What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-06-29 compared with 2022-07-14 · 101 added, 113 removed, 377 unchanged (36% of the section changed)

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Executive Summary

Carver concluded fiscal 2022 with a net loss of $0.8 million compared to net loss of $3.9 million for the prior year period.

The change in our results of operations was primarily driven by increases in net interest income and non-interest income, partially offset by an increase in non-interest expense.

Carver concluded fiscal 2023 with a net loss of $4.4 million, compared to a net loss of $0.8 million for the prior year period.

The change in our results of operations was primarily driven by a decrease in non-interest income and an increase in non-interest expense, partially offset by an increase in net interest income after recoveries of loan losses compared to the prior fiscal year.

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

Goods and services saw rapid growth in May and there was a large rise in food and energy prices.

Additionally, the Federal Reserve has increased the federal funds rate, and will likely continue to increase the federal funds rate in order to bring down inflation that is at a 40-year high.

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.

Despite the fact that one in five New York small businesses reported a return to normal operations in October 2021, the negative impacts on small businesses with less than 500 employees persist.

Small businesses account for the overwhelming majority of firms in most industry sectors in New York.

They also employ the majority of workers in industry sectors such as accommodation and food services;

wholesale trade;

construction;

professional, scientific and technical services;

and arts, entertainment and recreation.

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.

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.

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.

Management is actively working to minimize the current and future impact of this unprecedented situation, and is continuing to make adjustments to operations where appropriate or necessary to help slow the spread of the virus.

In addition, as a result of further actions that may be taken to contain or reduce the impact of the COVID-19 pandemic, the Company may experience changes in the value of collateral securing outstanding loans, reductions in the credit quality of borrowers and the inability of borrowers to repay loans in accordance with their terms.

The Company is actively managing the credit risk in its loan portfolio.

These and similar factors and events may have substantial negative effects on the business, financial condition, and results of operations of the Company and its customers.

Significant increases in food and energy prices resulted from swift increases in the rate of inflation.

Additionally, the Federal Reserve has increased the federal funds rate at each of its meetings since March 2022, and while the rate was held steady at the most recent meeting in June 2023, it has indicated that it will likely increase again later this year.

For Carver, the economic climate of New York City ("the City"), in particular, impacts our business as the City lags behind the rest of New York State and the nation both in restoring pandemic job losses and in rebounding to pre-pandemic levels of unemployment.

The City's unemployment rate remains high at 5.4%, exceeding the national average, as employment in the arts and entertainment, food and hospitality sectors continue to remain below their pre-pandemic highs.

In March 2023, the FDIC was appointed as receiver for Silicon Valley Bank and Signature Bank after they experienced runs on deposits and other liquidity constraints.

At the time, Silicon Valley Bank and Signature Bank were the 16th and 29th largest banks in the United States, respectively, as measured by total assets as of December 31, 2022.

Following the failures of Silicon Valley Bank and Signature Bank, on May 1, 2023, First Republic Bank was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver.

The closures of those banks led to industry-wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding confidence in the banking system.

In response to these recent developments, the Company took a number of preemptive actions, which included proactive outreach to clients and steps to maximize its funding sources.

As a result, the Company's liquidity position remains adequate.

The impact of market volatility from the adverse developments in the banking industry along with continued high inflation and rising interest rates, will depend on future developments, which are highly uncertain and difficult to predict.

The Company is closely monitoring its asset quality, liquidity, and capital positions, as well as the credit risk in its loan portfolio.

Management is actively working to minimize the current and future impact of this situation, and is continuing to make adjustments to operations where appropriate or necessary to mitigate risk.

However, these factors and events may have negative effects on the business, financial condition, and results of operations of the Company and its customers.

At the Market Offering

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 an “at the market offering.” 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.

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

During fiscal year 2022, 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 an “at the market offering.” During fiscal year 2022, the Company sold an aggregate of 397,367 shares of common stock pursuant to the terms of such sales agreement, resulting in aggregate gross proceeds of approximately $3.1 million and net proceeds of $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.

Subsequent Events

On April 12, 2023, the Company entered into an agreement with a third party, in which the third party would provide the Company with an unsecured long-term, below-market-rate loan in the amount of $2.5 million to finance eligible loans offered through the Bank's community investment initiatives and loan programs focused on Minority and Women-owned Business Enterprises and consumers across the greater New York City region.

