | | $ | 5,529 | | | Appraisal of collateral | | Appraisal adjustments | | 7.5% cost to sell |
Other real estate owned | | 60 | | | Appraisal of collateral | | Appraisal adjustments | | 7.5% cost to sell |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
$ in thousands | | Fair Value at March 31, 2022 | | Valuation Technique | | Significant Unobservable Inputs | | Significant Unobservable Input Value |
Impaired loans | | $ | 5,134 | | | Appraisal of collateral | | Appraisal adjustments | | 7.5% cost to sell |
Other real estate owned | | 60 | | | Appraisal of collateral | | Appraisal adjustments | | 7.5% cost to sell |
The fair values of collateral dependent impaired loans are determined using various valuation techniques, including consideration of appraised values and other pertinent real estate market data.
Other real estate owned represents property acquired by the Bank in settlement of loans less costs to sell (i.e., through foreclosure, repossession or as an in-substance foreclosure). These assets are recorded at the lower of their cost or fair value. At the time of acquisition of the real estate owned, the real property value is adjusted to its current fair value. Any subsequent adjustments will be to the lower of cost or fair value. As of March 31, 2023 and 2022, we had loans with a carrying value of $5.6 million and $3.1 million, respectively, for which formal foreclosure proceedings were in process.
NOTE 17.FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosures regarding the fair value of financial instruments are required to include, in addition to the carrying value, the fair value of certain financial instruments, both assets and liabilities recorded on and off-balance sheet, for which it is practicable to estimate fair value. Accounting guidance defines financial instruments as cash, evidence of ownership of an
entity, or a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument. The fair value of a financial instrument is discussed below. In cases where quoted market prices are not available, estimated fair values have been determined by the Bank using the best available data and estimation methodology suitable for each such category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate their recorded carrying value. The Bank's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact the Bank's fair value of all interest-earning assets and interest-bearing liabilities, other than those which are short-term in maturity.
The carrying amounts and estimated fair values of the Bank's financial instruments and estimation methodologies at March 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
$ in thousands | | Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Financial Assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 42,552 | | | $ | 42,552 | | | $ | 42,552 | | | $ | — | | | $ | — | |
| | | | | | | | | | |
Securities available-for-sale | | 53,843 | | | 53,843 | | | — | | | 53,843 | | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
Securities held-to-maturity | | 2,318 | | | 2,221 | | | — | | | 2,221 | | | — | |
Loans receivable | | 592,667 | | | 567,029 | | | — | | | — | | | 567,029 | |
| | | | | | | | | | |
Accrued interest receivable | | 1,911 | | | 1,911 | | | — | | | 1,911 | | | — | |
Mortgage servicing rights | | 152 | | | 152 | | | — | | | — | | | 152 | |
| | | | | | | | | | |
Financial Liabilities: | | | | | | | | | | |
Deposits | | $ | 600,429 | | | $ | 594,736 | | | $ | 418,432 | | | $ | 176,304 | | | $ | — | |
Advances from FHLB of New York | | 35,000 | | | 35,238 | | | — | | | 35,238 | | | — | |
Other borrowed money | | 15,903 | | | 14,575 | | | — | | | 14,575 | | | — | |
Accrued interest payable | | 380 | | | 380 | | | — | | | 380 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 |
$ in thousands | | Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Financial Assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 61,018 | | | $ | 61,018 | | | $ | 61,018 | | | $ | — | | | $ | — | |
| | | | | | | | | | |
Securities available-for-sale | | 67,596 | | | 67,596 | | | — | | | 67,596 | | | — | |
| | | | | | | | | | |
Securities held-to-maturity | | 5,254 | | | 5,276 | | | — | | | 5,276 | | | — | |
Loans receivable | | 573,880 | | | 563,821 | | | — | | | — | | | 563,821 | |
| | | | | | | | | | |
Accrued interest receivable | | 2,414 | | | 2,414 | | | — | | | 2,414 | | | — | |
Mortgage servicing rights | | 162 | | | 162 | | | — | | | — | | | 162 | |
| | | | | | | | | | |
Financial Liabilities: | | | | | | | | | | |
Deposits | | $ | 628,117 | | | $ | 624,160 | | | $ | 485,884 | | | $ | 138,276 | | | $ | — | |
| | | | | | | | | | |
Other borrowed money | | 15,906 | | | 15,673 | | | — | | | 15,673 | | | — | |
Accrued interest payable | | 91 | | | 91 | | | — | | | 91 | | | — | |
NOTE 18.VARIABLE INTEREST ENTITIES
Variable interest entities (“VIEs”) are consolidated, as required, where Carver has a controlling financial interest in these entities and is deemed to be the primary beneficiary. Carver is normally deemed to have a controlling financial interest and be the primary beneficiary if it has both (a) the power to direct activities of a VIE that most significantly impact the entities economic performance; and (b) the obligation to absorb losses of the entity that could benefit from the activities that could potentially be significant to the VIE.
