What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-06-29 compared with 2020-08-06 · 108 added, 102 removed, 343 unchanged (38% of the section changed)

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Executive Summary

Carver ended fiscal 2020 with a net loss of $5.4 million, compared to net loss of $5.9 million for the prior year period.

The change in our results of operations was primarily driven by decreases in non-interest expense.

Tight control over discretionary expenses offset the year-to-date period declines in interest and non-interest income and in provisions versus recoveries regarding the allowance for loan losses.

Carver concluded fiscal 2021 with a net loss of $3.9 million compared to net loss of $5.4 million for the prior year period.

The change in our results of operations was primarily driven by increases in non-interest income and non-interest expense.

The business climate continues to present significant challenges as banks continue to absorb heightened regulatory costs and compete for limited loan demand.

Carver continues to focus on diversifying its loan portfolio with C&I lending to local small businesses and strives to generate new loan production and to purchase loans at suitable prices.

On March 11, 2020, the World Health Organization declared a pandemic related to the global spread of COVID-19, the disease caused by a novel strain of coronavirus.

The COVID-19 pandemic has adversely affected global, national and local economies, resulting in significant volatility and disruption in banking and other financial activity in the areas in which we operate.

In response to the pandemic, Governor Andrew Cuomo issued the "New York State on PAUSE" executive order to shelter in place, maintain social distancing and close all non-essential businesses statewide effective March 22, 2020.

As banking was designated an essential business by New York State, the Company has remained open during this time.

The Company was proactive during the early stages of the crisis and immediately enacted our Business Continuity Plan and pandemic preparedness procedures.

The Company implemented additional safety measures to ensure the health of its employees and customers at our open retail branch locations and most of our Corporate office employees shifted to a remote

working environment.

On March 27, 2020, the CARES Act was signed to provide emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic.

There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19 and the extent of the impact of COVID-19 on the Company's operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, and the impact on customers, employees and vendors, all of which are uncertain and cannot be determined at this time.

In addition, the Bank launched a program introducing new deposit products and expanded its digital online services into nine states across the Northeast and Washington D.C.

COVID-19 continues to have a significant, negative effect on families and businesses in New York and throughout the United States.

While New York State went through a phased reopening upon expiration of an earlier executive order to shelter in place, maintain social distancing and close all non-essential businesses statewide, there remains a significant amount of uncertainty as certain geographic areas continue to experience surges in COVID-19 cases and governments at all levels continue to react to changes in circumstances.

The prolonged pandemic, or any other epidemic of this sort that ultimately harms the global economy, the U.S.

economy or the markets in which we operate could adversely affect Carver’s operations.

The long-term effects of COVID-19 on the Company’s business cannot be ascertained as there remains significant uncertainty regarding the breadth and duration of business disruptions related to the virus.

At this time, it is unknown if the easing of restrictions on individuals and businesses will continue and if and when businesses and their employees will be able to fully resume normal activities.

In addition, new information may emerge regarding the severity of COVID-19 or the effectiveness of

the vaccines developed, causing federal, state and local governments to take additional actions to contain COVID-19 or to treat its impact.

Even after formal restrictions have been lifted, changes in the behavior of customers, businesses and their employees – including social distancing – as a result of the pandemic, are unknown.

The Company is closely monitoring its asset quality, liquidity, and capital positions.

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Various elements of accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.

Carver's policy with respect to the methodologies used to determine the allowance for loan and lease losses, securities impairment, assessment of the recoverability of the deferred tax asset, and the fair value of financial instruments are the most critical accounting policies.

Carver's policy with respect to the methodologies used to determine the allowance for loan and lease losses, securities impairment, and assessment of the recoverability of the deferred tax asset are the most critical accounting policies.

These policies are important to the presentation of Carver's financial condition and results of operations, and involve a high degree of complexity, requiring management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters.

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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.

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.

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.

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A loan is considered "collateral dependent" when the repayment of the debt will be provided solely by the underlying collateral, and there are no other available and reliable sources of repayment.

Criticized and classified loans with at risk balances of $500,000 or more and loans below $500,000 that the Chief Credit Officer deems appropriate for review, are identified and reviewed for individual evaluation for impairment in accordance with ASC Subtopic 310-10.

