Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and Notes to Consolidated Financial Statements presented elsewhere in this report.
Executive Summary
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. 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
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.
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SELECTED FINANCIAL DATA
The following selected consolidated financial and other data is as of and for the years ended March 31 and is derived in part from, and should be read in conjunction with the Company's Consolidated Financial Statements and related notes:
$ in thousands 2023
2022
2021
2020
2019
Selected Financial Condition Data:
Assets $ 723,224 $ 735,314 $ 676,748 $ 578,770 $ 563,713
Total loans receivable, net 592,667 573,880 478,409 423,786 424,182
Investment securities 56,161 72,850 94,314 75,980 90,982
Cash and cash equivalents 42,552 61,018 75,591 47,540 31,228
Deposits 600,429 628,117 556,559 488,815 480,196
Advances from the FHLB-NY and other borrowed money 51,090 15,949 37,222 13,573 21,403
Equity 45,224 55,087 52,301 48,894 47,136
Number of deposit accounts 29,615 29,950 33,400 30,496 31,447
Number of branches 7 7 7 7 8
Operating Data:
Interest income 27,700 22,865 20,307 21,627 23,230
Interest expense 4,911 2,399 4,420 5,631 6,141
Net interest income before provision for (recovery of) loan losses 22,789 20,466 15,887 15,996 17,089
Provision for (recovery of) loan losses 100 603 (100) 19 (270)
Net interest income after provision for (recovery of) loan losses 22,689 19,863 15,987 15,977 17,359
Non-interest income 3,595 7,354 6,198 3,739 4,649
Non-interest expense 30,685 28,064 26,081 25,139 27,944
(Loss) income before income tax (benefit) expense (4,401) (847) (3,896) (5,423) (5,936)
Income tax (benefit) expense — — — — —
Net (loss) income attributable to Carver Bancorp, Inc. (4,401) (847) (3,896) (5,423) (5,936)
Basic (loss) earnings per common share (1.03) (0.24) (1.14) (1.47) (1.60)
Diluted (loss) earnings per common share (1.03) (0.24) (1.14) (1.47) (1.60)
Selected Statistical Data:
Return on average assets (1)
(0.62) % (0.12) % (0.58) % (0.95) % (0.96) %
Return on average stockholders' equity (2) (10)
(8.98) % (1.54) % (8.24) % (10.51) % (12.93) %
Return on average stockholders' equity, excluding AOCI (2) (10)
(7.28) % (1.49) % (8.25) % (10.52) % (12.31) %
Net interest margin (3)
3.33 % 3.01 % 2.49 % 2.95 % 2.80 %
Average interest rate spread (4)
3.11 % 2.88 % 2.30 % 2.69 % 2.57 %
Efficiency ratio (5)
116.30 % 100.88 % 118.09 % 127.38 % 128.55 %
Operating expense to average assets (6)
4.34 % 3.98 % 3.91 % 4.39 % 4.51 %
Average stockholders' equity to average assets (7) (10)
6.93 % 7.77 % 7.09 % 9.00 % 7.41 %
Average stockholders' equity, excluding AOCI, to average assets (7) (10)
8.55 % 8.05 % 7.08 % 9.00 % 7.79 %
Dividend payout ratio (8)
— — — — —
Asset Quality Ratios:
Non-performing assets to total assets (9)
1.70 % 1.57 % 1.07 % 1.19 % 1.90 %
Non-performing loans to total loans receivable (9)
2.05 % 1.98 % 1.49 % 1.58 % 2.40 %
Allowance for loan losses to total loans, excluding PPP loans 0.88 % 1.00 % 1.15 % 1.15 % 1.08 %
(1) Net income (loss) divided by average total assets.
(2) Net income (loss) divided by average total stockholders' equity.
(3) Net interest income divided by average interest-earning assets.
(4) Combined weighted average interest rate earned less combined weighted average interest rate cost.
(5) Operating expense divided by sum of net interest income and non-interest income.
(6) Non-interest expense divided by average total assets.
(7) Average stockholders' equity divided by average assets for the period ended.
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(8) Dividends paid to common stockholders as a percentage of net income available to common stockholders.
