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 2024 with a net loss of $3.0 million, compared to a net loss of $4.4 million for the prior year period. The change in our results of operations was primarily driven by increases in interest income and non-interest income, partially offset by increases in interest expense and non-interest expense 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. The Federal Reserve began increasing the federal funds rate at the March 2022 meeting, and is currently maintaining a target interest rate range between 5.25% and 5.5%. 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. As of March 31, 2024, the City's unemployment rate remains high at 4.9%, exceeding the national average, as employment in the arts and entertainment, food and hospitality sectors continue to remain below their pre-pandemic highs.
The closure of five banks in 2023 led to industry-wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding confidence in the banking system from the general public. In response to these 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 the current business and industry environment, 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.
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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 fiscal years 2023 and 2024.
Subsequent Events
On April 30, 2024, the Company entered into an agreement with a third party, in which the third party would provide the Company with a $25.0 million revolving unsecured long-term, below-market-rate loan to support the Bank in financing initiatives that reduce greenhouse gas emissions and promote energy efficiency in building projects, fleet upgrades to electric vehicles, and electric vehicle charging station infrastructure. The loan facility will also support the working capital and asset-specific financing needs of Minority and Women-owned Business Enterprises working on green energy projects, weatherization, electrification, and green technology.
On May 24, 2024, the Bank secured a $1.8 million 12-month fixed-rate advance through the second round of the FHLB-NY 0% Development Advance (ZDA) Program, which provides members with subsidized funding in the form of interest rate credits to assist in originating or purchasing loans that meet an eligibility criteria.
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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 2024
2023
2022
2021
2020
Selected Financial Condition Data:
Assets $ 756,796 $ 723,224 $ 735,314 $ 676,748 $ 578,770
Total loans receivable, net 617,007 592,667 573,880 478,409 423,786
Investment securities 50,038 56,161 72,850 94,314 75,980
Cash and cash equivalents 59,025 42,552 61,018 75,591 47,540
Deposits 646,999 600,429 628,117 556,559 488,815
Advances from the FHLB-NY and other borrowed money 46,536 51,090 15,949 37,222 13,573
Equity 42,309 45,224 55,087 52,301 48,894
Number of deposit accounts 29,086 29,615 29,950 33,400 30,496
Number of branches 7 7 7 7 7
Operating Data:
Interest income 34,019 27,700 22,865 20,307 21,627
Interest expense 11,458 4,911 2,399 4,420 5,631
Net interest income before provision for (recovery of) loan losses 22,561 22,789 20,466 15,887 15,996
Provision for (recovery of) loan losses 83 100 603 (100) 19
Net interest income after provision for (recovery of) loan losses 22,478 22,689 19,863 15,987 15,977
Non-interest income 6,723 3,595 7,354 6,198 3,739
Non-interest expense 32,178 30,685 28,064 26,081 25,139
(Loss) income before income tax (benefit) expense (2,977) (4,401) (847) (3,896) (5,423)
Income tax (benefit) expense — — — — —
Net (loss) income attributable to Carver Bancorp, Inc. (2,977) (4,401) (847) (3,896) (5,423)
Basic (loss) earnings per common share (0.61) (1.03) (0.24) (1.14) (1.47)
Diluted (loss) earnings per common share (0.61) (1.03) (0.24) (1.14) (1.47)
Selected Statistical Data:
Return on average assets (1)
(0.40) % (0.62) % (0.12) % (0.58) % (0.95) %
Return on average stockholders' equity (2) (10)
(7.04) % (8.98) % (1.54) % (8.24) % (10.51) %
Return on average stockholders' equity, excluding AOCI (2) (10)
(5.34) % (7.28) % (1.49) % (8.25) % (10.52) %
Net interest margin (3)
3.14 % 3.33 % 3.01 % 2.49 % 2.95 %
Average interest rate spread (4)
2.70 % 3.11 % 2.88 % 2.30 % 2.69 %
Efficiency ratio (5)
109.88 % 116.30 % 100.88 % 118.09 % 127.38 %
Operating expense to average assets (6)
4.36 % 4.34 % 3.98 % 3.91 % 4.39 %
Average stockholders' equity to average assets (7) (10)
5.74 % 6.93 % 7.77 % 7.09 % 9.00 %
Average stockholders' equity, excluding AOCI, to average assets (7) (10)
