What changed in this filing

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Item 1A. Risk Factors

2023-06-29 compared with 2022-07-14 · 62 added, 80 removed, 175 unchanged (45% of the section changed)

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Commercial real estate loans amount to $177.7 million, or 29.9% of our loan portfolio at March 31, 2023.

Commercial real estate loans generally are considered to involve a higher degree of risk due to a variety of

factors, including generally larger loan balances and loan terms which often do not require full amortization of the loan over its term and, instead, provide for a balloon payment at the stated maturity date.

Commercial real estate loans generally are considered to involve a higher degree of risk due to a variety of factors, including generally larger loan balances and loan terms which often do not require full amortization of the loan over its term and, instead, provide for a balloon payment at the stated maturity date.

Repayment of commercial real estate loans generally is dependent on income being generated by the rental property or underlying business in amounts sufficient to cover operating expenses and debt service.

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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.

In May 2016, the Bank entered into a Formal Agreement with the OCC.

The Formal Agreement required the Bank to reduce its concentration of commercial real estate and required that the Bank undertake several actions to improve compliance matters and overall profitability.

Based on an updated report of examination, the Bank's CRE concentration was at appropriate levels and there were no issues surrounding any compliance matters.

Failure to comply with the Formal Agreement could result in additional supervisory and enforcement actions against the Bank, its directors, or senior executive officers, including the issuance of a cease and desist order or the imposition of civil money penalties.

The Bank's compliance efforts may have an adverse impact on its non-interest expense and net income.

Any regulatory examination scrutiny or new regulatory requirements arising from the recent events in the banking industry could increase the Company’s expenses and affect the Company’s operations.

The Company anticipates increased regulatory scrutiny, in the course of routine examinations and otherwise, and new regulations directed towards banks, designed to address the recent negative developments in the banking industry, all of which may increase the Company’s costs of doing business and reduce its profitability.

Among other things, there may be an increased focus by both regulators and investors on deposit composition and the level of uninsured deposits.

As a result, the Bank could face increased scrutiny by regulators and the investor community.

Carver is subject to more stringent capital requirements, which may adversely impact the Company's return on equity, or constrain it from paying dividends or repurchasing shares.

In July 2013, the FDIC and the FRB approved a new rule that substantially amended the regulatory risk-based capital rules applicable to the Bank and the Company.

The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.

The final rule includes new minimum risk-based capital and leverage ratios, which became effective for the Bank and the Company on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios.

The new minimum capital requirements are:

(i) a new common equity Tier 1 capital ratio of 4.5%;

(ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%);

(iii) a total capital ratio of 8% (unchanged from current rules);

and (iv) a Tier 1 leverage ratio of 4%.

The final rule also established a “capital conservation buffer” of 2.5%, and the following minimum ratios:

(i) a common equity Tier 1 capital ratio of 7.0%;

(ii) a Tier 1 to risk-based assets capital ratio of 8.5%;

and (iii) a total capital ratio of 10.5%.

The new capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and increased each year until fully implemented in January 2019.

An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount.

These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.

Regardless of Basel III's minimum requirements, Carver, as a result of the previously described Formal Agreement, was issued an Individual Minimum Capital Ratio ("IMCR") letter by the OCC, which requires the Bank to maintain minimum regulatory capital levels of 9% for its Tier 1 leverage ratio and 12% for its total risk-based capital ratio.

At March 31, 2022, the Bank's capital level exceeded the regulatory requirements and its IMCR requirements with a Tier 1 leverage ratio of 10.45%, Common Equity Tier 1 capital ratio of 13.75%, Tier 1 risk-based capital ratio of 13.75%, and a total risk-based capital ratio of 14.78%.

Federal regulations require federally insured depository institutions to meet several minimum capital standards:

a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management personnel if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.

Regardless of the federal regulatory minimum requirements, 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 application of these capital requirements, including the higher IMCR requirements, could, among other things, result in lower returns on equity, result in regulatory actions if we are unable to comply with such requirements and could limit the Bank's ability to pay dividends to the Company.

There can be no assurance that our regulator will approve payment of our deferred interest on our outstanding trust preferred securities.

Carver is a unitary savings and loan association holding company regulated by the FRB and almost all of its operating assets are owned by Carver Federal.

Carver relies primarily on dividends from the Bank to pay cash dividends to its stockholders, and to engage in share repurchase programs.