(9) Non-performing assets consist of nonaccrual loans and real estate owned.
(10) See Non-GAAP Financial Measures disclosure below for comparable GAAP measures.
Non-GAAP Financial Measures
In addition to evaluating the Company's results of operations in accordance with U.S. generally accepted accounting principles (“GAAP”), management routinely supplements their evaluation with an analysis of certain non-GAAP financial measures, such as the return on average stockholders' equity excluding average accumulated other comprehensive income (loss) ("AOCI"), and average stockholders' equity excluding AOCI to average assets. 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 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. These fluctuations have been excluded due to the unpredictable nature of this item and is not necessarily indicative of current operating or future performance.
$ in thousands 2023
2022
2021
2020
2019
Average Stockholders' Equity
Average Stockholders' Equity $ 48,984 $ 54,858 $ 47,306 $ 51,609 $ 45,920
Average AOCI (11,467) (1,940) 57 43 (2,315)
Average Stockholders' Equity, excluding AOCI $ 60,451 $ 56,798 $ 47,249 $ 51,566 $ 48,235
Return on Average Stockholders' Equity (8.98) % (1.54) % (8.24) % (10.51) % (12.93) %
Return on Average Stockholders' Equity, excluding AOCI (7.28) % (1.49) % (8.25) % (10.52) % (12.31) %
Average Stockholders' Equity to Average Assets 6.93 % 7.77 % 7.09 % 9.00 % 7.41 %
Average Stockholders' Equity, excluding AOCI, to Average Assets 8.55 % 8.05 % 7.08 % 9.00 % 7.79 %
Critical Accounting Estimates
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. Changes in these judgments, assumptions or estimates could result in material differences in the Company's results of operations or financial condition.
Allowance for Loan and Lease Losses
The ALLL reflects management's evaluation of the loans presenting identified loss potential, as well as the risk inherent in various components of the portfolio. There is significant judgment applied in estimating the ALLL. These assumptions and estimates are susceptible to significant changes based on the current environment. 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. Further, any change in the size of the loan portfolio or any of its components could necessitate an increase in the ALLL even though there may not be a decline in credit quality or an increase in potential problem loans. As such, there can never be assurance that the ALLL accurately reflects the actual loss potential inherent in a loan portfolio.
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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 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:
• One-to-four family
• Multifamily
• Commercial Real Estate
• Business Loans
• Consumer (including Overdraft Accounts)
The Bank next applies to each pool a risk factor that determines the level of general reserves for that specific pool. The Bank estimates its historical charge-offs via a lookback analysis. The actual historical loss experience by major loan category is expressed as a percentage of the outstanding balance of all loans within the category. As the loss experience for a particular loan category increases or decreases, the level of reserves required for that particular loan category also increases or decreases. The Bank’s historical charge-off rate reflects the period over which the charge-offs were confirmed and recognized, not the period over which the earlier losses occurred. That is, the charge-off rate measures the confirmation of losses over a period that occurs after the earlier actual losses. During the period between the loss-causing events and the eventual confirmations of losses, conditions may have changed. There is always a time lag between the period over which average charge-off rates are calculated and the date of the financial statements. During that period, conditions may have changed. Another factor influencing the General Reserve is the Bank’s loss emergence period ("LEP") assumptions which represent the Bank’s estimate of the average amount of time from the point at which a loss is incurred to the point at which the loss is confirmed, either through the identification of the loss or a charge-off. Based upon adequate management information systems and effective methodologies for estimating losses, management has established a LEP floor of one year on all pools. In some pools, such as in its Commercial Real Estate, Multifamily and Business pools, the Bank demonstrates a LEP in excess of 12 months. The Bank also recognizes losses in accordance with regulatory charge-off criteria.
Because actual loss experience may not adequately predict the level of losses inherent in a portfolio, the Bank reviews nine qualitative factors to determine if reserves should be adjusted based upon any of those factors. As the risk ratings worsen, some of the qualitative factors tend to increase. The nine qualitative factors the Bank considers and may utilize are:
1. Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses ( Policy & Procedures ).