All substandard and doubtful loans and any other loans that the Chief Credit Officer deems appropriate for review, are identified and reviewed for individual evaluation for impairment in accordance with ASC Subtopic 310-10.

Carver also performs impairment analysis for all TDRs.

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

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

Loans determined to be impaired are evaluated to determine the amount of impairment based on one of the three measurement methods noted above.

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Once an obligation has been restructured because of such credit problems, it continues to be considered restructured until paid in full.

For cash flow dependent loans, the Bank records a specific valuation allowance reserve equal to the difference between the present value of estimated future cash flows under the restructured terms discounted at the loan's original effective interest rate, and the loan's original carrying value.

For cash flow dependent loans, the Bank records a specific valuation allowance reserve equal to the difference between the present value of estimated future cash flows

under the restructured terms discounted at the loan's original effective interest rate, and the loan's original carrying value.

For a collateral dependent loan, the Bank records an impairment charge when the current estimated fair value of the property that collateralizes the impaired loan, if any, is less than the recorded investment in the loan.

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With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral.

The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”)

The CARES Act, which became law on March 27, 2020, provide emergency economic relief to combat the coronavirus (“COVID-19”) and stimulate the economy.

The law had several provisions relevant to financial institutions, including:

• Allowing institutions not to characterize loan modifications relating to the COVID-19 pandemic as a troubled debt restructuring and also allowing them to suspend the corresponding impairment determination for accounting purposes.

• The ability of a borrower of a federally backed mortgage loan (VA, FHA, USDA, Freddie Mac and Fannie Mae) experiencing financial hardship due, directly or indirectly, to the COVID-19 pandemic to request forbearance from paying their mortgage by submitting a request to the borrower’s servicer affirming their financial hardship during the COVID-19 emergency.

Such a forbearance will be granted for up to 180 days, which can be extended for an additional 180-day period upon the request of the borrower.

During that time, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the mortgage contract will accrue on the borrower’s account.

Except for vacant or abandoned property, the servicer of a federally backed mortgage is prohibited from taking any foreclosure action, including any eviction or sale action, for not less than the 60-day period beginning March 18, 2020.

• The ability of a borrower of a multifamily federally backed mortgage loan that was current as of February 1, 2020, to submit a request for forbearance to the borrower’s servicer affirming that the borrower is experiencing financial hardship during the COVID-19 emergency.

A forbearance will be granted for up to 30 days, which can be extended for up to two additional 30-day periods upon the request of the borrower.

During the time of the forbearance, the multifamily borrower cannot evict or initiate the eviction of a tenant or charge any late fees, penalties or other charges

to a tenant for late payment of rent.

Additionally, a multifamily borrower that receives a forbearance may not require a tenant to vacate a dwelling unit before a date that is 30 days after the date on which the borrower provides the tenant notice to vacate and may not issue a notice to vacate until after the expiration of the forbearance.

Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (the “CRRSA Act”)

On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 ("CRRSA Act") was signed into law, which also contains provisions that could directly impact financial institutions including extending the time that insured depository institutions and depository institution holding companies have to comply with the current expected credit losses (CECL) account standing and extending the authority granted to banks under the CARES Act to elect to temporarily suspend the requirements under U.S.

GAAP applicable to troubled debt restructurings for loan modifications related to the COVID-19 pandemic for any loan that was not more than 30 days past due as of December 31, 2019.

The act directs financial regulators to support community development financial institutions and minority depository institutions and directs Congress to re-appropriate $429 billion in unobligated CARES Act funds.

The PPP, which was originally established under the CARES Act, was also extended under the CRRSA Act.

Securities Impairment

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This guidance also requires additional disclosures about investments in an unrealized loss position and the methodology and significant inputs used in determining the recognition of other-than-temporary impairment.

The Bank does

not have any securities that are classified as having other-than-temporary impairment in its investment portfolio at March 31, 2020.

The Bank does not have any securities that are classified as having other-than-temporary impairment in its investment portfolio at March 31, 2021.

Deferred Tax Assets

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As a result, at March 31, 2018, the valuation allowance was reduced by $340 thousand, the amount of the Company's AMT credits.