In April 2023, the Bank was awarded a $2.5 million grant as part of the U.S.

Department of the Treasury's Community Development Financial Institutions Fund's Equitable Recovery Program ("CDFI ERP").

The funds will be used towards financing programs and activities to help low- and moderate income communities recover from the COVID-19 pandemic in accordance with the terms and requirements of the CDFI ERP.

SELECTED FINANCIAL DATA

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Management believes these non-GAAP financial measures provide information that is useful to investors in understanding the Company's underlying operating performance and trends, and facilitates comparisons with the performance of other banks and thrifts.

Return on equity measures how efficiently we generate profits from the resources provided by our net assets.

Return on average stockholders' equity is calculated by dividing annualized net income (loss) attributable to Carver by average stockholders' equity, excluding AOCI.

Management believes that this performance measure explains the results of the Company's ongoing businesses in a manner that allows for a better understanding of the underlying trends in the Company's current businesses.

Return on average stockholders' equity, excluding AOCI measures how efficiently we generate profits from the resources provided by our net assets.

Return on average stockholders' equity, excluding AOCI is calculated by dividing annualized net income (loss) attributable to Carver by average stockholders' equity, excluding AOCI.

Management believes that this performance measure and average stockholders' equity, excluding AOCI to average assets explains the results of the Company's ongoing businesses in a manner that allows for a better understanding of the underlying trends in the Company's current businesses.

For purposes of the Company's presentation, AOCI includes the changes in the market or fair value of its investment portfolio.

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Critical Accounting Estimates

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 is 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.

Various elements of accounting estimates, 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 is the most critical accounting estimates.

These estimates 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.

Such assumptions and estimates are susceptible to significant changes in today's economic environment.

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These assumptions and estimates are susceptible to significant changes based on the current environment.

Citing strong job gains, the Federal Reserve approved the first interest rate hike in more than three years on March 16, 2022 and has intimated that rate hikes will continue the remainder of the year.

In a continued effort to combat inflation, 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 is the smallest adjustment since March 2022 and inflation seems to have eased, rates will likely continue to increase, although at potentially smaller increments.

A rising rate environment can negatively impact the Company if the higher debt service costs on adjustable-rate loans lead to borrowers' inability to pay contractual obligations.

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General Reserve Allowance

Carver's maintenance of a general reserve allowance in accordance with ASC Subtopic 450-20 includes the Bank's evaluating the risk to loss potential of homogeneous pools of loans based upon historical loss factors and a review of nine different environmental factors that are then applied to each pool.

Carver's maintenance of a general reserve allowance in accordance with ASC Subtopic 450-20 includes the Bank's evaluation of the risk to loss potential of homogeneous pools of loans based upon historical loss factors and a review of nine different environmental factors that are then applied to each pool.

The main pools of loans (“Loan Type”) are:

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

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

In accordance with guidance, if there is no impairment amount, no reserve is established for the loan.

Financial institutions were not required to comply with ASU No.

2016-13, "Financial Instruments - Credit Loss," which updates the guidance on recognition and measurement of credit losses for financial assets, from the enactment date of the CARES Act until the earlier of the end of the President's declaration of a National Emergency or December 31, 2020.

The new methodology requirements, know as the current expected credit loss model ("CECL"), will require entities to adopt an impairment model based on expected losses, rather than incurred losses.

An unallocated loan loss allowance is appropriate when it reflects an estimate of probable loss, determined in accordance with GAAP and is properly supported.

Financial institutions were not required to comply with ASC 326, "Financial Instruments - Credit Loss," which updates the guidance on recognition and measurement of credit losses for financial assets until the earlier of the end of the President's declaration of a National Emergency or December 31, 2020.

The new methodology requirements, known as the current expected credit loss model ("CECL"), will require entities to adopt an impairment model based on expected losses, rather than incurred losses.

The Consolidated Appropriations Act, 2021, that was enacted in December 2020, provided for a further extension of the required CECL adoption date to January 1, 2022.

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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.

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.

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.

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

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, the Company had a positive one-year gap equal to 6.57% of total rate sensitive assets at March 31, 2022.

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.

As illustrated below, the Company had a negative one-year gap equal to 12.70% of total rate sensitive assets at March 31, 2023.

