What changed in this filing

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Item 1A. Risk Factors

2021-06-29 compared with 2020-08-06 · 118 added, 111 removed, 136 unchanged (63% of the section changed)

4 unchanged sentences

Additional risks not presently known also may have a material adverse effect on the Company’s results of operations and financial condition.

Changes in interest rates may adversely affect our profitability and financial condition.

We derive our income mainly from the difference or “spread” between the interest earned on loans, securities and other interest-earning assets and interest paid on deposits, borrowings and other interest-bearing liabilities.

In general, the larger the spread, the more we earn.

When market rates of interest change, the interest we receive on our assets and the interest we pay on our liabilities will fluctuate.

This can cause decreases in our spread and can adversely affect our income.

From an interest rate risk perspective, we have generally been liability sensitive, which indicates that liabilities generally re-price faster than assets.

In response to improving economic conditions, the FRB’s Open Market Committee had slowly increased its federal funds rate target from a range of 0.00% - 0.25% that was in effect for several years to the target range of 2.25% - 2.50% that was in effect at March 31, 2019.

However, as the result of the COVID-19 pandemic and the related adverse local and economic consequences, the target range was decreased to the range of 0.00% - 0.25% at March 31, 2020.

Interest rates also affect how much money we lend.

For example, when interest rates rise, the cost of borrowing increases and loan originations tend to decrease.

In addition, changes in interest rates can affect the average life of loans and securities.

For example, a reduction in interest rates generally results in increased prepayments of loans and mortgage-backed securities, as borrowers refinance their debt in order to reduce their borrowing cost.

This causes reinvestment risk, because we generally are not able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities in a declining rate environment.

Changes in market interest rates also impact the value of our interest-earning assets and interest-bearing liabilities.

In particular, the unrealized gains and losses on securities available for sale are reported, net of taxes, as accumulated other comprehensive income which is a component of stockholders’ equity.

Consequently, declines in the fair value of these instruments resulting from changes in market interest rates may adversely affect stockholders’ equity.

Uncertainty surrounding the elimination of LIBOR and the proposed transition to SOFR may adversely affect our business.

dollar-denominated London Interbank Offered Rate ("LIBOR") is used to calculate interest rates for numerous types of debt obligations, including personal and commercial loans, interest rate swaps, and other derivative products, making it a primary metric in the global banking system.

Financial Conduct Authority ("FCA") has determined that LIBOR should no longer be used as a benchmark rate.

In anticipation of the elimination of LIBOR, the U.S.

Federal Reserve established the Alternative Reference Rates Committee ("ARRC") to select a replacement index for U.S.

Dollar LIBOR.

ARRC, comprised of a group of large domestic banks and regulators, has voted to use a benchmark, known as the Secured Overnight Financing Rate ("SOFR").

SOFR is based on short-term loans backed by Treasury securities, known as repurchase agreements or "repo" trades.

ARRC has announced a paced transition plan for this new rate, including specific steps and timelines designed to encourage adoption of SOFR.

As of March 31, 2020, we have exposure to approximately $23.6 million of financial assets and liabilities, including off-balance sheet instruments, which are LIBOR-based.

We do not yet know whether, and if so the extent to which, the elimination of LIBOR and the transition to SOFR will have any material impact on these instruments.

Risks Related to the COVID-19 Outbreak

The economic impact of the COVID-19 outbreak could adversely impact our financial condition and results of operations

The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home.

This has resulted in an unprecedented slow-down in economic activity, a related increase in unemployment and a significant decline in the value of the stock market, and in particular, bank stocks.

In response to the COVID-19 outbreak, the Federal Reserve has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10- and 30-year treasury notes have declined to historic lows.

Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees).

The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak.

Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry.

Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences.

We have many employees working remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business.

The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened.