The amount of the AMT credits recorded as a deferred tax asset was $0 at March 31, 2020, and $170 thousand at March 31, 2019.

The amount of the AMT credits recorded as a deferred tax asset was $0 at March 31, 2020.

The AMT credit was $143 thousand as

of March 31, 2020, all of which was requested to be refunded to the Company upon the recently filed fiscal year 2020 federal tax return.

Asset/Liability Management

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Management's asset/liability objectives are to maintain a strong, stable net interest margin, to utilize the Company's capital effectively without taking undue risks, to maintain adequate liquidity and to manage its exposure to changes in interest rates.

The economic environment is uncertain regarding future interest rate trends.

Management monitors the Company's cumulative gap position, which is the difference between the sensitivity to rate changes on the Company's interest-earning assets and interest-bearing liabilities.

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As a financial institution, the Bank's primary component of market risk is interest rate volatility.

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Bank's assets and liabilities, and the market value of all interest-earning assets, other than those which are short-term in maturity.

Since virtually all of the Company's interest-bearing assets and liabilities are held by the Bank, most of the Company's interest rate risk exposure is retained by the Bank.

As a result, all significant interest rate risk management procedures are performed at the Bank.

Based upon the Bank's nature of operations, the Bank is not subject to foreign currency exchange or commodity price risk.

The Bank does not own any trading assets.

Carver Federal seeks to manage its interest rate risk by monitoring and controlling the variation in repricing intervals between its assets and liabilities.

To a lesser extent, Carver Federal also monitors its interest rate sensitivity by analyzing the estimated changes in market value of its assets and liabilities assuming various interest rate scenarios.

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company's assets and liabilities, and the market value of all interest-earning assets, other than those which are short-term in maturity.

Based upon the Company's nature of operations, it is not subject to foreign currency exchange or commodity price risk.

The Company does not own any trading assets.

The Company seeks to manage its interest rate risk by monitoring and controlling the variation in repricing intervals between its assets and liabilities.

To a lesser extent, it also monitors its interest rate sensitivity by analyzing the estimated changes in market value of its assets and liabilities assuming various interest rate scenarios.

As discussed more fully below, there are a variety of factors that influence the repricing characteristics of any given asset or liability.

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An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period.

The interest rate sensitivity gap is defined

as the difference between the amount of interest-earning assets maturing or repricing within a specific period of time and the amount of interest-bearing liabilities maturing or repricing within that same time period.

The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific period of time and the amount of interest-bearing liabilities maturing or repricing within that same time period.

A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities and is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets.

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Conversely, during a period of rising interest rates a negative gap could adversely affect net interest income, while a positive gap could result in an increase in net interest income.

As illustrated below, Carver Federal had a positive one-year gap equal to 13.93% of total rate sensitive assets at March 31, 2020.

As a result, Carver Federal's net interest income may be positively affected by rising interest rates and may be negatively affected by falling interest rates.

The following table sets forth information regarding the projected maturities, prepayments and repricing of the major rate-sensitive asset and liability categories of Carver Federal as of March 31, 2020.

As illustrated below, the Company had a positive one-year gap equal to 17.64% of total rate sensitive assets at March 31, 2021.

As a result, the Company's net interest income may be positively affected by rising interest rates and may be negatively affected by falling interest rates.

The following table sets forth information regarding the projected maturities, prepayments and repricing of the major rate-sensitive asset and liability categories of the Company as of March 31, 2021.

Maturity repricing dates have been projected by applying estimated prepayment rates based on the current rate environment.

The repricing and other assumptions are not necessarily representative of the Bank's actual results.

The repricing and other assumptions are not necessarily representative of the Company's actual results.

Classifications of items in the table below are different from those presented in other tables and the financial statements and accompanying notes included herein and do not reflect non-performing loans:

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Rate Sensitive Liabilities:

Interest-bearing non-maturity deposits $ 2,293 $ 6,774 $ 17,308 $ 16,260 $ 36,478 $ 217,851 $ 57,489 $ 354,453

Non-maturity deposits $ 3,143 $ 9,649 $ 24,403 $ 22,911 $ 51,337 $ 303,358 $ — $ 414,801

Term deposits 54,922 57,908 29,691 10,104 99 — — 152,724

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Additionally, credit risk may increase as many borrowers may experience an inability to service their debt in the event of a rise in interest rate.