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

While the Company, as a liability-semsitive institution, may benefit from a falling interest rate environment, the rising rates over the past fiscal year have not yet been projected to end, indicating another period in which compressed margins may negatively impact net interest income.

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, 2023.

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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 the Company's interest income and expense during the fiscal years ended March 31, 2022, 2021, and 2020 (in thousands).

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

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Comparison of Financial Condition at March 31, 2023 and 2022

At March 31, 2022, total assets were $735.3 million, reflecting an increase of $58.6 million, or 8.7%, from total assets of $676.7 million at March 31, 2021.

The increase was primarily attributable to a $95.5 million increase in the Bank's net loan portfolio, partially offset by decreases of $21.4 million in the investment portfolio and $14.6 million in cash and cash equivalents.

At March 31, 2023, total assets were $723.2 million, reflecting a decrease of $12.1 million, or 1.6%, from total assets of $735.3 million at March 31, 2022.

The decrease was primarily attributable to decreases of $18.4 million in cash and cash equivalents and $16.7 million in the Bank's investment portfolio, partially offset by increases of $18.8 million in the Bank's net loan portfolio and $5.0 million in other assets.

Total cash and cash equivalents decreased $18.4 million, or 30.2%, from $61.0 million at March 31, 2022 to $42.6 million at March 31, 2023.

The decrease in cash was primarily due to the funding of net loan activity and repayment of advances on the PPPLF.

In addition, the Company made a payment of approximately $3.2 million to settle deferred interest on the subordinated debt associated with its trust preferred securities during the first quarter of the fiscal year.

These cash outflows were partially offset by an increase in total deposits and paydowns received on investment securities.

Total investment securities decreased $21.4 million, or 22.7%, to $72.9 million at March 31, 2022, compared to $94.3 million at March 31, 2021 due to scheduled principal payments received, and early payoffs of a $1.7 million mortgage-backed security in the held-to-maturity portfolio during the first quarter of the fiscal year, and a $2.5 million asset-backed security in the available-for-sale portfolio during the second quarter of the fiscal year.

Gross portfolio loans increased $96.0 million to $579.5 million at March 31, 2022, compared to $483.5 million at March 31, 2021, primarily due to loan pool purchases of $50.1 million and new loan originations of $151.5 million, of which $14.9 million were part of the SBA's PPP.

The new volume was partially offset by attrition and payoffs of $99.5 million and loans participated of $6.1 million.

The decrease in cash was primarily due to a $27.7 million decrease in deposits and increased net loan activity, partially offset by an increase of $35.2 million in borrowings and $10.7 million in paydowns received on investment securities.

Total investment securities decreased $16.7 million, or 22.9%, to $56.2 million at March 31, 2023, compared to $72.9 million at March 31, 2022 due to scheduled principal payments received of approximately $8.1 million and a $5.5 million increase in unrealized losses in the available-for-sale portfolio.

In addition, there was an early payoff of a $2.5 million mortgage-backed security in the held-to-maturity portfolio during the second quarter of the fiscal year.

Gross portfolio loans increased $18.4 million to $597.9 million at March 31, 2023, compared to $579.5 million at March 31, 2022, primarily due to new loan originations of $111.9 million and loan pool purchases of $14.3 million.

These were partially offset by attrition and payoffs of $101.7 million and loans participated of $4.0 million.

The unexpected high level of payoffs was primarily due to commercial real estate borrowers who perceived the rising rate environment, coupled with high inflation, as the right time to exit contractual debt.

Other assets increased $5.0 million to $12.2 million at March 31, 2023, compared to $7.2 million at March 31, 2022, primarily due to the purchase of a $5.0 million bank-owned life insurance policy during the first quarter of fiscal year 2023 as a channel to add the Company's non-interest income revenue by means of an investment considered safe and sound by the Company's regulators.

Liabilities and Equity

Total liabilities increased $55.8 million, or 8.9%, to $680.2 million at March 31, 2022, compared to $624.4 million at March 31, 2021, primarily due to increases in total deposits, partially offset by a decrease in other borrowings related to the PPP.

Deposits increased $71.5 million, or 12.8%, to $628.1 million at March 31, 2022, compared to $556.6 million at March 31, 2021, due primarily to PPP loan funds deposited by the program borrowers into their accounts at the Bank (a

majority of which have been retained as new customers) and new deposit account relationships established as the Bank continued to expand its digital online account openings into nine states across the Northeast and Washington D.C.