2. Changes in relevant economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments ( Economy ).
3. Changes in the nature or volume of the loan portfolio and in the terms of loans ( Nature & Volume ).
4. Changes in the experience, ability, and depth of lending management and other relevant staff ( Management ).
5. Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans ( Problem Assets ).
6. Changes in the quality of the loan review system ( Loan Review ).
7. Changes in the value of underlying collateral for collateral dependent loans ( Collateral Values ).
8. The existence and effect of any concentrations of credit and changes in the level of such concentrations ( Concentrations ).
9. The effect of other external forces such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio ( External Forces ).
Specific Reserve Allowance
Carver also maintains a specific reserve allowance for criticized and classified loans individually reviewed for impairment in accordance with ASC Subtopic 310-10 guidelines. The amount assigned to the specific reserve allowance is individually determined based upon the loan. The ASC Subtopic 310-10 guidelines require the use of one of three approved methods to estimate the amount to be reserved and/or charged off for such credits. The three methods are as follows:
1. The present value of expected future cash flows discounted at the loan's effective interest rate,
2. The loan's observable market price; or
3. The fair value of the collateral if the loan is collateral dependent.
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The Bank may choose the appropriate ASC Subtopic 310-10 measurement on a loan-by-loan basis for an individually impaired loan, except for an impaired collateral dependent loan. Guidance requires impairment of a collateral dependent loan to be measured using the fair value of collateral method. A loan is considered "collateral dependent" when the repayment of the debt will be provided solely by the underlying collateral, and there are no other available and reliable sources of repayment.
All substandard and doubtful loans and any other loans that the Chief Credit Officer deems appropriate for review, are identified and reviewed for individual evaluation for impairment in accordance with ASC Subtopic 310-10. Loans rated Substandard have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are inadequately protected by the current sound worth, paying capacity of the obligor, or of the collateral pledged, if any. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans rated Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable. 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 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.
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. For smaller reporting companies, as defined by the SEC, the FASB further extended the CECL implementation date. The new effective date is for fiscal years beginning after December 15, 2022 (for the Company, the fiscal year ending March 31, 2024), including interim periods within those fiscal years.
Asset/Liability Management
The Company's primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between the rates on interest-earning assets and interest-bearing liabilities, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and assets, and the credit quality of earning assets. 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 long-term 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. In addition, the Company uses various tools to monitor and manage interest rate risk, such as a model that projects net interest income based on increasing or decreasing interest rates.
Discussion of Market Risk-Interest Rate Sensitivity Analysis
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 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.
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution's interest rate sensitivity gap. 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
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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 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. 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 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:
$ in thousands <3 Mos. 3-12 Mos. 1-3 Yrs. 3-5 Yrs. 5-10 Yrs. 10+ Yrs. Non-Interest Bearing Total
Rate Sensitive Assets:
Loans $ 34,082 $ 70,837 $ 158,945 $ 87,466 $ 190,630 $ 52,339 $ — $ 594,299
Short-term investments 40,583 — — — — — — 40,583
Long-term investments 917 3,058 7,215 7,246 13,645 29,473 — 61,554
Other assets — — — — — — 26,788 26,788
Total assets $ 75,582 $ 73,895 $ 166,160 $ 94,712 $ 204,275 $ 81,812 $ 26,788 $ 723,224
Rate Sensitive Liabilities:
Non-maturity deposits $ 43,567 $ 44,029 $ 25,529 $ 18,312 $ 41,011 $ 249,285 $ — $ 421,733
Term deposits 59,913 80,401 36,238 2,151 — — — 178,703
Borrowings 10,000 — 25,000 2,500 — — — 37,500
Other liabilities — — — — — — 40,064 40,064
Equity — — — — — — 45,224 45,224
Total liabilities and equity $ 113,480 $ 124,430 $ 86,767 $ 22,963 $ 41,011 $ 249,285 $ 85,288 $ 723,224
Interest sensitivity gap $ (37,898) $ (50,535) $ 79,393 $ 71,749 $ 163,264 $ (167,473) $ (58,500) $ —
Cumulative interest sensitivity gap $ (37,898) $ (88,433) $ (9,040) $62,709 $225,973 $ 58,500 $ — $ —
Ratio of cumulative gap to total rate sensitive assets (5.44) % (12.70) % (1.30) % 9.00 % 32.45 % 8.40 % — —
The table above assumes that fixed maturity deposits are not withdrawn prior to maturity and that transaction accounts will decay as disclosed in the table above.