Virtually all of the adjustable-rate loans in Carver Federal's portfolio contain conditions that restrict the periodic change in interest rate.

Virtually all of the adjustable-rate loans in the Company's portfolio contain conditions that restrict the periodic change in interest rate.

Economic Value of Equity (“EVE”) Analysis.

As part of its efforts to maximize net interest income while managing risks associated with changing interest rates, management also uses the EVE methodology.

EVE is the present value of expected net cash flows from existing assets less the present value of expected cash flows from existing liabilities plus the

present value of net expected cash inflows from existing financial derivatives and off-balance sheet contracts.

EVE is the present value of expected net cash flows from existing assets less the present value of expected cash flows from existing liabilities plus the present value of net expected cash inflows from existing financial derivatives and off-balance sheet contracts.

At March 31, 2021, the Company did not report any holdings in financial derivative contracts.

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Projected values of EVE at both higher and lower interest rate risk scenarios are compared to base case values (no change in rates) to determine the sensitivity to changing interest rates.

Presented below, as of March 31, 2020, is an analysis of the Bank's interest rate risk as measured by changes in EVE for instantaneous parallel shifts of +400/-200 basis points change in market interest rates.

Such limits have been established with consideration of the impact of various rate changes and the Bank's current capital position.

The information set forth below relates solely to the Bank.

However, because virtually all of the Company's interest rate risk exposure lies at the Bank level, management believes the table below also similarly reflects an analysis of the Company's interest rate risk.

Presented below, as of March 31, 2021, is an analysis of the Company's interest rate risk as measured by changes in EVE for instantaneous parallel shifts of +400/-200 basis points change in market interest rates.

Such limits have been established with consideration of the impact of various rate changes and the Compamy's current capital position.

$ in thousands Economic Value of Equity

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In this regard, the models presented assume that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities.

Accordingly, although the EVE table provides an indication of Carver Federal's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on Carver Federal's net interest income and may differ from actual results.

Accordingly, although the EVE table provides an indication of the Company's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Company's net interest income and may differ from actual results.

Average Balance, Interest and Average Yields and Rates

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When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income:

2020 2019 2018

$ in thousands Average Balance Interest Average

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Rate/Volume Analysis

The following table sets forth information regarding the extent to which changes in interest rates and changes in volume of interest related assets and liabilities have affected Carver Federal's interest income and expense during the fiscal years ended March 31, 2020, 2019, and 2018 (in thousands).

The following table sets forth information regarding the extent to which changes in interest rates and changes in volume of interest related assets and liabilities have affected the Company's interest income and expense during the fiscal years ended March 31, 2021, 2020, and 2019 (in thousands).

For each category of interest-earning assets and interest-bearing liabilities, information is provided for changes attributable to:

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Changes in rate/volume variance are allocated proportionately between changes in rate and changes in volume.

Increase (Decrease) due to 2019 vs.

Increase (Decrease) due to

$ in thousands Volume Rate Total Volume Rate Total

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At March 31, 2021, total assets were $676.7 million, reflecting an increase of $97.9 million, or 16.9%, from total assets of $578.8 million at March 31, 2020.

The increase is primarily attributable to the adoption of Accounting Standards Codification Topic 842, Leases, (Topic 842) a new accounting standard which requires lessees to establish a right-of-use ("ROU") asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.

For the Company, this primarily applied to property leases and a ROU asset totaling $20 million was established on April 1, 2019.

In addition, an increase in cash and cash equivalents of $16.3 million was offset by a $15.0 million decrease in the investment portfolio.

Total cash and cash equivalents increased $16.3 million, or 52.2%, from $31.2 million at March 31, 2019 to $47.5 million at March 31, 2020, primarily due to a net decrease of $15.0 million in the investment portfolio.

An $8.6 million increase in total deposits enabled the Company to repay $7.8 million of FHLB short-term advances during the fiscal year.

Total investment securities decreased $15.0 million, or 16.5%, to $76.0 million at March 31, 2020, compared to $91.0 million at March 31, 2019 due to scheduled principal payments received, accelerated repayments on one SBA mortgage-backed security and the maturity of a $1.0 million corporate bond.