As the result of the

COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

• demand for our products and services may decline, making it difficult to grow assets and income;

• if the economy is unable to substantially and safely reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

• collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

• our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

• the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

• as the result of the decline in the Federal Reserve Board's target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

• our cybersecurity risks are increased as a result of an increase in the number of employees working remotely;

• we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us;

• Federal Deposit Insurance Corporation premiums may increase if the agency experience additional resolution costs.

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years.

The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy.

We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

Risks Related to the Lending Activities

Our loan portfolio exhibits a high degree of risk.

13 unchanged sentences

Additions to the allowance could have a negative impact on our results of operations.

Risks Related to Laws and Regulation and Their Enforcement

Failure to comply with the Formal Agreement could adversely affect our business, financial condition and operating results.

30 unchanged sentences

There are no assurances that dividend payments to the Company will resume.

Debenture interest payments on the Carver Statutory Trust I capital securities have been deferred, which is permissible under the terms of the Indenture for up to twenty consecutive quarterly periods, as the Company is prohibited from making payments without prior approval from the Federal Reserve Bank.

Debenture interest payments on the Carver Statutory Trust I capital securities had been deferred, which was permissible under the terms of the Indenture for up to twenty consecutive quarterly periods, as the Company was prohibited from making payments without prior approval from the Federal Reserve Bank.

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 has been deferred beginning with the December 2016 payment, per the terms of the agreement, which permit such deferral for up to twenty consecutive quarters through September 2021.

Interest on the debentures had been deferred beginning with the December 2016 payment, per the terms of the agreement, which permitted such deferral for up to twenty consecutive quarters through September 2021.

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 on the outstanding debenture interest was made on June 16, 2021.

Carver's results of operations may be adversely affected by loan repurchases from U.S.

7 unchanged sentences

Accordingly, any repurchase obligations to FNMA could materially and adversely affect the Bank's results of operations and earnings in the future.

The Company and the Bank operate in a highly regulated industry, which limits the manner and scope of business activities.

Carver Federal is subject to extensive supervision, regulation and examination by the OCC, as the Bank's chartering authority and, to a lesser extent, by the FDIC, as insurer of its deposits.

The Company is subject to extensive supervision, regulation and examination by the FRB, as regulator of the holding company.

As a result, Carver Federal and the Company are limited in the manner in which Carver Federal and the Company conducts its business, undertakes new investments and activities and obtains financing.

This regulatory structure is designed primarily for the protection of the deposit insurance funds and depositors, and not to benefit the Company's stockholders.

This regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to capital levels, the timing and amount of dividend payments, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.

In addition, Carver Federal must comply with significant anti-money laundering and anti-terrorism laws.

Government agencies have substantial discretion to impose significant monetary penalties on institutions which fail to comply with these laws.

The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments.

It also provides that the listing standards of the national securities exchanges shall require listed companies to implement and disclose “clawback” policies mandating the recovery of incentive compensation paid to executive officers in connection with accounting restatements.

The legislation also directs the FRB to promulgate rules prohibiting excessive compensation paid to bank holding company executives.

The Financial Accounting Standards Board, the SEC and other regulatory entities, periodically change the financial accounting and reporting guidance that governs the preparation of the Company's consolidated financial statements.

These changes can be difficult to predict and can materially impact how the Company records and reports its financial condition and results of operations.

In some cases, the Company could be required to apply new or revised guidance retroactively.

Risks Related to the Economic Conditions

Carver's results of operations are affected by economic conditions in the New York metropolitan area.

4 unchanged sentences

Consequently, deterioration in economic conditions in the New York metropolitan area could have a material adverse impact on the quality of the Bank's loan portfolio, which could result in increased delinquencies, decreased interest income results as well as an adverse impact on loan loss experience with probable increased allowance for loan losses.

deterioration also could adversely impact the demand for products and services, and, accordingly, further negatively affect results of operations.

Such deterioration also could adversely impact the demand for products and services, and, accordingly, further negatively affect results of operations.

The soundness of other financial institutions could negatively affect us.

5 unchanged sentences

There is no assurance that any such losses would not materially and adversely affect our results of operations.