Certain shortcomings are inherent in the method of analysis presented in the table above. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in the market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, generally have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. 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 the Company's portfolio contain conditions that restrict the periodic change in interest rate.
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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. At March 31, 2023, the Company did not report any holdings in financial derivative contracts.
Under this methodology, interest rate risk exposure is assessed by reviewing the estimated changes in EVE that would hypothetically occur if interest rates rapidly rise or fall along the yield curve. 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, 2023, is an analysis of the Company's interest rate risk as measured by changes in EVE for instantaneous parallel shifts of +300/-300 basis points change in market interest rates. Such limits have been established with consideration of the impact of various rate changes and the Company's current capital position.
$ in thousands Economic Value of Equity
Change in Rate $ Amount $ Change % Change
+300 bps 86,000 14,000 19.4 %
+200 bps 84,000 12,000 16.7 %
+100 bps 79,000 7,000 9.7 %
0 bps 72,000
-100 bps 61,000 (11,000) (15.3) %
-200 bps 44,000 (28,000) (38.9) %
-300 bps 22,000 (50,000) (69.4) %
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE requires the making of certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. 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 the repricing of specific assets and liabilities. 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
The following table sets forth certain information relating to Carver Federal's average interest-earning assets and average interest-bearing liabilities, and their related average yields and costs for the years ended March 31, 2023, 2022, and 2021. The table also presents information for the fiscal years indicated with respect to the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, or “interest rate spread,” which savings institutions have traditionally used as an indicator of profitability. Another indicator of an institution's profitability is its “net interest margin,” which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income:
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2023
2022
2021
$ in thousands Average Balance Interest Average
Yield/
Cost Average Balance Interest Average
Yield/
Cost Average Balance Interest Average
Yield/
Cost
Interest-Earning Assets:
Loans (1)
$ 576,249 $ 25,073 4.35 % $ 516,687 $ 21,335 4.13 % $ 456,112 $ 18,552 4.07 %
Mortgage-backed securities 32,512 619 1.90 % 45,371 710 1.56 % 41,513 708 1.71 %
Investment securities 35,467 929 2.62 % 42,278 714 1.69 % 50,727 953 1.88 %
Other investments 40,575 1,079 2.66 % 75,833 106 0.14 % 90,857 94 0.10 %
Total interest-earning assets 684,803 27,700 4.04 % 680,169 22,865 3.36 % 639,209 20,307 3.18 %
Non-interest-earning assets 22,068 25,526 27,704
Total assets $ 706,871 $ 705,695 $ 666,913
Interest-Bearing Liabilities:
Deposits
Interest-bearing checking $ 56,437 $ 55 0.10 % $ 53,180 $ 30 0.06 % $ 37,313 $ 30 0.08 %
Savings and clubs 111,508 166 0.15 % 112,094 123 0.11 % 107,820 235 0.22 %
Money market 185,473 1,728 0.93 % 155,719 378 0.24 % 125,867 525 0.42 %
Certificates of deposit 141,125 1,756 1.24 % 152,803 1,349 0.88 % 192,637 2,974 1.54 %
Mortgagors deposits 2,969 3 0.10 % 2,786 10 0.36 % 2,257 6 0.27 %
Total deposits 497,512 3,708 0.75 % 476,582 1,890 0.40 % 465,894 3,770 0.81 %
Borrowed money 27,864 1,203 4.32 % 22,923 509 2.22 % 38,005 650 1.71 %
Total interest-bearing liabilities 525,376 4,911 0.93 % 499,505 2,399 0.48 % 503,899 4,420 0.88 %
Non-interest-bearing liabilities:
Demand deposits 105,312 123,493 85,890
Other liabilities 27,199 27,839 29,818
Total liabilities 657,887 650,837 619,607
Stockholders' equity 48,984 54,858 47,306
Total liabilities & equity $ 706,871 $ 705,695 $ 666,913
Net interest income $ 22,789 $ 20,466 $ 15,887
Average interest rate spread 3.11 % 2.88 % 2.30 %
Net interest margin 3.33 % 3.01 % 2.49 %
Ratio of average interest-earning assets to interest-bearing liabilities 130.35 % 136.17 % 126.85 %
(1) Includes nonaccrual loans.