Gross portfolio loans remained relatively flat decreasing $0.1 million to $428.7 million at March 31, 2020, compared to $428.8 million at March 31, 2019, primarily due to attrition and payoffs of non-owner occupied commercial real estate mortgage loans.

The purchase of several pools of residential, multifamily and commercial loans, and growth in commercial mortgage and business loans through organic loan originations were instrumental in mitigating the decline in the portfolio.

The Bank has achieved its goal of maintaining a concentration level of commercial real estate loans commensurate with its risk profile.

The increase was attributable to a $28.1 million increase in cash and cash equivalents, and increases of $54.6 million and $18.3 million in the Bank's net loan and investment portfolios, respectively.

Total cash and cash equivalents increased $28.1 million, or 59.2%, from $47.5 million at March 31, 2020 to $75.6 million at March 31, 2021, primarily due to an increase in total deposits of $67.8 million and a $23.6 million increase in advances from the FHLB and other borrowings.

These increases were partially offset by investment purchases and loan originations and purchases.

Total investment securities increased $18.3 million, or 24.1%, to $94.3 million at March 31, 2021, compared to $76.0 million at March 31, 2020.

The Bank sold $37.8 million of securities out of the available-for-sale portfolio, recognizing gains of $1.2 million during the current fiscal year.

The proceeds were reinvested along with excess cash towards new securities purchases with a higher yield as part of management's strategy to restructure the Bank's investment portfolio and to improve its overall mix and duration.

Gross portfolio loans increased $54.8 million to $483.5 million at March 31, 2021, compared to $428.7 million at March 31, 2020, primarily due to new loan originations of $114.5 million, of which $41.9 million were part of the SBA's Paycheck Protection Program ("PPP"), and $26.8 million were from loan pool purchases.

The new volume was partially offset by attrition and payoffs of $86.5 million, primarily in residential and non-owner occupied commercial real estate mortgage loans.

Liabilities and Equity

Total liabilities increased $13.3 million, or 2.6%, to $529.9 million at March 31, 2020, compared to $516.6 million at March 31, 2019, primarily due to the initial recognition of the $20 million operating lease liabilities as a result of the adoption of Topic 842.

An increase in the Bank's total deposits was partially offset by a decrease in borrowed funds.

Deposits increased $8.6 million, or 1.8%, to $488.8 million at March 31, 2020, compared to $480.2 million at March 31, 2019, due primarily to an increase in money market accounts.

This increase was offset by declines in brokered certificate of deposit accounts.

The Company did not actively pursue the retention of certain non-relationship deposits as it has been seeking to reduce its overall level of above market rate brokered deposits.

Advances from the FHLB-NY and other borrowed money decreased $7.8 million, or 36.4%, to $13.6 million at March 31, 2020, compared to $21.4 million at March 31, 2019 as the Bank repaid FHLB short-term borrowings during the fiscal year.

Other liabilities decreased $5.7 million, or 38.0% to $9.3 million at March 31, 2020, compared to $15.0 million at March 31, 2019, due primarily to the $5.3 million recognition of the deferred gain on sale/leaseback of buildings as a cumulative effect adjustment to equity as a result of the adoption of Topic 842.

Total liabilities increased $94.5 million, or 17.8%, to $624.4 million at March 31, 2021, compared to $529.9 million at March 31, 2020, primarily due to increases in total deposits and other borrowings related to the PPP.

Deposits increased $67.8 million, or 13.9%, to $556.6 million at March 31, 2021, compared to $488.8 million at March 31, 2020, due primarily to PPP loan funds deposited by the program borrowers into their accounts at the Bank and new

deposit account relationships established as the Bank launched a program introducing new products and expanded its digital online account openings into nine states across the Northeast and Washington D.C.

Advances from the FHLB-NY and other borrowed money increased $23.6 million to $37.2 million at March 31, 2021, compared to $13.6 million at March 31, 2020 as the Bank secured advances on its PPP liquidity facility ("PPPLF") at the Federal Reserve to fund PPP loans.

At March 31, 2021, the Bank had no outstanding borrowings from the FHLB-NY.

Total equity increased $3.4 million, or 7.0%, to $52.3 million at March 31, 2021, compared to $48.9 million at March 31, 2020.