Total liabilities decreased $2.2 million, or 0.3%, to $678.0 million at March 31, 2023, compared to $680.2 million at March 31, 2022, primarily due to decreases in total deposits and other liabilities, partially offset by an increase in advances from the FHLB-NY.

Deposits decreased $27.7 million, or 4.4%, to $600.4 million at March 31, 2023, compared to $628.1 million at March 31, 2022.

The decline was primarily related to a large withdrawal by one customer, who had previously informed Carver of the intended withdrawal due to concerns regarding a large deposit concentration with one bank.

This was partially offset by increases in certificate of deposit accounts due to an increase in interest rates, coupled with significant outreach efforts from the retail team.

As of March 31, 2023 and 2022, the aggregate amount of uninsured deposits (deposits in amounts greater than or equal to $250,000, which is the maximum amount for federal deposit insurance) was $116.8 million and $187.4 million, respectively.

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See Note 8 to Consolidated Financial Statements for additional information on our deposits.

Advances from the FHLB-NY and other borrowed money decreased $21.3 million to $15.9 million at March 31, 2022, compared to $37.2 million at March 31, 2021.

The Bank paid down $23.7 million of its PPPLF at the Federal Reserve as it continued to receive forgiveness payments from the SBA on the PPP loan portfolio.

The Company borrowed $2.5 million in low-rate unsecured loans from third parties to finance eligible loans offered through the Bank's community investment initiatives loan program.

At March 31, 2022, the Bank had no outstanding borrowings from the FHLB-NY.

Other liabilities increased $7.1 million to $21.8 million at March 31, 2022, compared to $14.7 million at March 31, 2021 due to an increase in retail liabilities, primarily attributed to an outstanding teller check at March 31, 2022.

Total equity increased $2.8 million, or 5.4%, to $55.1 million at March 31, 2022, compared to $52.3 million at March 31, 2021.

The increase was primarily due to $4.0 million raised in net proceeds from the issuance of preferred stock during the second quarter.

During fiscal year 2022, a series of transfers was effected to convert $3.8 million Series D Preferred Stock into common stock, resulting in a transfer between preferred shares and paid in capital.

These conversions had no impact on the Company's total capital.

The Company also raised approximately $3.0 million in net proceeds through the sale of common stock under the ATM offering during the third and fourth quarters of fiscal year 2022.

These were partially offset by an increase of $3.5 million in unrealized losses on securities available-for-sale and a net loss of $0.8 million for the fiscal year.

Advances from the FHLB-NY and other borrowed money increased $35.2 million to $51.1 million at March 31, 2023, compared to $15.9 million at March 31, 2022.

The Bank secured a $25.0 million 2-year advance from the FHLB-NY during the fourth quarter of fiscal year 2023.

In addition, the Bank secured a $10.0 million overnight advance from the FHLB-NY on March 31, 2023.

At March 31, 2023, the Bank had $35.0 million outstanding advances from the FHLB-NY.

Other liabilities decreased $8.5 million to $13.3 million at March 31, 2023, compared to $21.8 million at March 31, 2022 due to a decrease in outstanding teller checks from the prior fiscal year that cleared during the first quarter.

Total equity decreased $9.9 million, or 18.0%, to $45.2 million at March 31, 2023, compared to $55.1 million at March 31, 2022.

The decrease was due to a net loss of $4.4 million, coupled with an increase of $5.5 million in unrealized losses on securities available-for-sale for the twelve month period ended March 31, 2023.

Comparison of Operating Results for the Years Ended March 31, 2023 and 2022

The Company reported a net loss of $0.8 million for fiscal year 2022, compared to net loss of $3.9 million for the prior year period.

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

The Company reported a net loss of $4.4 million for fiscal year 2023, compared to a net loss of $0.8 million for the prior year period.

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

Net Interest Income

Net interest income increased $2.3 million, or 11.2%, to $22.8 million for fiscal year 2023, compared to $20.5 million for the prior year period.

The increase was attributable to a $2.6 million increase in interest income and $2.0 million decrease in interest expense for the period.

The increase was attributable to a $4.8 million increase in interest income, partially offset by a $2.5 million increase in interest expense for the period.

Interest income increased $4.8 million, or 21.0%, to $27.7 million, compared to $22.9 million for the prior year period.