(2) Includes FHLB-NY stock.
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, 2023, 2022, and 2021. For each category of interest-earning assets and interest-bearing liabilities, information is provided for changes attributable to: (1) changes in volume (changes in volume multiplied by prior rate); (2) changes in rate (change in rate multiplied by old volume). Changes in rate/volume variance are allocated proportionately between changes in rate and changes in volume.
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2023 vs. 2022
Increase (Decrease) due to
2022 vs. 2021
Increase (Decrease) due to
$ in thousands Volume Rate Total Volume Rate Total
Interest-Earning Assets:
Loans $ 2,459 $ 1,279 $ 3,738 $ 2,464 $ 319 $ 2,783
Mortgage-backed securities (201) 110 (91) 66 (64) 2
Investment securities (115) 330 215 (159) (80) (239)
Other investments (49) 1,022 973 (16) 28 12
Total interest-earning assets 2,094 2,741 4,835 2,355 203 2,558
Interest-Bearing Liabilities:
Deposits
Interest-bearing checking 1 24 25 13 (13) —
Savings and clubs (1) 44 43 9 (121) (112)
Money market savings 72 1,278 1,350 125 (272) (147)
Certificates of deposit (103) 510 407 (615) (1,010) (1,625)
Mortgagors deposits 1 (8) (7) 2 2 4
Total deposits (30) 1,848 1,818 (466) (1,414) (1,880)
Borrowed money 110 584 694 (258) 117 (141)
Total interest-bearing liabilities 80 2,432 2,512 (724) (1,297) (2,021)
Net change in net interest income $ 2,014 $ 309 $ 2,323 $ 3,079 $ 1,500 $ 4,579
Comparison of Financial Condition at March 31, 2023 and 2022
Assets
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 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
Liabilities
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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. These uninsured balances disclosed do not consider that FDIC insurance can be further extended by claimant within certain law firm deposit accounts. In addition, as of March 31, 2023, the aggregate amount of all our uninsured certificates of deposit was $25.8 million. We have no deposits that are uninsured for any reason other than being in excess of the maximum amount for federal deposit insurance. See Note 8 to Consolidated Financial Statements for additional information on our deposits.
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.
Equity
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
Net Loss
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 $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. 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.
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Provision for Loan Losses
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. At March 31, 2023, nonaccrual loans totaled $12.3 million, or 1.7% of total assets, compared to $11.5 million, or 1.6% of total assets at March 31, 2022. The ALLL was $5.2 million at March 31, 2023, which represents a ratio of the ALLL to nonaccrual loans of 42.6%, compared to 49.0% at March 31, 2022. The ratio of the allowance for loan losses to total loans receivable, excluding PPP loans, was 0.9% at March 31, 2023, compared to 1.0% at March 31, 2022.
Non-interest Income
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. 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.
Income Taxes
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 $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
Liquidity is a measure of the Bank's ability to generate adequate cash to meet its financial obligations. The principal cash requirements of a financial institution are to cover potential deposit outflows, fund increases in its loan and investment portfolios and ongoing operating expenses. The Bank's primary sources of funds are deposits, borrowed funds and principal and interest payments on loans, mortgage-backed securities and investment securities. While maturities and scheduled amortization of loans, mortgage-backed securities and investment securities are predictable sources of funds, deposit flows and loan and mortgage-backed securities prepayments are strongly influenced by changes in general interest rates, economic conditions and competition. Carver Federal monitors its liquidity utilizing guidelines that are contained in a policy developed by its management and approved by its Board of Directors. Carver Federal's several liquidity measurements are evaluated on a frequent basis.
Management believes Carver Federal’s short-term assets have sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash requirements, including interest payments on our subordinated debt securities. 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 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 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
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2023. 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. The level of these assets is dependent on the Bank's operating, investing and financing activities during any given period. 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. 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. However, in a rising rate environment, customers generally tend to prefer fixed rate mortgage loan products over variable rate products. Carver Federal is also at risk to deposit outflows due to a competitive interest rate environment.