A new accounting standard will likely require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for the Company for our first fiscal year after December 15, 2022.

This standard, referred to as Current Expected Credit Loss (“CECL”) will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses.

This will change the current method of providing allowances for loan losses that are probable, which would likely require us to increase our allowance for loan losses, and to increase the types of data we would need to collect and review to determine the appropriate level of the allowance for loan losses.

Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations.

Strong competition within the Bank's market areas could adversely affect profits and slow growth.

The New York metropolitan area has a high density of financial institutions, of which many are significantly larger than Carver Federal and with greater financial resources.

Additionally, various large out-of-state financial institutions may continue to enter the New York metropolitan area market.

All are considered competitors to varying degrees.

Carver Federal faces intense competition both in making loans and attracting deposits.

Competition for loans, both locally and in the aggregate, comes principally from mortgage banking companies, commercial banks, savings banks and savings and loan associations.

Most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations and credit unions.

The Bank also faces competition for deposits from money market mutual funds and other corporate and government securities funds, as well as from other financial intermediaries, such as brokerage firms and insurance companies.

Market area competition is a factor in pricing the Bank's loans and deposits, which could reduce net interest income.

Competition also makes it more challenging to effectively grow loan and deposit balances.

The Company's profitability depends upon its continued ability to successfully compete in its market areas.

Risks Related to Market Interest Rates

Changes in interest rates may adversely affect our profitability and financial condition.

In general, the larger the spread, the more we earn.

When market rates of interest change, the interest we receive on our assets and the interest we pay on our liabilities will fluctuate.

This can cause decreases in our spread and can adversely affect our income.

From an interest rate risk perspective, we have generally been liability sensitive, which indicates that liabilities generally re-price faster than assets.

However, as the result of the COVID-19 pandemic and the related adverse local and economic consequences, the target range was decreased to the range of 0.00% - 0.25% at March 31, 2020.

Interest rates also affect how much money we lend.

For example, when interest rates rise, the cost of borrowing increases and loan originations tend to decrease.

In addition, changes in interest rates can affect the average life of loans and securities.

Changes in market interest rates also impact the value of our interest-earning assets and interest-bearing liabilities.

In particular, the unrealized gains and losses on securities available for sale are reported, net of taxes, as accumulated other comprehensive income which is a component of stockholders’ equity.

Consequently, declines in the fair value of these instruments resulting from changes in market interest rates may adversely affect stockholders’ equity.

Risks Related to the Bank's Business

Uncertainty surrounding the elimination of LIBOR and the proposed transition to SOFR may adversely affect our business.

Financial Conduct Authority ("FCA") has determined that LIBOR should no longer be used as a benchmark rate.

In anticipation of the elimination of LIBOR, the U.S.

Federal Reserve established the Alternative Reference Rates Committee ("ARRC") to select a replacement index for U.S.

Dollar LIBOR.

ARRC, comprised of a group of large domestic banks and regulators, has voted to use a benchmark, known as the Secured Overnight Financing Rate ("SOFR").

SOFR is based on short-term loans backed by Treasury securities, known as repurchase agreements or "repo" trades.

ARRC has announced a paced transition plan for this new rate, including specific steps and timelines designed to encourage adoption of SOFR.

As of March 31, 2021, we have exposure to approximately $25.3 million of financial assets and liabilities, including off-balance sheet instruments, which are LIBOR-based.

We do not yet know whether, and if so the extent to which, the elimination of LIBOR and the transition to SOFR will have any material impact on these instruments.

Risks Related to the Bank's Operations

Failure to maintain effective systems of internal and disclosure controls could have a material adverse effect on the Company’s results of operation and financial condition.

6 unchanged sentences

Any failure to maintain effective controls or to timely implement any necessary improvement of the Company’s internal and disclosure controls could, among other things, result in losses from fraud or error, harm the Company’s reputation, or cause investors to lose confidence in the Company’s reported financial information, all of which could have a material adverse effect on the Company’s results of operation and financial condition.