Interest income on loans increased $3.8 million, or 17.8%, primarily due to a $59.6 million, or 11.5%, increase in average loan balances coupled with an increase in the average yield on the portfolio of 22 basis points.

The increase in the loan portfolio was driven by a restructured lending team and funded by an increase in total deposits.

Interest income on investment securities decreased $0.3 million, or 30.0%, due to a decrease in average balances and yields compared to the prior fiscal year.

Interest expense decreased $2.0 million, or 45.5%, to $2.4 million compared to $4.4 million for the prior year period.

Interest expense on deposits decreased $1.9 million, or 50.0%, primarily due to a decrease in the average balances and rates paid on certificates of deposit.

The Company strategically exited its high-cost DTC brokered deposits, as well as many of its large high-rate non-relationship time deposits, and replaced them with demand deposits, savings and money market accounts (core deposits).

Interest expense on borrowings decreased $0.2 million, or 28.6%, from the prior fiscal year despite an increase in the average rates, due to a decrease in average borrowings as the Bank paid down advances on its PPPLF at the Federal Reserve.

Interest income on money market investments increased $1.0 million to $1.1 million, compared to $0.1 million for the prior year period, due to an increase in interest rates on the Bank's interest-bearing account at the Federal Reserve Bank.

Interest income on investment securities was also higher, despite a decrease in average balances, due to an increase in yields compared to the prior year period.

Interest expense increased $2.5 million to $4.9 million, compared to $2.4 million for the prior year period.

The higher interest rate environment is reflected in the average cost of interest-bearing deposits and borrowing costs for the comparative period.

Interest expense on deposits increased $1.8 million, or 94.7%, primarily due to an increase in the average rates paid on money market and certificate of deposit accounts.

Interest expense on borrowings increased $0.7 million from the prior fiscal year, mostly due to an increase in the average borrowing rates.

Provision for Loan Losses

The Bank recorded a $603 thousand provision for loan losses for fiscal year 2022, compared to a $100 thousand recovery of loan losses for the prior year period.

The provision was primarily due to the overall increase in the Bank's loan portfolio during fiscal year 2022.

For the year ended March 31, 2022, net charge-offs of $119 thousand were recognized, compared to net recoveries of $294 thousand in the prior year period.

The Bank recorded a $100 thousand provision for loan loss for fiscal year 2023, compared to a $603 thousand provision for loan loss for the prior year period.

For the year ended March 31, 2023, net charge-offs of $495 thousand were recognized, compared to net charge-offs of $119 thousand in the prior year period.

Total charge-offs of $727 thousand were recognized for fiscal year 2023, compared to total charge-offs of $257 thousand for the prior fiscal year.

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Non-interest Income

Non-interest income for the twelve months ended March 31, 2022 increased $1.2 million, or 19.4%, to $7.4 million compared to $6.2 million in the prior year period.

Non-interest income included grant income of $2.1 million and $0.5 million for fiscal years 2022 and 2021, respectively.

For the twelve months ended March 31, 2022, the Bank recognized $0.2 million and $1.8 million grant income from the CDFI Fund's Bank Enterprise Award and Rapid Response Program, respectively.

In addition, other non-interest income for the current fiscal year included $2.6 million correspondent banking fees, which was $1.3 million higher compared to the prior fiscal year due to higher volume related to the Bank's servicing of PPPLF activity for the correspondent bank.

The increases in the current fiscal year were partially offset by a reduction of $0.5 million, or 19.2%, in depository fees and charges as the Bank partnered with Wells Fargo and Chase to offer no-charge ATM access to our customers.

The prior fiscal year included $1.2 million gains recognized from the sales of securities, as management restructured the Bank's investment portfolio to improve the overall yield.

Non-interest income for the twelve months ended March 31, 2023 decreased $3.8 million, or 51.4%, to $3.6 million compared to $7.4 million in the prior year period.

Non-interest income in the prior year included $2.1 million grant income recognized from the Bank's awards through the CDFI Fund's Bank Enterprise Award and Rapid Response Program.

In addition, the Bank recognized a $107 thousand gain on the sale of a nonperforming loan during the current fiscal year.

Other non-interest income includes correspondent banking fees, related to the Bank's servicing of PPPLF activity for a correspondent bank, that was $2.4 million higher in the prior fiscal year, compared to the current year period.

The decline in fees was due to the winding down of the PPP program.