The OCC regulates all capital distributions, including dividend payments, by the Bank to the Company, and the FRB regulates dividends paid by the Company.

Carver relies, in part,on dividends from the Bank to pay cash dividends to its stockholders, and to engage in share repurchase programs.

Under the prior Formal Agreement, the OCC regulated all capital distributions, including dividend payments, by the Bank to the Company, and the FRB regulates dividends paid by the Company.

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, for among other reasons, that would result in the Bank’s failure to meet the OCC minimum capital requirements.

In accordance with the Agreement, the Bank is currently prohibited from paying any dividends without prior OCC approval, and, as such, has suspended its regular quarterly cash dividend to the Company.

Carver has suspended its regular quarterly cash dividend on its common stock.

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

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A streamlined process has been developed for the Company to request regulatory approval to make the debenture interest payments.

Quarterly interest payments are now current, up to and including the most recent one, which was due on June 17, 2022.

Quarterly interest payments are now current, up to and including the most recent one, which was due on March 17, 2023.

However, there can be no assurance that our regulators will approve future payments on our outstanding trust preferred securities.

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Risks Related to the Economic Conditions

Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system.

The recent high-profile bank failures involving First Republic Bank, Silicon Valley Bank and Signature Bank have generated significant market volatility among publicly traded bank holding companies.

These market developments have negatively impacted customer confidence in the safety and soundness of banks.

As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations.

While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of these recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in banks and the banking system more broadly.

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

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Adverse changes in the economy caused by inflation, recession, unemployment, state or local real estate laws and regulations or other factors beyond the Bank's control may also continue to have a negative effect on the ability of borrowers to make timely mortgage or business loan payments, which would have an adverse impact on earnings.

Over the past several months:

(1) Russia declared war on Ukraine, (2) the annual inflation rate for the United States reached 8.6% for the twelve-month period ended May 31, 2022 (the largest annual increase since December 1981) and (3) as of June 14, 2022, the national average gas price hit a record high.

As of that date, the national average price for a gallon of gas was $5.01, the highest number ever recorded.

Additionally, COVID-19 has impacted businesses in New York more severely than in the rest of the nation, according to a report from the Office of the New York State Comptroller.

Since the U.S.

Census Bureau began collecting and reporting data through the Small Business Pulse Survey, New York’s small businesses have consistently reported experiencing a negative effect from the pandemic at rates that exceed the national average.

Consequently, deterioration in economic conditions in the New York metropolitan area, including the continued out-sized negative impact of COVID-19 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.

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.

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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 had ordered non-essential businesses to close and residents to shelter in place at home.

This 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 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 declined to historic lows.

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

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

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

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

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

The extent of such impact is dependent upon future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy would reopen.

As a 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;

• 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.

The ongoing COVID-19 pandemic and measures intended to prevent its spread could adversely affect the Company’s business activities, financial condition, and results of operations.

Global health concerns relating to the COVID-19 pandemic and related government actions taken to reduce the spread of the virus have affected the macroeconomic environment, both nationally and in the Company’s market area.

Federal and state agencies may pass measures to address the economic and social consequences of the pandemic that could impact the Company’s financial results and have a destabilizing effect on financial markets, key market indices, and overall economic activity.

Prolonged measures by public health or other governmental authorities encouraging or requiring significant restrictions on travel, assembly or other core business practices could harm the Bank’s business and that of its customers, in particular small to medium-sized business customers.

Although the Company has business continuity plans and other safeguards in place, there is no assurance that they will be effective.

A decline in economic conditions generally and a prolonged negative impact on small to medium-sized businesses, in particular, due to the COVID-19 pandemic, could result in a material adverse effect on the Company’s business, financial condition, and results of operations and may heighten many of the known risks described herein and in other filings with the SEC.

Risks Related to Market Interest Rates

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

From an interest rate risk perspective, for many years the Company was liability sensitive, which indicated that liabilities were generally re-pricing faster than assets.

For the past several years, Carver has been asset sensitive, which indicates that assets generally re-price faster than liabilities.

In a rising rate environment, asset sensitivity is preferable as it results in improvement to our net interest margin.

interest rate risk perspective, for many years the Company was asset sensitive, which indicated that assets were generally re-pricing faster than liabilities.

For the past few years, Carver has been liability sensitive, which indicates that liabilities generally re-price faster than assets.

In a rising rate environment, liability sensitivity is not preferable as it results in a reduction to our net interest margin.

In response to improving economic conditions, the Federal Open Market Committee ("FOMC") 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.