The Company's subsidiary, Carver Statutory Trust I (the "Trust"), was formed in 2003 for the purpose of issuing $13 million aggregate liquidation amount of floating rate Capital Securities due September 17, 2033 (“Capital Securities”) and $0.4 million of common securities (which are the only voting securities of the Trust), which are 100% owned by Carver Bancorp, Inc., and using the proceeds to acquire Junior Subordinated Debentures issued by Carver Bancorp, Inc. Carver Bancorp, Inc. has fully and unconditionally guaranteed the Capital Securities along with all obligations of the Trust under the trust agreement relating to the Capital Securities. The Company does not consolidate the accounts and related activity of Carver Statutory Trust I because it is not the primary beneficiary of the entity. At March 31, 2023, the Company's maximum exposure to the Trust is $13.4 million, which is the Company's liability to the Trust and includes the Company's investment in the Trust.
The Bank's subsidiary, Carver Community Development Corporation (“CCDC”), was formed to facilitate its participation in local economic development and other community-based initiatives. Per the NMTC Award's Allocation Agreement between the CDFI Fund and CCDC, CCDC is permitted to form and sub-allocate credits to subsidiary Community Development Entities (“CDEs”) to facilitate investments in separate development projects. CCDC established various special purpose entities (CDEs 22-25) through which its investments in NMTC eligible activities will be conducted. As of March 31, 2023, there have been no activities in these entities.
The Company had no consolidated VIEs at March 31, 2023.
NOTE 19.NON-INTEREST REVENUE AND EXPENSE
ASC Topic 606, Revenue from Contracts with Customers ("Topic 606") does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain non-interest income streams such as gains on sales of residential mortgage and SBA loans, income associated with servicing assets, and loan fees, including residential mortgage originations to be sold and prepayment and late fees charged across all loan categories are also not in scope of the new guidance. Topic 606 is applicable to non-interest revenue streams, such as depository fees, service charges and commission revenues. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Non-interest revenue streams in-scope of Topic 606 are discussed below.
Depository fees and charges
Depository fees and charges primarily relate to service fees on deposit accounts and fees earned from debit cards and check cashing transactions. Service fees on deposit accounts consist of ATM fees, NSF fees, account maintenance charges and other deposit related fees. The revenue is recognized monthly when the Bank's performance obligations are complete, or as incurred for transaction-based fees in accordance with the fee schedules for the Bank's deposit products and services.
Loan fees and service charges
Loan fees and service charges primarily relate to program management fees and fees earned in accordance with the Bank's standard lending fees (such as inspection and late charges). These standard lending fees are earned on a monthly basis upon receipt.
Other non-interest income
Other non-interest income includes correspondent banking fees, and income associated with an advertising services agreement covering marketing and use of the Bank's office space with a third party. The revenue is recognized on a monthly basis.
Interchange income
The Company earns interchange fees from debit card holder transactions conducted through various payment networks. Interchange fees from cardholder transactions are recognized daily, concurrently with the transaction processing services provided by an outsource technology solution and are presented on a net basis.
The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended March 31, 2023 and 2022:
| | | | | | | | | | | |
| Years Ended March 31, |
$ in thousands | 2023 | | 2022 |
Non-interest income | | | |
In-scope of Topic 606 | | | |
Depository fees and charges | $ | 2,197 | | | $ | 2,141 | |
Loan fees and service charges | 466 | | | 225 | |
Other non-interest income | 236 | | | 2,616 | |
Non-interest income (in-scope of Topic 606) | 2,899 | | | 4,982 | |
Non-interest income (out-of-scope of Topic 606) | 696 | | | 2,372 | |
Total non-interest income | $ | 3,595 | | | $ | 7,354 | |
The following table sets forth other non-interest income and expense totals exceeding 1% of the aggregate of total interest income and non-interest income for any of the years presented: | | | | | | | | | | | |
| Years Ended March 31, |
$ in thousands | 2023 | | 2022 |
Other non-interest income: | | | |
| | | |
| | | |
Correspondent banking fees | $ | 147 | | | $ | 2,574 | |
Other | 225 | | | 307 | |
Total non-interest income | $ | 372 | | | $ | 2,881 | |
| | | |
Other non-interest expense: | | | |
Advertising | $ | 513 | | | $ | 572 | |
Legal expense | 442 | | | 626 | |
Insurance and surety | 1,200 | | | 927 | |
Audit expense | 573 | | | 851 | |
| | | |
Data lines / internet | 398 | | | 410 | |
| | | |
Retail expenses | 933 | | | 820 | |
| | | |
| | | |