7.55 % 8.55 % 8.05 % 7.08 % 9.00 %
Dividend payout ratio (8)
— — — — —
Asset Quality Ratios:
Non-performing assets to total assets (9)
1.56 % 1.70 % 1.57 % 1.07 % 1.19 %
Non-performing loans to total loans receivable (9)
1.89 % 2.05 % 1.98 % 1.49 % 1.58 %
Allowance for credit losses to total loans receivable 0.94 % 0.87 % 0.97 % 1.06 % 1.15 %
(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 2024
2023
2022
2021
2020
Average Stockholders' Equity
Average Stockholders' Equity $ 42,293 $ 48,984 $ 54,858 $ 47,306 $ 51,609
Average AOCI (13,410) (11,467) (1,940) 57 43
Average Stockholders' Equity, excluding AOCI $ 55,703 $ 60,451 $ 56,798 $ 47,249 $ 51,566
Return on Average Stockholders' Equity (7.04) % (8.98) % (1.54) % (8.24) % (10.51) %
Return on Average Stockholders' Equity, excluding AOCI (5.34) % (7.28) % (1.49) % (8.25) % (10.52) %
Average Stockholders' Equity to Average Assets 5.74 % 6.93 % 7.77 % 7.09 % 9.00 %
Average Stockholders' Equity, excluding AOCI, to Average Assets 7.55 % 8.55 % 8.05 % 7.08 % 9.00 %
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 credit losses is the most critical accounting estimates. This estimate is important to the presentation of Carver's financial condition and results of operations, and involves 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 Credit Losses ("ACL")
The ACL 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 ACL. 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 the 11th interest rate hike in July 2023, raising the overnight borrowing rate 25 basis points to a target range of 5.25% to 5.5%, the highest it has been in 22 years. Interest rates were held steady at the May 2024 meeting and the Federal Reserve is not expected to start cutting rates yet. A high interest 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 ACL even
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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 ACL accurately reflects the actual loss potential inherent in a loan portfolio.
The ACL is a valuation account that is deducted from the loan portfolio's amortized cost basis to present the net amount expected to be collected on the loans. Additions to the allowance are recognized through the provision for credit losses. Loan losses are charged off against the allowance when management believes a loan balance is deemed as uncollectible. Management continues its collection efforts on previously charged-off balances and applies recoveries as additions to the ACL. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The discounted cash flow ("DCF") methodology is used for substantially all pools, applied with a 4-quarter reasonable and supportable forecast period and the loss rate reverts back to the long-term historical loss average with a 12-quarter straight-line reversion period where the ACL reflects the difference between the amortized cost and the present value of the expected cash flows.
Expected credit losses are measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogeneous segments, or pools, for allowance calculation. The Company's loan portfolio segments as of March 31, 2024 were as follows:
• One-to-four Family - Carver Federal purchases first mortgage loans secured by one-to-four family properties that serve as the primary residence of the owner and non-qualified mortgages for one-to-four family residential loans. The loans are underwritten in accordance with applicable secondary market underwriting guidelines and requirements for sale. These loans present a moderate level of risk due primarily to general economic conditions.
• Multifamily - Carver Federal originates and purchases recourse and non-recourse multifamily loans. The Bank generally requires a debt service coverage ratio at origination of at least 1.30x, and that the maximum loan-to-value ("LTV") at origination not exceed 70% based on the appraised value of the mortgaged property. Multifamily property lending entails additional risks compared to one-to-four family lending. These loans are dependent on the successful operation of such buildings and can be significantly impacted by economic conditions, industry concentration, valuation of the underlying properties, lease terms, occupancy/vacancy rates, and changes in market demand for multifamily units. The Bank primarily considers the property's ability to generate net operating income sufficient to support the debt service, the financial resources, income level and managerial expertise of the borrower, the marketability of the property and the Bank's lending experience with the owner/guarantor.