Non-interest Expense

Non-interest expense for the twelve months ended March 31, 2023 increased $2.6 million, or 9.3%, to $30.7 million compared to $28.1 million for the prior year period.

Compensation and benefits increased $0.3 million, or 2.7%, due primarily to annual merit increases.

Consulting fees increased as the Bank hired consultants to support the higher loan production.

Other non-interest expense included additional audit and legal fees related to a wire fraud matter that occurred during the first quarter of fiscal year 2022.

In addition, security services were higher as the Bank continues to address the need for security guards in our branches in response to the ongoing homeless crisis in New York City.

These increases were partially offset by lower data processing costs for the current fiscal year as the Company was able to utilize flex credits received from conversion costs associated with the Bank's upgrade to a new core banking system during the prior fiscal year.

Employee compensation and benefits were higher compared to the prior year period due to agency fees and the increased use of consultants for temporary assistance in the underwriting department as the Company sought to add permanent staff due to increased loan volume.

Net equipment expense increased as a result of additional hardware/software maintenance contracts put in place for new business strategies being implemented and data processing expense was higher due to upgraded cybersecurity systems and an improved remote work environment.

The Company did not have any federal, state and local income tax expense as of March 31, 2023 and 2022.

State and local capital tax expenses of $0.2 million and $0.1 million for fiscal years 2022 and 2021, respectively, were included in other non-interest expense on the statements of operations.

State and local capital tax expenses of $215 thousand and $202 thousand for fiscal years 2023 and 2022, respectively, were included in other non-interest expense on the statements of operations.

Liquidity and Capital Resources

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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 $21.3 million

during fiscal year 2022 as the Bank paid down $23.7 million of its PPP liquidity facility ("PPPLF") at the Federal Reserve.

The Bank had no advances outstanding from the FHLB-NY at March 31, 2022.

Net borrowings increased $35.1 million during fiscal year 2023 as the Bank secured a $25.0 million 2-year advance from the FHLB-NY during the fourth quarter of fiscal year 2023.

In addition, the Bank secured a $10.0 million overnight advance from the FHLB-NY on March 31, 2023.

At March 31, 2023, based on available collateral held at the FHLB-NY, Carver Federal had the ability to borrow an additional $6.3 million on a secured basis, utilizing mortgage-related loans and securities as collateral.

The Bank has the ability to pledge additional loans as collateral in order to borrow up to 30% of its total assets.

The Company also had $13.4 million in long-term subordinated debt securities and added $2.5 million in low interest loans during fiscal year 2022.

The Bank repaid its remaining $3 thousand outstanding advance under its PPP liquidity facility ("PPPLF") at the Federal Reserve during the first quarter of fiscal year

The Company also had $13.4 million in long-term subordinated debt securities and $2.5 million in low interest loans outstanding as of March 31, 2023.

The Bank's most liquid assets are cash and short-term investments.

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At March 31, 2023 and 2022, assets qualifying for short-term liquidity, including cash and cash equivalents, totaled $42.6 million and $61.0 million, respectively.

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 an “at the market offering.” During fiscal year 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.

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.

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

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

During fiscal year 2022, total cash and cash equivalents decreased $14.6 million to $61.0 million reflecting cash used in investing activities of $79.1 million, partially offset by cash provided by financing activities of $57.4 million and cash provided by operating activities of $7.2 million.

Net cash used in investing activities of $79.1 million was attributable to loan originations and purchases, net of principal repayments and payoffs, offset by investment paydowns.

Net cash provided by financing activities of $57.4 million resulted from net increases in deposits of $71.6 million, partially offset by a decrease of $21.2 million in FHLB-NY advances and other borrowings.

The net increase in deposits was primarily due to PPP loan funds deposited by the program borrowers into their accounts at the Bank and new deposit account relationships established as the Bank continues to expand its digital online account openings into nine states across the Northeast.

The $21.2 million decrease in other borrowings was attributable to $23.7 million paydowns on the Bank's PPP liquidity facility at the Federal Reserve, offset by $2.5 million in unsecured low interest loans provided by third parties to finance eligible loans offered through the Bank's community investment initiatives loan program.

In addition, cash provided by financing activities included $4.0 million capital raised from the issuance of preferred stock during the second quarter and $3.0 million net proceeds from the ATM offerings during the third and fourth quarters of fiscal year 2022.