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Citing strong job gains, a falling unemployment rate and "elevated" inflation, the Federal Reserve approved the first interest rate hike in more than three years on March 16, 2022, increasing the target range to 0.25% - 0.50%.

On May 5, 2022, the FOMC voted approval for a 50 basis-point increase in the primary credit rate up to 1.00%.

In their most recent meeting in June 2022, the FOMC approved a 75 basis-point increase to 1.75%, which was the first 0.75% rate hike issued by the FOMC since 1994.

The Federal Reserve approved its eighth consecutive interest rate hike in February 2023, raising the overnight borrowing rate 25 basis points to a target range of 4.5% to 4.75%, the highest it has been in 15 years.

While this quarter-point rate increase was the smallest adjustment since March 2022 and inflation seems to have eased, rates will likely continue to increase, although at potentially smaller increments.

Interest rates also affect how much money we lend.

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

Rising interest rates have decreased the value of the Company’s held-to-maturity securities portfolio, and the Company would realize losses if it were required to sell such securities to meet liquidity needs.

As a result of inflationary pressures and the resulting rapid increases in interest rates over the last year, the trading value of previously issued government and other fixed income securities has declined significantly.

These securities make up a majority of the securities portfolio of most banks in the U.S., including a significant portion of the Company’s, resulting in unrealized losses embedded in the U.S.

banks’ securities portfolios.

While the Company does not currently intend to sell these securities, if the Company were required to sell such securities to meet liquidity needs, it may incur losses, which could impair the Company’s capital, financial condition, and results of operations and require the Company to raise additional capital on unfavorable terms, thereby negatively impacting its profitability.

While the Company has taken actions to maximize its funding sources, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs.

Furthermore, while the Federal Reserve Board has announced a Bank Term Funding Program available to eligible depository institutions secured by U.S.

treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral at par, to mitigate the risk of potential losses on the sale of such instruments, there is no guarantee that such programs will be effective in addressing liquidity needs as they arise.

Risks Related to the Bank's Business

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As of March 31, 2023, we have exposure to approximately $15.9 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.

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

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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.

The Company is subject to certain risks with respect to liquidity.

Liquidity refers to the Company's ability to generate sufficient cash flows to support its operations and to fulfill its obligations, including commitments to originate loans, to repay wholesale borrowings and other liabilities, and to satisfy the withdrawal of deposits by its customers.

The Company's primary sources of liquidity are the cash flows generated through the repayment of loans and securities, cash flows from the sale of loans and securities, deposits gathered organically through the Bank's branch network, from socially motivated depositors, city and state agencies and deposit brokers and borrowed funds, primarily in the form of wholesale borrowings from the FHLB-NY.

In addition, and depending on current market conditions, the Company has the ability to access the capital markets from time to time.

Deposit flows, calls of investment securities and wholesale borrowings, and prepayments of loans and mortgage-related securities are strongly influenced by such external factors as the direction of interest rates, whether actual or perceived, local and national economic conditions and competition for deposits and loans in the markets the Bank serves.

Furthermore, changes to the FHLB-NY's underwriting guidelines for wholesale borrowings may limit or restrict the Bank's ability to borrow, and could therefore have a significant adverse impact on liquidity.

A decline in available funding could adversely impact the Bank's ability to originate loans, invest in securities, and meet expenses, or to fulfill such obligations as repaying borrowings or meeting deposit withdrawal demands.

A lack of liquidity could adversely affect the Company’s financial condition and results of operations.

Liquidity is essential to the Company’s business.

The Company relies on its ability to generate deposits and effectively manage the repayment of its liabilities to ensure that there is adequate liquidity to fund operations.

An inability to raise funds through deposits, borrowings, the sale and maturities of loans and securities and other sources could have a substantial negative effect on liquidity.

The Company’s most important source of funds is its deposits.

Deposit balances can decrease when customers perceive alternative investments as providing a better risk adjusted return, which are strongly influenced by such external factors as the direction of interest rates, local and national economic conditions and the availability and attractiveness of alternative investments.

Further, the demand for deposits may be reduced due to a variety of factors such as current negative trends in the banking sector, the level of and/or composition of our uninsured deposits, demographic patterns, changes in customer preferences, reductions in consumers’ disposable income, the monetary policy of the FRB or regulatory actions that decrease customer access to particular products.