• Commercial Real Estate ("CRE") - CRE lending consists predominantly of originating loans for the purpose of purchasing or refinancing office, mixed-use properties, retail and church buildings in the Bank's market area. Mixed-use loans are secured by properties that are intended for both commercial and residential use, but predominantly commercial, and are classified as CRE. The Bank primarily considers the ability of the net operating income generated by the real estate to support the debt service, the financial resources, income level and managerial expertise of the borrower, the marketability of the property and the Bank's lending experience with the owner/guarantor. The maximum LTV ratio on CRE loans at origination is generally 70% based on the latest appraised fair market value of the mortgaged property and the Bank generally requires a debt service coverage ratio at origination of at least 1.30x. The Bank also requires the assignment of rents of all tenants' leases in the mortgaged property and personal guarantees may be obtained for additional security from these borrowers. CRE loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the complexities involved in valuing the underlying collateral.
• Construction - Carver Federal historically originated or participated in construction loans for new construction and renovation of multifamily buildings, residential developments, community service facilities, churches, and affordable housing programs. The loans provide for disbursement in stages as construction is completed. Borrowers must satisfy all credit requirements that apply to the Bank’s permanent mortgage loan financing for the mortgaged property. The Bank has additional criteria for construction loans, including an engineer’s plan and periodic cost reviews on all construction budgets for loans. Construction loans present an increased level of risk from the effect of general economic conditions and uncertainties surrounding construction costs.
• Business - Carver Federal originates and purchases business and SBA loans primarily to businesses located in its primary market area and surrounding areas. Business loans are typically personally guaranteed by the owners and may also be secured by additional collateral, including real estate, equipment and inventory. Business loans are subject to increased risk from the effect of general economic conditions. SBA loans are guaranteed by the U.S. government based on the percentage of each individual program.
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• Consumer (including Overdraft accounts) - The Consumer portfolio includes student loans to medical students enrolled in several medical schools, throughout the United States and Caribbean, as well as unsecured consumer loans purchased from or originated through strategic partnerships with Bankers Healthcare Group, LLC and Upstart Holdings, Inc. Consumer loans are typically unsecured and more susceptible to declining economic conditions.
Because expected loss predictions may not adequately project the level of losses inherent in a portfolio, the Bank reviews a number of qualitative factors to determine if reserves should be adjusted based upon any of those factors. As the risk ratings deteriorate, some of the qualitative factors tend to increase. A number of qualitative factors are considered including economic forecast uncertainty, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, impact of rising rates, external factors and other considerations. Although the quantitative calculation includes a measurement of statistical economic conditions based on national averages, an additional analysis is performed at the qualitative level that applies specifically to the Company's geographic area and the banking industry that includes reasonable and supportable forecasts.
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 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 20.28% of total rate sensitive assets at March 31, 2024. 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-sensitive institution, may benefit from a falling interest rate environment, the continued high interest rate environment may indicate 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, 2024. 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
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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 $ 33,768 $ 75,372 $ 165,299 $ 92,035 $ 205,190 $ 47,276 $ — $ 618,940
Short-term investments 56,500 — — — — — — 56,500
Long-term investments 795 2,629 6,359 6,185 15,371 24,882 — 56,221
Other assets — — — — — — 25,135 25,135
Total assets $ 91,063 $ 78,001 $ 171,658 $ 98,220 $ 220,561 $ 72,158 $ 25,135 $ 756,796
Rate Sensitive Liabilities:
Non-maturity deposits $ 44,256 $ 43,433 $ 25,391 $ 18,691 $ 41,528 $ 249,903 $ — $ 423,202
Term deposits 118,653 83,056 19,623 2,387 — — — 223,719
Borrowings — 28,027 2,500 2,500 — — — 33,027
Other liabilities — — — — — — 34,539 34,539
Equity — — — — — — 42,309 42,309
Total liabilities and equity $ 162,909 $ 154,516 $ 47,514 $ 23,578 $ 41,528 $ 249,903 $ 76,848 $ 756,796
Interest sensitivity gap $ (71,846) $ (76,515) $ 124,144 $ 74,642 $ 179,033 $ (177,745) $ (51,713) $ —
Cumulative interest sensitivity gap $ (71,846) $ (148,361) $ (24,217) $50,425 $229,458 $ 51,713 $ — $ —
Ratio of cumulative gap to total rate sensitive assets (9.82) % (20.28) % (3.31) % 6.89 % 31.36 % 7.07 % — —
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.