Director's fees | 373 | | | 344 | |
Other | 2,767 | | | 2,659 | |
Total non-interest expense | $ | 7,199 | | | $ | 7,209 | |
NOTE 20.CARVER BANCORP, INC. - PARENT COMPANY ONLY
CONDENSED STATEMENTS OF FINANCIAL CONDITION | | | | | | | | | | | |
| As of March 31, |
$ in thousands | 2023 | | 2022 |
Assets | | | |
Cash on deposit with subsidiaries | $ | 668 | | | $ | 1,433 | |
Investment in subsidiaries | 62,453 | | | 70,646 | |
Other assets | 123 | | | 66 | |
Total assets | $ | 63,244 | | | $ | 72,145 | |
| | | |
Liabilities and Stockholders' Equity | | | |
Borrowings | $ | 15,903 | | | $ | 15,903 | |
Accounts payable to subsidiaries | 1,475 | | | 499 | |
Other liabilities | 642 | | | 656 | |
Total liabilities | 18,020 | | | 17,058 | |
| | | |
Stockholders’ equity | 45,224 | | | 55,087 | |
Total liabilities and stockholders’ equity | $ | 63,244 | | | $ | 72,145 | |
CONDENSED STATEMENTS OF OPERATIONS | | | | | | | | | | | | | |
| Years Ended March 31, |
$ in thousands | 2023 | | 2022 | | |
Income | | | | | |
Equity in net loss/income from subsidiaries | $ | (2,640) | | | $ | 706 | | | |
Other income | 27 | | | 17 | | | |
Grant income | 439 | | | 60 | | | |
Total (loss) income | (2,174) | | | 783 | | | |
Expense | | | | | |
Interest expense on borrowings | 839 | | | 481 | | | |
Salaries and employee benefits | 712 | | | 232 | | | |
Shareholder expense | 155 | | | 162 | | | |
Other | 521 | | | 755 | | | |
Total expense | 2,227 | | | 1,630 | | | |
| | | | | |
| | | | | |
Net loss | $ | (4,401) | | | $ | (847) | | | |
Comprehensive loss | $ | (9,954) | | | $ | (4,334) | | | |
CONDENSED STATEMENTS OF CASH FLOW
| | | | | | | | | | | | | |
| Years Ended March 31, |
$ in thousands | 2023 | | 2022 | | |
Cash Flows From Operating Activities | | | | | |
Net loss | $ | (4,401) | | | $ | (847) | | | |
Adjustments to reconcile net loss to net cash from operating activities: | | | | | |
Equity in net loss/income from subsidiaries | 2,640 | | | (706) | | | |
Restricted stock vesting | 91 | | | 122 | | | |
Decrease in accounts receivable from subsidiaries | — | | | 205 | | | |
(Increase) decrease in other assets | (57) | | | 92 | | | |
Increase (decrease) in accounts payable to subsidiaries | 976 | | | (1,212) | | | |
Decrease in other liabilities | (14) | | | (2,593) | | | |
| | | | | |
Net cash used in operating activities | (765) | | | (4,939) | | | |
| | | | | |
Cash Flows From Investing Activities | | | | | |
| | | | | |
Capital contribution | — | | | (15,500) | | | |
| | | | | |
Net cash used in investing activities | — | | | (15,500) | | | |
| | | | | |
Cash Flows From Financing Activities | | | | | |
Increase in borrowings | — | | | 2,500 | | | |
| | | | | |
| | | | | |
Issuance of common stock | — | | | 2,998 | | | |
Issuance of preferred stock | — | | | 4,000 | | | |
Net cash provided by financing activities | — | | | 9,498 | | | |
| | | | | |
Net decrease in cash | (765) | | | (10,941) | | | |
Cash and cash equivalents – beginning | 1,433 | | | 12,374 | | | |
Cash and cash equivalents – ending | $ | 668 | | | $ | 1,433 | | | |
NOTE 21.SUBSEQUENT EVENTS
On April 12, 2023, the Company entered into an agreement with a third party, in which the third party would provide the Company with an unsecured long-term, below-market-rate loan in the amount of $2.5 million to finance eligible loans offered through the Bank's community investment initiatives and loan programs focused on Minority and Women-owned Business Enterprises and consumers across the greater New York City region.
In April 2023, the Bank was awarded a $2.5 million grant as part of the U.S. Department of the Treasury's Community Development Financial Institutions Fund's Equitable Recovery Program ("CDFI ERP"). The funds will be used towards financing programs and activities to help low- and moderate income communities recover from the COVID-19 pandemic in accordance with the terms and requirements of the CDFI ERP.
On April 1, 2023, the Company adopted ASU No. 2016-13, "Financial Instruments - Credit Loss (Topic 326)" and its subsequent amendments, which replaces the guidance on recognition and measurement of credit losses for financial assets. The new requirements, known as the current expected credit loss model ("CECL") will require entities to adopt an impairment model based on expected losses rather than incurred losses. Based on the Company's CECL model results that it has performed alongside the incurred loss approach, the adoption of ASU 2016-13 will result in an increase of approximately $0.7 million to the allowance for credit losses for loans, including the reserve for off-balance sheet credit exposure recorded in other liabilities. There is no material impact for other assets within the scope of the new CECL guidance, such as held-to-maturity debt securities and other receivables. The Company will apply the new guidance as a cumulative-effect adjustment to retained earnings as of April 1, 2023, using the modified-retrospective approach. As the Company finalizes the CECL implementation, final decisions made by management may result in a different impact than that stated above for financial statement disclosure purposes.