If customers move money out of bank deposits and into other investments such as money market funds, the Company would lose a relatively low-cost source of funds, which would increase its funding costs and reduce net interest income.

Any changes made to the rates offered on deposits to remain competitive with other financial institutions may also adversely affect profitability and liquidity.

Other primary sources of funds consist of cash flows from operations, maturities and sales of investment securities and/or loans, brokered deposits, borrowings from the FHLB of New York and/or FRB discount window, and unsecured borrowings.

The Company also may borrow funds from third-party lenders, such as other financial institutions.

The Company’s access to funding sources in amounts adequate to finance or capitalize its activities, or on terms that are acceptable, could be impaired by factors that affect the Company directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry, a decrease in the level of the Company’s business activity as a result of a downturn in markets or by one or more adverse regulatory actions against the Company or the financial sector in general.

Any decline in available funding could adversely impact the Company’s ability to originate loans, invest in securities, meet expenses, or to fulfill obligations such as meeting deposit withdrawal demands, any of which could have a material adverse impact on its liquidity, business, financial condition and results of operations.

Carver may not be able to utilize its income tax benefits.

The Company's ability to utilize the deferred tax asset generated by New Markets Tax Credit income tax benefits as well as other deferred tax assets depends on its ability to meet the NMTC compliance requirements and its ability to generate sufficient taxable income from operations in the future.

Since the Bank has not generated sufficient taxable income to utilize

tax credits as they were earned, a deferred tax asset has been recorded in the Company's financial statements.

Since the Bank has not generated sufficient taxable income to utilize tax credits as they were earned, a deferred tax asset has been recorded in the Company's financial statements.

For additional information regarding Carver's NMTC, refer to Item 7, "Variable Interest Entities."

The future recognition of Carver's deferred tax asset is highly dependent upon Carver's ability to generate sufficient taxable income.

A valuation allowance is required to be maintained for any deferred tax assets that we estimate are more likely than not to be unrealizable, based on available evidence at the time the estimate is made.

A valuation allowance is required to be maintained for any deferred tax assets that we estimate are more likely

than not to be unrealizable, based on available evidence at the time the estimate is made.

In assessing Carver's need for a valuation allowance, we rely upon estimates of future taxable income.

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Computer break-ins, phishing and other disruptions may occur, and in infrequent cases have occurred, and could jeopardize the security of information stored in and transmitted through Carver’s computer systems and network infrastructure, which may result in significant liability to Carver and may cause existing and potential customers to refrain from doing business with Carver.

Although Carver, with the help of third-party service providers, intends to continue to

implement security technology and establish operational procedures designed to prevent such damage, its security measures may not be successful.

Although Carver, with the help of third-party service providers, intends to continue to implement security technology and establish operational procedures designed to prevent such damage, its security measures may not be successful.

In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms Carver and its third-party service providers use to encrypt and protect customer transaction data.

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We are subject to risks and losses resulting from fraudulent activities that could adversely impact our financial performance and results of operations.

As a bank, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation.

As a bank, we are susceptible to fraudulent activity that has been, and in the future may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation.

We are most subject to fraud and compliance risk in connection with the origination of loans, ACH transactions, wire transactions, ATM transactions, checking transactions, and debit cards that we have issued to our customers and through our online banking portals.

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Under SEC rules, we are prohibited from selling securities under such a registration statement if the aggregate market value of the securities sold thereunder in any twelve-month period exceeds one-third of the market value of our outstanding common stock held by non-affiliates.

In 2021, we entered into a sales agreement, with an agent to sell, from time to time, our common stock having an aggregate offering price of up to $20.0 million, in one or more “at the market offerings.” As of March 31, 2022, we have sold an aggregate of 397,367 shares of our common stock pursuant to the terms of such sales agreement, for aggregate gross proceeds of approximately $3.1 million.

During fiscal year 2022, the Company entered into a sales agreement, with an agent to sell, from time to time, our common stock having an aggregate offering price of up to $20.0 million, in one or more “at the market offerings.” During fiscal year 2022, we had sold an aggregate of 397,367 shares of our common stock pursuant to the terms of such sales agreement, for aggregate gross proceeds of approximately $3.1 million.

Aggregate net proceeds received were approximately $3.0 million, after deducting expenses and commissions paid to the placement agent.

There were no additional offerings during the twelve months ended March 31, 2023.

In the future, we may be limited in our ability to access sufficient funding through a public or private equity offering or convertible debt offering.

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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 1A. Risk Factors