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, 2024, 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, 2024, 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.
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$ in thousands Economic Value of Equity
Change in Rate $ Amount $ Change % Change
+300 bps 96,000 14,000 17.1 %
+200 bps 93,000 11,000 13.4 %
+100 bps 89,000 7,000 8.5 %
0 bps 82,000
-100 bps 72,000 (10,000) (12.2) %
-200 bps 57,000 (25,000) (30.5) %
-300 bps 37,000 (45,000) (54.9) %
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, 2024, 2023, and 2022. 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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2024
2023
2022
$ 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)
$ 609,129 $ 29,651 4.87 % $ 576,249 $ 25,073 4.35 % $ 516,687 $ 21,335 4.13 %
Mortgage-backed securities 27,695 583 2.11 % 32,512 619 1.90 % 45,371 710 1.56 %
Investment securities (2)
33,093 1,131 3.42 % 35,467 929 2.62 % 42,278 714 1.69 %
Money market investments 49,032 2,654 5.41 % 40,575 1,079 2.66 % 75,833 106 0.14 %
Total interest-earning assets 718,949 34,019 4.73 % 684,803 27,700 4.04 % 680,169 22,865 3.36 %
Non-interest-earning assets 18,468 22,068 25,526
Total assets $ 737,417 $ 706,871 $ 705,695
Interest-Bearing Liabilities:
Deposits
Interest-bearing checking $ 49,582 $ 289 0.58 % $ 56,437 $ 55 0.10 % $ 53,180 $ 30 0.06 %
Savings and clubs 111,053 310 0.28 % 111,508 166 0.15 % 112,094 123 0.11 %
Money market 156,794 2,102 1.34 % 185,473 1,728 0.93 % 155,719 378 0.24 %
Certificates of deposit 197,830 6,370 3.22 % 141,125 1,756 1.24 % 152,803 1,349 0.88 %
Mortgagors deposits 2,783 8 0.29 % 2,969 3 0.10 % 2,786 10 0.36 %
Total deposits 518,042 9,079 1.75 % 497,512 3,708 0.75 % 476,582 1,890 0.40 %
Borrowed money 45,380 2,379 5.24 % 27,864 1,203 4.32 % 22,923 509 2.22 %
Total interest-bearing liabilities 563,422 11,458 2.03 % 525,376 4,911 0.93 % 499,505 2,399 0.48 %
Non-interest-bearing liabilities:
Demand deposits 107,184 105,312 123,493
Other liabilities 24,518 27,199 27,839
Total liabilities 695,124 657,887 650,837
Stockholders' equity 42,293 48,984 54,858
Total liabilities & equity $ 737,417 $ 706,871 $ 705,695
Net interest income $ 22,561 $ 22,789 $ 20,466
Average interest rate spread 2.70 % 3.11 % 2.88 %
Net interest margin 3.14 % 3.33 % 3.01 %
Ratio of average interest-earning assets to interest-bearing liabilities 127.60 % 130.35 % 136.17 %
(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, 2024, 2023, and 2022. 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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2024 vs. 2023
Increase (Decrease) due to
2023 vs. 2022
Increase (Decrease) due to
$ in thousands Volume Rate Total Volume Rate Total
Interest-Earning Assets:
Loans $ 1,431 $ 3,147 $ 4,578 $ 2,459 $ 1,279 $ 3,738
Mortgage-backed securities (92) 56 (36) (201) 110 (91)
Investment securities (62) 264 202 (115) 330 215
Money market investments 225 1,350 1,575 (49) 1,022 973
Total interest-earning assets 1,502 4,817 6,319 2,094 2,741 4,835
Interest-Bearing Liabilities:
Deposits
Interest-bearing checking (6) 240 234 1 24 25
Savings and clubs (1) 145 144 (1) 44 43
Money market (268) 642 374 72 1,278 1,350
Certificates of deposit 705 3,909 4,614 (103) 510 407
Mortgagors deposits — 5 5 1 (8) (7)
Total deposits 430 4,941 5,371 (30) 1,848 1,818
Borrowed money 755 421 1,176 110 584 694
Total interest-bearing liabilities 1,185 5,362 6,547 80 2,432 2,512
Net change in net interest income $ 317 $ (545) $ (228) $ 2,014 $ 309 $ 2,323
Comparison of Financial Condition at March 31, 2024 and 2023
Assets
At March 31, 2024, total assets were $756.8 million, reflecting an increase of $33.6 million, or 4.6%, from total assets of $723.2 million at March 31, 2023. The increase was primarily attributable to increases of $16.4 million in cash and cash equivalents and $24.3 million in the Bank's net loan portfolio, partially offset by a decrease of $6.2 million in the Bank's investment portfolio.