The increase was primarily due to the recognition of the $5.3 million deferred gain on sale/leaseback of buildings, as discussed above.

In addition, a decrease of $1.8 million in unrealized losses on securities available-for-sale was offset by a net loss of $5.4 million for the fiscal year.

The increase was primarily due to capital raised from several equity transactions that were completed outside of the ordinary course of business during the fiscal year.

These were partially offset by an increase of $4.1 million in unrealized losses on securities available-for-sale and a net loss of $3.9 million for the fiscal year.

Comparison of Operating Results for the Years Ended March 31, 2021 and 2020

The Company reported a net loss of $3.9 million for fiscal year 2021, compared to net loss of $5.4 million for the prior year period.

The change in our results was primarily driven by lower non-interest expense, offset by a decrease in net interest income and non-interest income in the current period compared to the prior year.

The change in our results was primarily driven by an increase in non-interest income and recoveries of loan losses compared to a provision for loan loss in the prior year, which were partially offset by an increase in non-interest expense and decline in net interest income compared to the prior fiscal year.

Net Interest Income

Net interest income decreased $0.1 million, or 0.6%, to $15.9 million for fiscal year 2021, compared to $16.0 million for the prior year period.

The decrease was due to a $1.6 million decrease in interest income, partially offset by a $0.5 million decrease in interest expense for the period.

The decrease was attributable to a $1.3 million decrease in interest income, partially offset by a $1.2 million decrease in interest expense for the period.

Interest income decreased $1.3 million, or 6.0%, to $20.3 million, compared to $21.6 million for the prior year period.

Interest income on money market investments decreased $0.6 million, or 50.0%, primarily due to a decline in the average balance of the Bank's interest-bearing account at the Federal Reserve Bank.

Interest income on loans decreased $0.5 million, or 2.6%, comprised of a decrease of $0.8 million due to a $18.8 million decrease in average balances in the current period, which was partially offset by a current period increase of $0.3 million due to an 8 basis-point improvement in the overall yield.

The decrease in the average loans outstanding is a result of the Bank's focused efforts to reduce the concentration level of commercial real estate loans during the prior fiscal years.

Interest income on mortgage-backed securities decreased $0.5 million due to a decline in average balances and rates compared to the prior year.

Interest income on money market investments decreased $0.5 million as the $58.9 million increase in the average balance of the Bank's interest-bearing account at the Federal Reserve Bank was offset by a 1.77% decrease in interest rates.

Interest income on loans decreased $0.4 million, or 2.1%, comprised of a decrease of $1.9 million due to a 41 basis-point decline in the overall yield of the loan portfolio resulting primarily from attrition of above market-rate purchased residential loans, which also caused acceleration of premiums.

This was partially offset by an increase in interest income of $1.5 million due to a $32.7 million increase in average loan balances.

Interest expense decreased $1.2 million, or 21.4%, to $4.4 million compared to $5.6 million for the prior year period.

Interest expense on deposits decreased $0.6 million, or 11.5%, primarily due to a $62.0 million decrease in the average balances of certificates of deposit.

This decrease was partially offset by higher rates on certificates of deposits.

Interest expense on borrowings increased $0.1 million, or 11.1%, from the prior fiscal year due to an increase in average borrowings during the current year-to-date period, partially offset by a 60 basis points decrease in the cost to borrow.

Interest expense on deposits decreased $0.8 million, or 17.4%, primarily due to a decrease in the average rates of certificates of deposit.

Interest expense on borrowings decreased $0.3 million, or 30.0%, from the prior fiscal year despite an increase in the average borrowings as the Bank secured advances on the PPPLF at the Federal Reserve at a lower cost to borrow of 35 basis points in order to support its PPP program.

Provision for Loan Losses

The Bank recorded a $19 thousand provision of loan losses for fiscal year 2020 (which was primarily related to overdraft deposit charge-offs), compared to a $270 thousand recovery for loan losses for the prior year period.

For the year ended March 31, 2020, net recoveries of $281 thousand were recognized, compared to net charge-offs of $210 thousand in the prior year period.

The recoveries were offset by an increase in the pool reserves as economic and collateral qualitative factors were adjusted to account for any potential negative impacts of COVID-19.