The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. 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
During the period 2004 through 2009, the Bank originated 1-4 family residential mortgage loans and sold the loans to the FNMA. The loans were sold to FNMA with the standard representations and warranties for loans sold to the GSE's. The Bank may be required to repurchase these loans in the event of breaches of these representations and warranties. In the event of a repurchase, the Bank is typically required to pay the unpaid principal balance as well as outstanding interest and fees. The Bank then recovers the loan or, if the loan has been foreclosed, the underlying collateral. The Bank is exposed to any losses on repurchased loans after giving effect to any recoveries on the collateral. The Bank has not received a request to repurchase any of these loans since the second quarter of fiscal 2015, and there have not been any additional requests from FNMA for loans to be reviewed. 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.
Management has established a representation and warranty reserve for losses associated with the repurchase of mortgage loans sold by the Bank to FNMA that we consider to be both probable and reasonably estimable. These reserves are reported in the consolidated statement of financial condition as a component of other liabilities. The reserves totaled $95 thousand as of March 31, 2023. The table below summarizes changes in our representation and warranty reserves in fiscal 2023:
$ in thousands March 31, 2023
Representation and warranty repurchase reserve, as of March 31, 2022 (1)
$ 123
Net adjustment to reserve for repurchase losses (2)
(28)
Representation and warranty repurchase reserve, as of March 31, 2023 (1)
$ 95
(1) Reported in consolidated statements of financial condition as a component of other liabilities.
(2) Component of other non-interest expense.
Additional information related to the representation and warranty reserve, including factors that may impact the adequacy of the reserves and the ultimate amount of losses incurred is found in “Note 15 Commitments and Contingencies.”
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Off-Balance Sheet Arrangements and Contractual Obligations
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and in connection with its overall investment strategy. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are not recorded in the consolidated financial statements. Such instruments primarily include lending obligations, including commitments to originate mortgage and consumer loans and to fund unused lines of credit. The Bank 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.
The Bank has contractual obligations at March 31, 2023 as follows:
$ in thousands Payments due by period
Contractual Obligations Total Less than
1 year 1 - 3
years 3 - 5
years More than
5 years
Certificates of deposit $ 179,012 $ 133,313 $ 40,828 $ 3,884 $ 987
Debt obligations:
FHLB advances $ 35,013 $ 10,001 $ 25,012 $ — $ —
Other borrowings 2,690 24 114 2,552 —
Guaranteed preferred beneficial interest in junior subordinated debentures 13,447 — — — 13,447
Total debt obligations 51,150 10,025 25,126 2,552 13,447
Operating lease obligations:
Lease obligations for rental properties 14,289 2,921 5,392 4,700 1,276
Total contractual obligations $ 244,451 $ 146,259 $ 71,346 $ 11,136 $ 15,710
Variable Interest Entities ("VIEs")
The Company's subsidiary, Carver Statutory Trust I, is not consolidated with Carver Bancorp Inc. for financial reporting purposes in accordance with the FASB's ASC Topic 810 regarding the consolidation of variable interest entities. Carver Statutory Trust I was formed in 2003 for the purpose of issuing $13 million aggregate liquidation amount of floating rate Capital Securities due September 17, 2033 (“Capital Securities”) and $0.4 million of common securities (which are the only voting securities of Carver Statutory Trust I), which are 100% owned by Carver Bancorp Inc., and using the proceeds to acquire junior subordinated debentures issued by Carver Bancorp, Inc. Carver Bancorp, Inc. has fully and unconditionally guaranteed the Capital Securities along with all obligations of Carver Statutory Trust I under the trust agreement relating to the Capital Securities. 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
The Bank must satisfy minimum capital standards established by the OCC. 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. For additional information regarding Carver Federal's Regulatory Capital and Ratios, refer to Note 12 of Notes to Consolidated Financial Statements, “Stockholders' Equity.”
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
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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. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a greater impact on Carver Federal's performance than do the effects of the general level of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See discussion of Market Risk-Interest Rate Sensitivity Analysis in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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