Total cash and cash equivalents increased $16.4 million, or 38.5%, from $42.6 million at March 31, 2023 to $59.0 million at March 31, 2024. The increase in cash was primarily due to an increase in total deposits and paydowns received on investment securities, partially offset by net loan activity and a decrease in advances from the FHLB-NY and other borrowed money. In addition, the Bank received $2.5 million during the second quarter for the CDFI Fund's Equitable Recovery Program (ERP) award.
Total investment securities decreased $6.2 million, or 11.0%, to $50.0 million at March 31, 2024, compared to $56.2 million at March 31, 2023 due to scheduled principal payments received of approximately $5.3 million and a $0.5 million increase in unrealized losses in the available-for-sale portfolio.
Gross portfolio loans increased $25.0 million, or 4.2%, to $622.9 million at March 31, 2024, compared to $597.9 million at March 31, 2023, primarily due to new loan originations of $61.7 million and loan pool purchases of $31.5 million. These were partially offset by attrition and payoffs of $68.2 million. The level of payoffs during the current fiscal year, significantly lower than the prior period's, can be attributed to borrowers continuing to sell commercial real estate, although now at a slower pace, in order to lock in values, as well as paydowns on lines of credit for borrowers looking for opportunities to reduce interest expense in the current rate environment.
Liabilities and Equity
Liabilities
Total liabilities increased $36.5 million, or 5.4%, to $714.5 million at March 31, 2024, compared to $678.0 million at March 31, 2023, primarily due to an increase in total deposits, partially offset by a decrease in advances from the FHLB-NY and other borrowed money.
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Deposits increased $46.6 million, or 7.8%, to $647.0 million at March 31, 2024, compared to $600.4 million at March 31, 2023. The increase was primarily related to increases in money market and certificate of deposit accounts, market-rate products for which the rates increased over the current fiscal year period. As of March 31, 2024 and 2023, 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 $91.0 million and $116.8 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, 2024, the aggregate amount of all our uninsured certificates of deposit was $19.5 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 decreased $4.6 million, or 9.0%, to $46.5 million at March 31, 2024, compared to $51.1 million at March 31, 2023. The Bank repaid a $10.0 million overnight advance secured from the FHLB-NY on March 31, 2023 and secured a $3.0 million 18-month advance from the new FHLB-NY 0% Development Advance (ZDA) Program during the second quarter. At March 31, 2024, the Bank had $28.0 million outstanding advances from the FHLB-NY. In addition, the Company borrowed $2.5 million through a long-term unsecured, below-market rate term loan from a third party to finance eligible loans offered through the Bank's community investment initiatives and loan programs.