During fiscal year 2023, total cash and cash equivalents decreased $18.4 million to $42.6 million reflecting $10.5 million and $15.3 million cash used in operating and investing activities, respectively, partially offset by cash provided by financing activities of $7.3 million.

Net cash used in operating activities totaled $10.5 million, which was primarily due to a $8.4 million decrease in other liabilities related to an outstanding teller check from the prior fiscal year that cleared during the first quarter of the current fiscal year.

Net cash used in investing activities of $15.3 million was attributable to loan originations and purchases, net of principal repayments and payoffs, and the purchase of a $5.0 million bank-owned life insurance policy during the first quarter, partially offset by investment paydowns.

Net cash provided by financing activities of $7.3 million resulted from an increase of $35.0 million in FHLB-NY advances and other borrowings, partially offset by a net decrease in deposits of $27.7 million.

Potential Mortgage Representation and Warranty Liabilities

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The Bank is exposed to any losses on repurchased loans after giving effect to any recoveries on the collateral.

Through fiscal 2011, none of the loans sold to FNMA were repurchased by the Bank.

During the periods from fiscal 2012 through 2015, 20 loans that had been sold to FNMA were repurchased by the Bank.

No loans have been repurchased by the Bank subsequent to fiscal 2015.

The Bank has not received a request to repurchase any of these loans since the second quarter of fiscal 2015, and there have not been any additional requests from FNMA for loans to be reviewed.

At March 31, 2023 the Bank continues to service 79 loans with a principal balance of $12.4 million for FNMA that were sold with standard representations and warranties.

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These reserves are reported in the consolidated statement of financial condition as a component of other liabilities.

The Bank has not received a request to repurchase any of these loans since the second quarter of fiscal 2015, and there have not been any additional requests from FNMA for loans to be reviewed.

The reserves totaled $95 thousand as of March 31, 2023.

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The Bank also has contractual obligations related to operating leases.

At March 31, 2023, the Bank had $244.5 million in outstanding commitments to extend credit and standby letters of credit.

See Note 15 of Notes to Consolidated Financial Statements for the Bank's outstanding lending commitments and contractual obligations at March 31, 2023.

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Debt obligations:

FHLB advances $ 35,013 $ 10,001 $ 25,012 $ — $ —

Other borrowings 2,690 24 114 2,552 —

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has fully and unconditionally guaranteed the Capital Securities along with all obligations of Carver Statutory Trust I under the trust agreement relating to the Capital Securities.

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.

Involvement with SPE (000s) Funded Exposure Unfunded Exposure Total

Recognized Gain (Loss) (000's) Total Rights transferred Significant unconsolidated VIE assets Total Involvement with SPE asset Debt Investments Equity Investments Funding Commitments Maximum exposure to loss

Carver Statutory Trust I (1)

$ — $ — $ 13,403 $ 13,403 $ 13,022 $ 403 $ — $ — $ 13,425

1 Carver Statutory Trust debt investment includes deferred interest of $22 thousand.

The Company does not consolidate the accounts and related activity of Carver Statutory Trust I because it is not the primary beneficiary of the entity.

At March 31, 2023, the Company's maximum exposure to the Trust is $13.4 million, which is the Company's liability to the Trust and includes the Company's investment in the Trust.

Regulatory Capital Position

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For a description of the OCC capital regulation, see “Item 1-Regulation and Supervision-Federal Banking Regulation-Capital Requirements.” Regardless of Basel III's minimum requirements, Carver, as a result of the Formal Agreement, was issued an Individual Minimum Capital Ratio ("IMCR") letter by the OCC, which requires the Bank to maintain minimum regulatory capital levels of 9% for its Tier 1 leverage ratio and 12% for its total risk-based capital ratio.

The Formal Agreement was terminated on January 18, 2023.

The IMCR remains in effect.

At March 31, 2023, the Bank's capital level exceeded the regulatory requirements and its IMCR requirements with a common equity Tier 1 ratio, Tier 1 leverage ratio, Tier 1 risk-based capital ratio, and total risk-based capital ratio of 12.47%, 10.61%, 12.47% and 13.37%, respectively.

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Impact of Inflation and Changing Prices

The financial statements and accompanying notes appearing elsewhere herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation.

considering the changes in the relative purchasing power of money over time due to inflation.

The impact of inflation is reflected in the increased cost of Carver Federal's operations.

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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