The Bank recorded a $0.1 million recovery of loan loss for fiscal year 2021, compared to a $19 thousand provision for loan losses for the prior year period.

The prior year provision was primarily related to overdraft deposit chargeoffs.

For the year ended March 31, 2021, net recoveries of $294 thousand were recognized, compared to net recoveries of $281 thousand in the prior year period.

Total chargeoffs of $78 thousand were recognized for fiscal year 2021, compared to total chargeoffs of $183 thousand for the prior fiscal year.

At March 31, 2021, nonaccrual loans totaled $7.2 million, or 1.1% of total assets, compared to $6.8 million, or 1.2% of total assets at March 31, 2020.

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Non-interest Income

Non-interest income for the twelve months ended March 31, 2020 decreased $0.9 million, or 19.6%, to $3.7 million compared to $4.6 million in the prior year period.

Non-interest income in the prior period included gain on sale of building of $0.6 million.

The total deferred gain on sale/leaseback of buildings was recognized as a cumulative effect adjustment to equity effective April 1, 2019 in accordance with the transition to Topic 842.

In addition, other non-interest income decreased from the prior year due to the completion of NMTC projects.

Non-interest income for the twelve months ended March 31, 2021 increased $2.5 million, or 67.6%, to $6.2 million compared to $3.7 million in the prior year period.

Other non-interest income for the current fiscal year included $1.2 million

fees earned from a new correspondent banking relationship and $0.5 million grant income provided by UBS for the Company to extend working capital loans and financial education to small businesses owned and operated by minorities.

In addition, non-interest income included $1.2 million gains recognized from the sales of securities during the fiscal year, as management restructured the Bank's investment portfolio.

These increases were partially offset by lower depository fees compared to the prior fiscal year due to the negative impact of the COVID-19 pandemic on branch activities.

Non-interest Expense

Non-interest expense for the twelve months ended March 31, 2020 decreased $2.8 million, or 10.0%, to $25.1 million compared to $27.9 million for the the prior year period.

Operating efficiencies and improvement in the control environment and in the regulatory infrastructure created year-over-year savings in the bank's regulatory assessment, audit expense and various others.

FDIC premiums were significantly lower in the current fiscal year, decreasing $0.5 million, or 83.3%, as a result of the Bank's commitment to improve its regulatory position.

The Bank was eligible for the FDIC small bank assessment credit that was applied beginning the second quarter of the current fiscal year In addition, a vendor management initiative resulted in senior management canceling or renegotiating a number of long-standing contracts at a significant savings to the Company.

Outsourced service fees declined as Company personnel became knowledgeable in and assumed responsibility for various processes formerly performed by external vendors.

Employee compensation and benefits expense decreased $0.8 million due to a strategic reduction in force.

These decreases were partially offset by higher net equipment expense as the Company upgraded banking equipment, and occupancy costs related to the relocation of the Company's administrative offices during the prior fiscal year.

Non-interest expense for the twelve months ended March 31, 2021 increased $1.0 million, or 4.0%, to $26.1 million compared to $25.1 million for the the prior year period.

Net equipment and data processing costs were higher compared to the prior fiscal year due to new hardware/software contracts related to technology upgrades required to facilitate the infrastructure for a remote work environment due to the ongoing pandemic, and one-time conversion costs associated with the Bank's upgrade to a new core banking system.

In addition, FDIC premiums were lower in the prior year since the Bank was eligible for the FDIC small bank assessment credit.

The Company did not have any federal, state and local income tax expense as of March 31, 2021 and 2020.

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Additionally, Carver Federal has other sources of liquidity including the ability to borrow from the Federal Home Loan Bank of New York ("FHLB-NY") utilizing unpledged mortgage-backed securities and certain mortgage loans, the sale of available-for-sale securities and the sale of certain mortgage loans.

Net borrowings decreased $7.8 million during fiscal year 2020 due to the repayment of FHLB short-term borrowings.

In addition, the Bank entered into $0.2 million finance leases during the period.

Net borrowings increased $23.6 million during fiscal year 2021 as the Bank secured advances on the PPP liquidity facility ("PPPLF") at the Federal Reserve at a rate of 35 basis points to fund PPP loans.