Equity
Total equity decreased $2.9 million, or 6.4%, to $42.3 million at March 31, 2024, compared to $45.2 million at March 31, 2023. The decrease was due to a net loss of $3.0 million, coupled with an increase of $0.5 million in unrealized losses on securities available-for-sale for the twelve month period ended March 31, 2024. In addition, the Bank recorded a $0.7 million decrease to retained earnings to reflect the cumulative effect adjustment related to the adoption of CECL (Topic 326), effective April 1, 2023. These decreases were partially offset by a $1.0 million increase in capital as a result of the issuance of common shares in a private placement during the second quarter.
Comparison of Operating Results for the Years Ended March 31, 2024 and 2023
Net Loss
The Company reported a net loss of $3.0 million for fiscal year 2024, compared to a net loss of $4.4 million for the prior year period. The change in our results was primarily driven by increases in interest income and non-interest income, partially offset by an increase in non-interest expense compared to the prior fiscal year.
Net Interest Income
Net interest income decreased $0.2 million, or 0.9%, to $22.6 million for fiscal year 2024, compared to $22.8 million for the prior year period. The decrease was attributable to a $6.6 million increase in interest expense, partially offset by a $6.3 million increase in interest income for the period.
Interest income increased $6.3 million, or 22.7%, to $34.0 million, compared to $27.7 million for the prior year period. Interest income on loans increased $4.6 million, or 18.3%, primarily due to an increase in the average yield on the portfolio of 52 basis points, coupled with a $32.9 million, or 5.7%, increase in average loan balances. Interest income on money market investments increased $1.6 million to $2.7 million, compared to $1.1 million for the prior year period, due to an increase in average interest rates of 2.75% on the Bank's interest-bearing account at the Federal Reserve Bank. Interest income on investment securities was also higher, despite a decrease of $7.2 million in average balances, due to an average increase in yields of 54 basis points compared to the prior year period.
Interest expense increased $6.6 million to $11.5 million, compared to $4.9 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 $5.4 million, primarily due to an increase in the average rates paid on money market and certificate of deposit accounts. Interest expense on borrowings increased $1.2 million from the prior fiscal year, due to increases in both the average outstanding balances of $17.5 million and average borrowing rates of 92 basis points.
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Provision for Credit Losses
The Bank recorded an $83 thousand provision for credit loss for fiscal year 2024, compared to a $100 thousand provision for loan loss for the prior year period. For the year ended March 31, 2024, net charge-offs of $109 thousand were recognized, compared to net charge-offs of $495 thousand in the prior year period. Total charge-offs of $170 thousand were recognized for fiscal year 2024, compared to total charge-offs of $727 thousand for the prior fiscal year. At March 31, 2024, nonaccrual loans totaled $11.8 million, or 1.6% of total assets, compared to $12.3 million, or 1.7% of total assets at March 31, 2023. The ACL was $5.9 million at March 31, 2024, which represents a ratio of the ACL to nonaccrual loans of 49.9%, compared to 42.6% at March 31, 2023. The ratio of the ACL to total loans receivable, excluding PPP loans, was 0.94% at March 31, 2024, compared to 0.88% at March 31, 2023.
Non-interest Income
Non-interest income for the twelve months ended March 31, 2024 increased $3.1 million, or 86.1%, to $6.7 million compared to $3.6 million in the prior year period. Non-interest income for the current fiscal year included $2.4 million grant income recognized from the Bank's award through the CDFI Fund's Equitable Recovery Program. The Bank also recognized $0.5 million grant income associated with a loan program no longer in existence, that had been transferred to the Bank through an acquired institution. In addition, other non-interest income included a $296 thousand death benefit recorded in BOLI income during the third quarter of the current fiscal year.
Non-interest Expense
Non-interest expense for the twelve months ended March 31, 2024 increased $1.5 million, or 4.9%, to $32.2 million compared to $30.7 million for the prior year period. Employee compensation and benefits increased compared to the prior year period due to the Company's transition to a new payroll and benefits administrator during the first quarter of the current fiscal year, and new permanent staff hired to replace temporary consultants. Data processing expense was higher due to upgraded cybersecurity systems and the implementation of service contracts for new consumer loan and deposit products. Other non-interest expense increased due to higher legal costs associated with an activist shareholder and audit fees related to the CECL implementation. In addition, operating charge-offs were higher compared to the prior year period due to a higher number of check fraud incidents.
Income Taxes
The Company did not have any federal, state and local income tax expense as of March 31, 2024 and 2023. State and local capital tax expenses of $162 thousand and $215 thousand for fiscal years 2024 and 2023, 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 decreased $4.6 million during fiscal year 2024 as the Bank repaid a $10.0 million overnight advance secured from the FHLB-NY on March 31, 2023 and secured a $3.0 million 18-month advance from the new FHLB-NY 0% Development Advance (ZDA) Program during the second quarter of the current fiscal year. In addition, the Company borrowed $2.5 million through a long-term unsecured, below-market rate term loan from a third party to finance eligible loans offered through the Bank's community investment initiatives and loan programs. At March 31, 2024, based on available collateral held at the FHLB-NY, Carver Federal had the
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ability to borrow an additional $7.8 million on a secured basis, utilizing mortgage-related loans and securities as collateral. At March 31, 2024, the Bank had $28.0 million outstanding advances from the FHLB-NY. 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 $5.0 million in low interest loans outstanding as of March 31, 2024.
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, 2024 and 2023, assets qualifying for short-term liquidity, including cash and cash equivalents, totaled $59.0 million and $42.6 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 fiscal years 2023 and 2024.
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 2024, total cash and cash equivalents increased $16.4 million to $59.0 million reflecting cash provided by financing activities of $43.1 million, partially offset by cash used in investing activities of $20.1 million and cash used in operating activities of $6.6 million. Net cash used in operating activities totaled $6.6 million. Net cash used in investing activities of $20.1 million was attributable to loan purchases, partially offset by loan repayments and payoffs, net of originations and investment paydowns. Net cash provided by financing activities of $43.1 million resulted from a $46.6 million increase in net deposits, partially offset by a $4.6 million decrease in net borrowings. The Bank repaid a $10.0 million FHLB-NY overnight advance secured on March 31, 2023 and secured a $3.0 million 18-month advance from the new FHLB-NY 0% Development Advance (ZDA) Program during the second quarter of the current fiscal year. The Company also borrowed $2.5 million through a long-term unsecured below-market rate term loan from a third party to finance eligible loans offered through the Bank's community investment initiatives and loan programs. In addition, the Company issued common shares in a private placement transaction during the second quarter for gross proceeds of $1.0 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, 2024 the Bank continues to service 76 loans with a principal balance of $11.4 million for FNMA that had been 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 $86 thousand as of March 31, 2024. The table below summarizes changes in our representation and warranty reserves in fiscal 2024:
$ in thousands March 31, 2024
Representation and warranty repurchase reserve, as of March 31, 2023 (1)
$ 95
Net adjustment to reserve for repurchase losses (2)
(9)
Representation and warranty repurchase reserve, as of March 31, 2024 (1)
$ 86
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(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.”
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, 2024, the Bank had $4.9 million in outstanding commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated statements of condition when they are funded. See Note 15 of Notes to Consolidated Financial Statements for the Bank's outstanding lending commitments at March 31, 2024.
The Bank has contractual obligations at March 31, 2024 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 $ 224,684 $ 198,524 $ 22,278 $ 3,881 $ 1
Debt obligations:
FHLB advances 28,136 28,136 — — —
Other borrowings 5,113 3 2,606 2,504 —
Guaranteed preferred beneficial interest in junior subordinated debentures 13,448 — — — 13,448
Total debt obligations 46,697 28,139 2,606 2,504 13,448
Operating lease obligations:
Lease obligations for rental properties 11,367 2,705 5,127 3,349 186
Total contractual obligations $ 282,748 $ 229,368 $ 30,011 $ 9,734 $ 13,635
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 $13.0 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, 2024, 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, 2024, 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 12.00%, 9.56%, 12.00% and 12.98%, respectively. For additional information regarding Carver Federal's Regulatory Capital and Ratios, refer to Note 12 of Notes to Consolidated Financial Statements, “Stockholders' Equity.”
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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. 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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