The Bank had no advances outstanding from the FHLB-NY at March 31, 2021.

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The most significant potential liquidity challenge the Bank faces is variability in its cash flows as a result of mortgage refinance activity.

When mortgage interest rates decline, customers’ refinance activities tend to accelerate, causing the cash

flow from both the mortgage loan portfolio and the mortgage-backed securities portfolio to accelerate.

When mortgage interest rates decline, customers’ refinance activities tend to accelerate, causing the cash flow from both the mortgage loan portfolio and the mortgage-backed securities portfolio to accelerate.

In contrast, when mortgage interest rates increase, refinance activities tend to slow, causing a reduction of liquidity.

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The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities.

During fiscal year 2020, total cash and cash equivalents increased $16.3 million to $47.5 million reflecting cash provided by investing activities of $15.7 million and cash provided by financing activities of $0.6 million, offset by cash used in operating activities of $0.0 million.

Net cash provided by investing activities of $15.7 million was attributable to net loan principal repayments and investment paydowns.

This was partially offset by $35.5 million in loan purchases during the fiscal year.

Net cash provided by financing activities of $0.6 million resulted from net increases in deposits of $8.6 million, partially offset by a decrease of $8.0 million in FHLB-NY advances and other borrowings due to the repayment of FHLB short-term advances during the period.

During fiscal year 2021, total cash and cash equivalents increased $28.1 million to $75.6 million reflecting cash provided by financing activities of $102.8 million and cash provided by operating activities of $2.2 million, partially offset by cash used in investing activities of $77.0 million.

Net cash provided by financing activities of $102.8 million resulted from net

increases in deposits and borrowings of $67.7 million and $23.7 million, respectively.

The net increase in deposits was primarily due to PPP loan funds deposited by the program borrowers into their accounts at the Bank and new deposit account relationships established across the Northeast as the Bank launched a program introducing new products and expanded its digital online account openings into nine states and Washington D.C.

The $23.7 million increase in other borrowings was attributable to advances secured on the Bank's PPP liquidity facility at the Federal Reserve to fund PPP loans.

In addition, the Company raised capital through the issuance of common and preferred shares.

Net cash used in investing activities of $77.0 million was attributable to securities purchases and loan originations and purchases, net of principal repayments and payoffs.

Potential Mortgage Representation and Warranty Liabilities

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years More than

Certificates of deposit $ 152,751 $ 114,045 $ 28,351 $ 10,259 $ 96

Debt obligations:

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CCDC provides funding to underlying projects.

While providing funding to investments in the NMTC eligible projects, CCDC has retained a 0.01% interest in other special purpose entities created to facilitate the investments, with the investors owning the remaining 99.99%.

While providing funding to investments in the NMTC eligible projects, CCDC retained a 0.01% interest in other special purpose entities created to facilitate the investments, with the investors owning the remaining 99.99%.

CCDC also provides certain administrative services to these entities and receives servicing fee income during the term of the qualifying projects.

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The Bank has a contingent obligation to reimburse the investors for any loss or shortfall incurred as a result of the NMTC project not being in compliance with certain regulations that would void the investor's ability to otherwise utilize tax credits stemming from the award.

As of March 31, 2020, all three allocation awards have been fully utilized in qualifying projects.

The NMTC compliance period was completed for all these entities, which were dissolved upon exiting the NMTC projects.

The Bank's unconsolidated VIEs, in which the Company holds significant variable interests or has continuing involvement through servicing a majority of assets in a VIE are presented in the table below.

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$ — $ — $ 13,400 $ 13,400 $ 16,110 $ 400 $ — $ — $ 16,510

CDE 18* 600 13,254 — — — — — 5,169 5,169

CDE 19 500 10,746 11,060 11,060 — 1 — 4,191 4,192

Total $ 1,100 $ 24,000 $ 24,460 $ 24,460 $ 15,549 $ 401 $ — $ 9,360 $ 25,310

* Entity exited the NMTC project during fiscal year 2018 and remains on the above table pending final dissolution.

1 Carver Statutory Trust debt investment includes deferred interest of $2.5 million.

1 Carver Statutory Trust debt investment includes deferred interest of $3.1 million, which was paid on June 16, 2021.

Regulatory Capital Position

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis