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(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation
or Organization)
13-3904174
(I.R.S. Employer Identification No.)
75 West 125th Street, New York, New York
(Address of Principal Executive Offices)
10027
(Zip Code)
Registrant’s telephone number, including area code: (718) 230-2900
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
CARV
The
NASDAQ Stock Market, LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes oNo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
o Large
Accelerated Filer
o Accelerated Filer
o Non-accelerated Filer
þ Smaller Reporting Company
o Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Federal Home Loan Bank of New York (“FHLB-NY”)
stock, at cost
1,468
926
Accrued interest receivable
2,065
2,019
Right-of-use assets
18,783
—
Other
assets
6,588
9,320
Total assets
$
586,992
$
563,713
LIABILITIES
AND EQUITY
LIABILITIES
Deposits:
Non-interest bearing checking
$
58,415
$
60,201
Interest-bearing
deposits:
Interest-bearing checking
22,119
23,473
Savings
97,400
99,310
Money
market
102,083
94,376
Certificates of deposit
191,025
200,607
Escrow
2,079
2,229
Total
interest-bearing deposits
414,706
419,995
Total deposits
473,121
480,196
Advances from the FHLB-NY and other borrowed money
33,552
21,403
Operating
lease liability
19,254
—
Other liabilities
9,756
14,978
Total liabilities
535,683
516,577
EQUITY
Preferred
stock, (par value $0.01 per share: 45,118 Series D shares, with a liquidation preference of $1,000 per share, issued and outstanding)
45,118
45,118
Common stock (par value $0.01 per share: 10,000,000 shares authorized; 3,701,328 and 3,700,728 shares issued; 3,699,384 and 3,698,784 shares outstanding at September 30, 2019 and March 31, 2019, respectively)
61
61
Additional
paid-in capital
55,516
55,514
Accumulated deficit
(49,051
)
(52,201
)
Treasury stock, at cost (1,944 shares)
(417
)
(417
)
Accumulated
other comprehensive loss
82
(939
)
Total equity
51,309
47,136
Total liabilities and equity
$
586,992
$
563,713
See
accompanying notes to consolidated financial statements
Notes
to Consolidated Financial Statements (Unaudited)
NOTE 1. ORGANIZATION
Nature of operations
Carver Bancorp, Inc. (on a stand-alone basis, the “Company” or “Registrant”), was incorporated in May 1996 and its principal wholly-owned subsidiary is Carver Federal Savings Bank (the “Bank” or “Carver Federal”). Carver Federal's wholly-owned subsidiaries are CFSB Realty Corp., Carver Community Development Corporation (“CCDC”) and CFSB Credit Corp., which is currently inactive. The Bank has a real estate investment trust, Carver Asset Corporation ("CAC"),
that was formed in February 2004.
“Carver,” the “Company,”“we,”“us” or “our” refers to the Company along with its consolidated subsidiaries. The Bank was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally-chartered mutual savings and loan association. The Bank converted to a federal savings bank in 1986. On October 24, 1994, the Bank converted from a mutual holding company structure to stock form and issued 2,314,375 shares of its common stock, par value 0.01 per share. On
October 17, 1996, the Bank completed its reorganization into a holding company structure (the “Reorganization”) and became a wholly-owned subsidiary of the Company.
Carver Federal’s principal business consists of attracting deposit accounts through its branches and investing those funds in mortgage loans and other investments permitted by federal savings banks. The Bank has eight branches located throughout the City of New York that primarily serve the communities in which they operate.
In September 2003, the Company formed Carver Statutory Trust I (the “Trust”)
for the sole purpose of issuing trust preferred securities and investing the proceeds in an equivalent amount of floating rate junior subordinated debentures of the Company. In accordance with Accounting Standards Codification (“ASC”) 810, “Consolidations,” Carver Statutory Trust I is unconsolidated for financial reporting purposes. On September 17, 2003, Carver Statutory Trust I issued 13,000 shares, liquidation amount $1,000 per share, of floating rate capital securities. Gross proceeds from the sale of these trust preferred debt securities of $13 million, and proceeds from the sale of the trust's common securities of $0.4 million,
were used to purchase approximately $13.4 million aggregate principal amount of the Company's floating rate junior subordinated debt securities due 2033. The trust preferred debt securities are redeemable at par quarterly at the option of the Company beginning on or after September 17, 2008, and have a mandatory redemption date of September 17, 2033. Cash distributions on the trust preferred debt securities are cumulative and payable at a floating rate per annum resetting quarterly with a margin of 3.05% over the three-month LIBOR. During the second quarter of fiscal year 2017, the
Company applied for and was granted regulatory approval to settle all outstanding debenture interest payments through September 2016. Such payments were made in September 2016. Interest on the debentures has been deferred beginning with the December 2016 payment, per the terms of the agreement, which permit such deferral for up to twenty consecutive quarters, as the Company is prohibited from making payments without prior regulatory approval. The interest rate was 5.19% and the total amount of deferred interest was $2.2 million at September 30, 2019.
Carver relies primarily on dividends from Carver Federal
to pay cash dividends to its stockholders, to engage in share repurchase programs and to pay principal and interest on its trust preferred debt obligation. The OCC regulates all capital distributions, including dividend payments, by Carver Federal to Carver, and the FRB regulates dividends paid by Carver. As the subsidiary of a savings and loan association holding company, Carver Federal must file a notice or an application (depending on the proposed dividend amount) with the OCC (and a notice with the FRB) prior to the declaration of each capital distribution. The OCC will disallow any proposed dividend, for among other reasons, that would result in Carver Federal’s failure to meet the OCC minimum capital requirements. In accordance with the Agreement defined directly below, Carver Federal is currently prohibited from paying any dividends without prior OCC approval, and, as such, has suspended Carver’s regular quarterly cash dividend on its common stock. There
are no assurances that dividend payments to Carver will resume.
Regulation
On October 23, 2015, the Board of Directors of the Company adopted resolutions requiring, among other things, written approval from the Federal Reserve Bank of Philadelphia prior to the declaration or payment of dividends, any increase in debt by the Company, or the redemption of Company common stock.
On May 24, 2016, the Bank entered
into a Formal Agreement ("the Agreement") with the OCC to undertake certain compliance-related and other actions as further described in the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission (“SEC”) on May 27, 2016. As a result of the Agreement, the Bank must obtain the approval of the
6
OCC prior to effecting any change in its directors or senior executive officers. The Bank may not declare or pay dividends or make any other capital distributions, including to the Company, without first filing an application with the OCC and receiving the
prior approval of the OCC. Furthermore, the Bank must seek the OCC's written approval and the FDIC's written concurrence before entering into any "golden parachute payments" as that term is defined under 12 U.S.C. § 1828(k) and 12 C.F.R. Part 359.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidated financial statement presentation
The consolidated financial statements include the accounts of the Company, the Bank and the Bank’s wholly-owned or majority-owned subsidiaries,
Carver Asset Corporation, CFSB Realty Corp., CCDC, and CFSB Credit Corp. All significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended September 30, 2019 are not necessarily indicative
of the results that may be expected for the year ended March 31, 2020. The consolidated balance sheet at September 30, 2019 has been derived from the unaudited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the period then ended. These unaudited consolidated financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended March 31,
2019. Amounts subject to significant estimates and assumptions are items such as the allowance for loan losses, realization of deferred tax assets, assessment of other-than-temporary impairment of securities, and the fair value of financial instruments. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses or future writedowns of real estate owned may be necessary based on changes in economic conditions in the areas where Carver Federal has extended mortgages and other credit instruments. Actual results could differ significantly from those assumptions. Current market conditions increase the risk and complexity of the judgments in these estimates.
Certain comparative amounts for the prior period have been reclassified to conform to current period presentations. Such reclassifications
had no effect on net income or shareholders' equity.
NOTE 3. LOSS PER COMMON SHARE
The following table reconciles the net loss (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted loss per share for the following periods:
Three
Months Ended September 30,
Six Months Ended
September 30,
$ in thousands except per share data
2019
2018
2019
2018
Net
loss
$
(1,050
)
$
(2,017
)
(2,189
)
(3,047
)
Weighted
average common shares outstanding - basic
3,699,384
3,698,664
3,699,101
3,698,286
Weighted
average common shares outstanding – diluted
3,699,384
3,698,664
3,699,101
3,698,286
Basic
loss per common share
$
(0.28
)
$
(0.55
)
$
(0.59
)
$
(0.82
)
Diluted
loss per common share
$
(0.28
)
$
(0.55
)
$
(0.59
)
$
(0.82
)
For
the three and six months ended September 30, 2019 and 2018, all restricted shares and outstanding stock options were anti-dilutive.
7
NOTE 4. COMMON STOCK DIVIDENDS
On October 28, 2011, the Treasury exchanged the CDCI Series B preferred stock for 2,321,286 shares of Carver common stock and the Series C preferred stock
converted into 1,208,039 shares of Carver common stock and 45,118 shares of Series D preferred stock. Series C stock was previously reported as mezzanine equity, and upon conversion to common and Series D preferred stock is now reported as equity attributable to Carver Bancorp, Inc. The holders of the Series D Preferred Stock are entitled to receive dividends, on an as-converted basis, simultaneously to the payment of any dividends on the common stock.
NOTE 5. OTHER COMPREHENSIVE INCOME (LOSS)
The following tables set forth changes in each component of accumulated other comprehensive income (loss), net of tax for the six
months ended September 30, 2019 and 2018:
Net
unrealized income (loss) on securities available-for-sale
$
(2,726
)
721
$
(686
)
$
(2,691
)
There
were no reclassifications out of accumulated other comprehensive loss to the consolidated statement of operations for the six months ended September 30, 2019 and 2018.
NOTE 6. INVESTMENT SECURITIES
The Bank utilizes mortgage-backed and other investment securities in its asset/liability management strategy. In making investment decisions, the Bank considers, among other things, its yield and interest rate objectives, its interest rate and credit risk position, and its liquidity
and cash flow.
Generally, the investment policy of the Bank is to invest funds among categories of investments and maturities based upon the Bank’s asset/liability management policies, investment quality, loan and deposit volume and collateral requirements, liquidity needs and performance objectives. GAAP requires that securities be classified into three categories: trading, held-to-maturity, and available-for-sale. At September 30, 2019, $75.1 million, or 87.6%, of the Bank’s total securities were classified as available-for-sale, and $10.7 million, or 12.4%, were classified as held-to-maturity. The
Bank had no securities classified as trading at September 30, 2019 and March 31, 2019.
Equity securities primarily consist of the Bank's investment in a Community Reinvestment Act ("CRA") mutual fund and other equity investments. As a result of the adoption of ASU 2016-01 in April 2018, the Company determined that these investments fall under the provisions of ASU 2016-01, and accordingly, were transferred from available-for-sale and reclassified into equity securities on the Statement of Financial Condition. These securities are measured at fair value
with unrealized holding gains and losses reflected in net income. Effective April 1, 2018, the Company recorded a cumulative effect adjustment of $721 thousand as a reclassification from accumulated other comprehensive loss to retained earnings. Additionally, all subsequent changes in fair value have been recognized in the Statements of Operations. The Bank redeemed its $9.2 million investment in the CRA mutual fund during the third quarter of fiscal year 2019.
Other investments totaled $492 thousand at September 30, 2019
and are included in Other Assets on the Statements of Financial Condition.
8
The following tables set forth the amortized cost and fair value of securities available-for-sale and held-to-maturity at September 30, 2019 and March 31, 2019:
There
were no sales of available-for-sale and held-to-maturity securities for the three and six months ended September 30, 2019 and 2018.
9
The following tables set forth the unrealized losses and fair value of securities in an unrealized loss position at September 30, 2019 and March 31, 2019 for less than 12 months and 12 months or longer:
A
total of 24 securities had an unrealized loss at September 30, 2019 compared to 35 at March 31, 2019. U.S. government agency securities and mortgage-backed securities represented 53.7% and 40.6%, respectively, of total available-for-sale securities in an unrealized loss position at September 30, 2019. There were 13 mortgage-backed securities, three corporate bonds, and three
U.S. government agency securities, that had an unrealized loss position for more than 12 months at September 30, 2019. The Bank had one mortgage-backed security in the held-to-maturity portfolio that had an unrealized loss position for more than 12 months. Given the high credit quality of the securities which are backed by the U.S. government's guarantees, and the corporate securities which are all reputable institutions in good financial standing, the risk of credit loss is minimal. Management believes that these unrealized losses are a direct result of the current rate environment and that the Company has the ability and intent to hold the securities until maturity or until the valuations recover.
The
amount of an other-than-temporary impairment when there are credit and non-credit losses on a debt security which management does not intend to sell, and for which it is more likely than not that the Company will not be required to sell the security prior to the recovery of the non-credit impairment is accounted for as follows: (1) the portion of the total impairment that is attributable to the credit loss would be recognized in earnings, and (2) the remaining difference between the debt security's amortized cost basis and its fair value would be included in other comprehensive income (loss). The Bank did not have any other securities that were classified as having other-than-temporary impairment in its investment portfolio at September 30, 2019.
10
The following is a summary of the amortized cost and fair value of debt securities at September 30, 2019, by remaining period to contractual maturity (ignoring earlier call dates, if any). Actual maturities may differ from contractual maturities because certain security issuers have the right to call or prepay their obligations. The table below does not consider the effects of possible prepayments or unscheduled repayments.
$
in thousands
Amortized Cost
Fair Value
Weighted
Average Yield
Available-for-Sale:
Less
than one year
$
1,001
$
1,000
1.65
%
One through five years
7,962
7,925
1.72
%
Five
through ten years
15,392
15,377
2.63
%
After ten years
50,650
50,807
2.61
%
Total
$
75,005
$
75,109
2.51
%
Held-to-maturity:
One
through five years
$
4,498
$
4,569
2.40
%
Five through ten years
$
4,144
$
4,226
3.35
%
After
ten years
2,038
2,084
2.86
%
Total
$
10,680
$
10,879
2.86
%
NOTE
7. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The loans receivable portfolio is segmented into one-to-four family, multifamily, commercial real estate, business (including Small Business Administration loans), and consumer loans.
The allowance for loan and lease losses ("ALLL") reflects management’s judgment in the evaluation of probable loan losses inherent in the portfolio at the balance sheet date. Management uses a disciplined process and methodology to calculate the ALLL each quarter. To determine the total ALLL, management estimates the reserves needed for each segment of the loan portfolio, including loans analyzed individually and loans analyzed on a pooled basis.
From
time to time, events or economic factors may affect the loan portfolio, causing management to provide additional or to release reserves from the ALLL. The ALLL is sensitive to risk ratings assigned to individually evaluated loans and economic assumptions and delinquency trends. Individual loan risk ratings are evaluated based on the specific facts related to that loan. Additions to the ALLL are made by charges to the provision for loan losses. Credit exposures deemed to be uncollectible are charged against the ALLL, while recoveries of previously charged off amounts are credited to the ALLL.
Unamortized
premiums, deferred costs and fees, net
3,598
3,023
Allowance
for loan losses
(4,625
)
(4,646
)
Total loans receivable, net
$
428,659
$
424,182
(1)
Includes business overdrafts
(2) Includes personal loans and consumer overdrafts
11
The following is an analysis of the allowance for loan losses based upon the method of evaluating loan impairment for the three and six month periods ended September 30, 2019 and 2018, and the fiscal year ended March 31, 2019.
Nonaccrual loans generally consist of loans for which the accrual of interest has been discontinued as a result of such loans becoming 90 days or more delinquent as to principal and/or interest payments. Interest income on nonaccrual loans is recorded when received based upon the collectability of the loan.
At
September 30, 2019, other non-performing assets totaled $120 thousand which consisted of other real estate owned comprised of two foreclosed residential properties, compared to $404 thousand comprised of four residential properties at March 31, 2019.
Although we believe that substantially all risk elements at September 30, 2019 have been disclosed, it is possible that for a variety of reasons, including economic
conditions, certain borrowers may be unable to comply with the contractual repayment terms on certain real estate and commercial loans.
The Bank utilizes an internal loan classification system as a means of reporting problem loans within its loan categories. Loans may be classified as “Pass,”“Special Mention,”“Substandard,”“Doubtful,” and “Loss.” Loans rated Pass have demonstrated satisfactory asset quality, earning history, liquidity, and other adequate margins of creditor protection. They represent a moderate credit risk and some degree of financial stability. Loans are considered collectible in full, but perhaps require greater than average amount of loan officer attention. Borrowers are capable of absorbing normal setbacks without failure. Loans rated Special Mention have potential weaknesses that deserve management's close attention. If
left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank's credit position at some future date. Loans rated Substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. 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
13
or liquidation in full, based on currently existing facts, conditions and values, highly questionable
and improbable. Loans classified as Loss are those considered uncollectible with insignificant value and are charged off immediately to the allowance for loan losses.
One-to-four family residential loans and consumer and other loans are rated non-performing if they are delinquent in payments ninety or more days, a troubled debt restructuring with less than six months contractual performance or past maturity. All other one-to-four family residential loans and consumer and other loans are performing loans.
At September 30, 2019, and based on the most recent analysis performed in the current quarter, the risk category by class of loans is as follows:
$
in thousands
Multifamily
Commercial
Real Estate
Business
Credit Risk Profile by Internally Assigned Grade:
Pass
$
80,390
$
136,826
$
84,496
Special
Mention
—
625
3,981
Substandard
2,433
—
2,339
Doubtful
—
—
—
Loss
—
—
—
Total
$
82,823
$
137,451
$
90,816
One-to-four
family
Consumer
Credit Risk Profile Based on Payment Activity:
Performing
$
114,749
$
3,657
Non-Performing
3,753
35
Total
$
118,502
$
3,692
At
March 31, 2019, and based on the most recent analysis performed, the risk category by class of loans is as follows:
$ in thousands
Multifamily
Commercial Real Estate
Business
Credit
Risk Profile by Internally Assigned Grade:
Pass
$
83,672
$
128,319
$
90,336
Special
Mention
—
2,497
2,425
Substandard
3,214
476
3,900
Doubtful
—
—
—
Loss
—
—
—
Total
$
86,886
$
131,292
$
96,661
One-to-four
family
Consumer
Credit Risk Profile Based on Payment Activity:
Performing
$
106,531
$
4,063
Non-Performing
3,395
—
Total
$
109,926
$
4,063
14
The following table presents an aging analysis of the recorded investment of past due loans receivables at September 30, 2019 and March 31, 2019.
The
following table presents information on impaired loans with the associated allowance amount, if applicable, at September 30, 2019 and March 31, 2019.
The following tables presents information on average balances of impaired loans and the interest income recognized on a cash basis for the three and six month periods ended September 30, 2019 and 2018.
Troubled
debt restructured ("TDR") loans consist of modified loans where borrowers have been granted concessions in regards to the terms of their loans due to financial or other difficulties, which rendered them unable to repay their loans under the original contractual terms. Total TDR loans at September 30, 2019 were $4.5 million, $2.5 million of which were non-performing as they were either not consistently performing in accordance with their modified terms or not performing in accordance with their modified terms for at least six months. At March 31, 2019, total TDR loans were $5.4 million, of which $3.2 million
were non-performing.
In certain circumstances, the Bank will modify a loan as part of a TDR under GAAP. Situations around these modifications may include extension of maturity date, reduction in the stated interest rate, rescheduling of future cash flows, reduction in the face amount of the debt or reduction of past accrued interest. Loans modified in TDRs are placed on nonaccrual status until the Company determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate performance according to the restructured terms for a period of at least six months. There were no loan modifications made during the three and six month periods ended September 30,
2019. There was one loan modification made during the three and six month periods ended September 30, 2018. The modification set a schedule of principal repayments with an interest rate concession and maturity date extension. The following table presents an analysis of the loan modification that was classified as a TDR during the three and six month periods ended September 30, 2018.
Modifications
to loans during the three month period ended
Modifications to loans during the six month period ended
In
an effort to proactively resolve delinquent loans, the Bank has selectively extended to certain borrowers concessions such as extensions, rate reductions or forbearance agreements. For the periods ended September 30, 2019 and 2018, there were no modified loans that defaulted within 12 months of modification.
At September 30, 2019, there were 7 loans in the TDR portfolio totaling $2.0 million that were on accrual status as the
Company has determined that future collection of the principal and interest is reasonably assured. These have generally performed according to restructured terms for a period of at least six months. At March 31, 2019, there were 8 loans in the TDR portfolio totaling $2.2 million that were on accrual status.
16
Transactions With Certain Related Persons
Federal law requires that all loans or extensions of credit to executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for comparable transactions with the general public and must not involve more than the normal risk of repayment or present other unfavorable features.
The aggregate amount of loans outstanding to related parties was $70 thousand at September 30, 2019 and $80 thousand at March 31, 2019. During the six months ended September 30, 2019, principal repayments totaled $10 thousand.
Furthermore,
loans above the greater of $25,000, or 5% of Carver Federal’s capital and surplus (up to $500,000), to Carver Federal’s directors and executive officers must be approved in advance by a majority of the disinterested members of Carver Federal’s Board of Directors.
NOTE 8. FAIR VALUE MEASUREMENTS
Per GAAP, fair value is an “exit” price, representing the amount that would be received when selling an asset, or paid when transferring a liability, in an orderly transaction between market participants. Fair value is thus a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, GAAP
establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
•
Level 1— Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•
Level 2— Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly
or indirectly, for substantially the full term of the financial instrument.
•
Level 3— Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s categorization within this valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following table presents, by valuation hierarchy, assets that are measured at fair value on a recurring basis as of September 30,
2019 and March 31, 2019, and that are included in the Company’s Consolidated Statements of Financial Condition at these dates:
Instruments
for which unobservable inputs are significant to their fair value measurement (i.e., Level 3) include mortgage servicing rights (“MSR”) and other investments. Level 3 assets accounted for 0.11% of the Company’s total assets measured at fair value at September 30, 2019 and March 31, 2019.
The Company reviews and updates the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next that are related to the observable inputs to a
fair value measurement may result in a reclassification from one hierarchy level to another.
Below is a description of the methods and significant assumptions utilized in estimating the fair value of available-for-sale securities and MSR:
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.
If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited
to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to market information, models also incorporate transaction details, such as maturity and cash flow assumptions. Securities valued in this manner would generally be classified within Level 2 of the valuation hierarchy and primarily include such instruments as mortgage-related securities and corporate debt.
In the six month period ended September 30, 2019, there were no transfers of investments into or out of each level of the fair value hierarchy.
In certain cases where there is limited activity or less transparency around inputs to the valuation, securities
are classified within Level 3 of the valuation hierarchy. In valuing certain securities, the determination of fair value may require benchmarking to similar instruments or analyzing default and recovery rates. Quoted price information for the MSRs is not available. Therefore, MSRs are valued using market-standard models to model the specific cash flow structure. Key inputs to the model consist of principal balance of loans being serviced, servicing fees and discount and prepayment rates.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
18
The following table includes a rollforward of assets classified by the Company within Level 3 of the valuation hierarchy for the six months ended September 30, 2019 and 2018:
Change in Unrealized Gains/(Losses) Related to Instruments Held at September 30, 2018
Other investments
$
433
$
2
$
—
$
—
$
435
$
—
Mortgage
servicing rights
181
(20
)
—
—
161
(18
)
(1)
Includes net servicing cash flows and the passage of time.
For Level 3 assets measured at fair value on a recurring basis as of September 30, 2019 and March 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:
Certain assets are measured at fair value on a non-recurring basis. Such instruments are subject to fair value adjustments under certain circumstances (e.g. when there is evidence of impairment). The following table presents assets and liabilities that were measured at fair value on a non-recurring basis as of September 30, 2019 and March 31,
2019, and that are included in the Company’s Consolidated Statements of Financial Condition at these dates:
Quoted
Prices in Active Markets for Identical Assets
Significant Other Observable Inputs
Significant Unobservable Inputs
Total Fair Value
$ in thousands
(Level 1)
(Level 2)
(Level
3)
Impaired loans
$
—
$
—
$
2,027
$
2,027
Other
real estate owned
—
—
404
$
404
For
Level 3 assets measured at fair value on a non-recurring basis as of September 30, 2019 and March 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:
The fair values of collateral dependent impaired loans are determined using various valuation
techniques, including consideration of appraised values and other pertinent real estate market data.
Other real estate owned represents property acquired by the Bank in settlement of loans less costs to sell (i.e., through foreclosure, repossession or as an in-substance foreclosure). These assets are recorded at the lower of their cost or fair value. At the time of acquisition of the real estate owned, the real property value is adjusted to its current fair value. Any subsequent adjustments will be to the lower of cost or market.
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosures regarding the fair value of financial
instruments are required to include, in addition to the carrying value, the fair value of certain financial instruments, both assets and liabilities recorded on and off-balance sheet, for which it is practicable to estimate fair value. Accounting guidance defines financial instruments as cash, evidence of ownership of an entity, or a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument. The fair value of a financial instrument is discussed below. In cases where quoted market prices are not available, estimated fair values have been determined by the Bank using the best available data and estimation methodology suitable for each such category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate
their recorded carrying value. The Bank's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact the Bank's fair value of all interest-earning assets and interest-bearing liabilities, other than those which are short-term in maturity.
20
The carrying amounts and estimated fair values of the Bank’s financial instruments and estimation methodologies at September 30, 2019 and March 31, 2019 are as follows:
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant
Unobservable Inputs (Level 3)
Financial Assets:
Cash and cash equivalents
$
31,228
$
31,228
$
31,228
$
—
$
—
Securities
available-for-sale
79,845
79,845
—
79,845
—
Other
investments
454
454
—
—
454
FHLB
Stock
926
926
—
926
—
Securities
held-to-maturity
11,137
11,107
—
11,107
—
Loans
receivable
424,182
424,013
—
—
424,013
Accrued
interest receivable
2,019
2,019
—
2,019
—
Mortgage
servicing rights
180
180
—
—
180
Other
assets - Interest-bearing deposits
976
976
—
976
—
Financial
Liabilities:
Deposits
$
480,196
$
477,503
$
277,360
$
200,143
$
—
Advances
from FHLB of New York
8,000
8,001
—
8,001
—
Other
borrowed money
13,403
12,393
—
12,393
—
Accrued
interest payable
1,931
1,931
—
1,931
—
Securities
The
fair values for securities available-for-sale, securities held-to-maturity and equity securities are based on quoted market or dealer prices, if available. If quoted market or dealer prices are not available, fair value is estimated using quoted market or dealer prices for similar securities. Available-for-sale securities and equity securities are classified across Levels 1, 2 and 3. Held-to-maturity securities are classified as Level 2.
21
Mortgage Servicing Rights
The fair value of mortgage servicing rights is determined by discounting the present value of estimated future servicing cash flows using current market assumptions for prepayments, servicing costs and other factors
and are classified as Level 3.
NOTE 10. NON-INTEREST REVENUE AND EXPENSE
On April 1, 2018, the Company adopted ASU No, 2014-09, "Revenue from Contracts with Customers (Topic 606)" and all subsequent ASUs that modified Topic 606. As stated in Note 12, Impact of Recent Accounting Standards, the implementation of the new standard did not have a material impact to the Company's consolidated financial
statements and as such, management determined that a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after April 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with the previous accounting guidance under Topic 605.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain non-interest income streams such as gains on sales of residential mortgage and SBA loans, income associated with servicing assets, and loan fees, including residential mortgage originations to be sold and prepayment and late fees charged across all loan categories are also not in scope of the new guidance. Topic 606 is applicable
to non-interest revenue streams, such as depository fees, service charges and commission revenues. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Non-interest revenue streams in-scope of Topic 606 are discussed below.
Depository fees and charges
Depository fees and charges primarily relate to service fees on deposit accounts and fees earned from debit cards and check cashing transactions. Service fees on deposit accounts consist of ATM fees, NSF fees, account maintenance charges and other deposit related fees. The revenue is recognized monthly when the Bank's performance obligations are complete, or as incurred for transaction-based fees in accordance with the fee schedules for the Bank's deposit products and services.
Loan
fees and service charges
Loan fees and service charges primarily relate to program management fees and fees earned in accordance with the Bank's standard lending fees (such as inspection and late charges). These standard lending fees are earned on a monthly basis upon receipt.
Other non-interest income
Other non-interest income primarily relates to an advertising services agreement, covering marketing and use of the Bank's office space with a third party. The revenue is recognized on a monthly basis.
The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope
of Topic 606, for the three and six months ended September 30, 2019 and 2018:
Three Months Ended September 30,
Six
Months Ended September 30,
$ in thousands
2019
2018
2019
2018
Non-interest income
In-scope
of Topic 606
Depository fees and charges
$
811
$
854
$
1,615
$
1,687
Loan
fees and service charges
70
67
146
122
Other non-interest income
14
16
27
33
Non-interest
income (in-scope of Topic 606)
895
937
1,788
1,842
Non-interest income (out-of-scope
of Topic 606)
303
142
370
541
Total non-interest income
$
1,198
$
1,079
$
2,158
$
2,383
22
The following table sets forth other non-interest income and expense totals exceeding 1% of the aggregate of total interest income and non-interest income for any of the periods presented:
Three Months Ended September 30,
Six
Months Ended September 30,
$ in thousands
2019
2018
2019
2018
Other non-interest income:
Gain
on sale of real estate owned
$
188
$
16
$
208
$
79
Compliance
fee
28
44
56
180
Other
76
(36
)
93
10
Total
non-interest income
$
292
$
24
$
357
$
269
Other
non-interest expense:
Advertising
$
109
$
97
$
202
$
176
Legal
expense
75
102
173
243
Insurance and surety
160
203
304
368
Audit
expense
136
143
262
331
Outsourced service
89
174
245
308
Data
lines / internet
102
96
210
172
Retail expenses
177
211
377
414
Regulatory
assessment
53
86
108
174
Director's fees
77
86
154
173
Other
419
598
935
1,198
Total
non-interest expense
$
1,397
$
1,796
$
2,970
$
3,557
NOTE
11. LEASES
On April 1, 2019, the Company adopted ASU No, 2016-02, "Leases (Topic 842)" and all subsequent ASUs that modified Topic 842. The Company has operating leases related to its administrative offices, eight retail branches and three ATM centers. Two of the operating leases are for branch locations where the Company had entered into a sale and leaseback transaction. The gain had been calculated utilizing the profit on sale in excess of the present value of the minimum lease payments, and the profit on the sale was deferred from gain recognition to be amortized
into income over the terms of the leases in accordance with ASC 840. ASC 842 does not require previous sale and leaseback transactions accounted for under ASC 840 to be reassessed. Because the transactions had no off-market terms, the Company recorded a $5.3 million cumulative effect adjustment to retained earnings to recognize the total deferred gain balance at the adoption date. The implementation of the new standard resulted in the recognition of $20 million right-of-use ("ROU") assets and corresponding operating lease liabilities upon adoption.
As the implicit rates of the Company's existing leases are
not readily determinable, the discount rate used in determining the lease liability obligation for each individual lease was the FHLB-NY fixed-rate advance rates based on the remaining lease terms as of April 1, 2019.
As of September 30, 2019, the Company had $158 thousand and $149 thousand of ROU asset and lease liability, respectively, for a finance lease related to equipment. The ROU asset is included in Premises and Equipment, net, and the lease liability is included in Advances from the FHLB-NY and Other Borrowed Money on the statements of financial
condition.
23
The following tables present information about the Company's leases and the related lease costs as of and for the three and six months ended September 30, 2019:
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard, as modified and augmented by subsequently issued pronouncements (ASUs 2016-08, 2016-10, 2016-12, 2016-20, 2017-05, 2017-13 and 2017-14) became effective for annual periods beginning after December 15, 2017 (April
1, 2018 for the Company), and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a modified retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote
24
disclosures). The Company completed its review of the impact of this guidance and concluded that (1) a substantial majority of the
Company's revenue is comprised of interest income on financial assets, which is explicitly excluded from the scope of ASU 2014-09 and (2) based on our understanding of the standard and subsequent modification and the nature of our non-interest revenue, many elements of non-interest income are unaffected. The Company identified the non-interest income streams that are contractually based and adopted this ASU on a modified retrospective approach. Since the new guidance did not have a material impact to the Company's consolidated financial statements, a cumulative effect adjustment to opening retained earnings was not deemed necessary.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments
- Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The amendments (1) require equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) require public business entities to use an exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) require an entity to separately present in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific
credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements, and (7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. ASU No. 2016-01 is effective for fiscal years beginning after December 15, 2017 (for the Company, the fiscal year ended March 31, 2019), including interim periods within those fiscal years. The adoption of this standard by public
entities is permitted as of the beginning of the year of adoption for selected amendments, including the amendment related to unrealized gains and losses on equity securities, by a cumulative effect adjustment to the statement of financial condition. In February 2018, the FASB issued ASU No. 2018-03, "Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10)" to clarify certain aspects of the guidance issued in ASU 2016-01. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. The Company completed its evaluation of the provisions of ASU 2016-01 and identified the equity investments that falls under ASU 2016-01. The
Company adopted this ASU during the first quarter of fiscal year 2019 and the impact amounted to a cumulative effect adjustment of $721 thousand as a reclassification from accumulated other comprehensive loss to accumulated deficit. There was no tax impact on this reclassification because of the full deferred tax asset valuation allowance. Additionally, all future unrealized gains and losses will be recognized in the Statements of Operations. See Note 6 "Investment Securities" for further information.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." From the lessee's perspective, the new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases
will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessee. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn't convey risks and rewards or control, an operating lease results. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. ASU No. 2016-02, as augmented by ASU No. 2018-01, is effective for fiscal
years beginning after December 15, 2018 (for the Company, the fiscal year ended March 31, 2020), including interim periods within those fiscal years. In July 2018, the FASB issued ASU No. 2018-10, "Codification Improvements to Topic 842, Leases," to clarify and correct unintended application of the guidance in ASU No. 2016-02. The amendments in this ASU affect aspects of the guidance and provide clarification to related topics such as 1) rate implicit in the lease; 2) reassessment of leases; 3) transition guidance; and 4) impairment of net investment in the lease. In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842) Target Improvements," which provides guidance related to comparative reporting requirements for initial adoption. This amendment provides entities
with another transition method, in addition to the modified retrospective approach, by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB issued ASU 2018-20, "Leases (Topic 842) Narrow-Scope Improvements for Lessors," which clarifies how to apply the leases standard when accounting for sales taxes and other similar taxes collected from lessees, certain lessor costs, and recognition of variable payments for contracts with lease and nonlease components. In March 2019, the FASB issued ASU 2019-01, "Leases (Topic 842) Codification Improvements," which clarifies certain issues related to 1) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers; 2) presentation
on the statement of cashflows for sales-type and direct financing leases; and 3) transition disclosures related to Topic 250, Accounting Changes and Error Corrections. The Company adopted ASU No. 2016-02 effective April 1, 2019 and elected to apply the guidance
25
as of the beginning of the period of adoption (April 1, 2019) and not restate comparative periods. The Company also elected certain optional practical expedients, which allow the Company to forego
a reassessment of (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) the initial direct costs for any existing leases. See Note 11 "Leases" for further information.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Loss," which updates the guidance on recognition and measurement of credit losses for financial assets. The new 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. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019 (for the
Company, the fiscal year ending March 31, 2021), including interim periods within those fiscal years. In May 2019, the FASB issued ASU No. 2019-05, "Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief," to provide transition relief by providing entities with an option to irrevocably elect the fair value option for certain financial assets measured at amortized cost upon adoption of ASU 2016-13. The fair value election option is applied on an instrument-by-instrument basis and does not apply to held-to-maturity debt securities. In August 2019, the FASB issued a proposal which would extend the CECL implementation date for smaller reporting companies, as defined by the SEC. In October 2019, the FASB approved this proposal, changing the effective date for smaller reporting companies to fiscal years beginning after December 31, 2023 (for
the Company, the fiscal year ending March 31, 2024). The Company is currently in the implementation stage of ASU 2016-13 and has engaged two vendors to assist management in evaluating the requirements of the new standard, modeling requirements and assessment of the potential impact of the adoption of the new standard on its consolidated statements of financial condition and results of operations.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," a consensus of the FASB's Emerging Issues Task Force. The update is intended to reduce diversity in practice
in how certain transactions are classified in the statement of cash flows, and provides guidance on how the following cash receipts and payments should be presented and classified in the statement of cash flows: debt prepayment or debt extinguishment costs, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, settlements of insurance claims, settlements of corporate-owned and bank-owned life insurance policies, distributions received from equity method investees, and beneficial interests in securitization transactions. The ASU also clarifies when an entity should separate cash receipts and payments and classify them into more than one class of cash flows. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017 (for the Company, the fiscal year ending March
31, 2019), and interim periods within those fiscal years. The Company has evaluated the potential impact of the adoption of the new standard on its consolidated statement of cash flows and is generally unaffected by the update. The items defined in the ASU are not relevant to the Company's operations at this time.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," to require that a statement of cash flows explain the change during the period in restricted cash or restricted cash equivalents, in addition to changes in cash and cash equivalents. The update provides guidance that restricted cash and restricted cash equivalents should be included
with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2017 (for the Company, the fiscal year ending March 31, 2019), and interim periods within those fiscal years. The Company adopted ASU 2016-18 and was generally unaffected by the update. The Company does not have restricted cash at this time.
In March 2017, the FASB issued ASU No. 2017-08, "Receivables -
Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities," which shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The amendments are effective for fiscal years beginning after December 15, 2018 (for the Company, the fiscal year ending March 31, 2020), and interim periods within those fiscal years. Based on management's review of the securities in the Company's portfolio at March 31, 2019, the adoption of the standard did not have a material impact on the
Company's consolidated statements of financial condition and results of operations.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting," which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance became effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 (for the Company, the fiscal year ending March 31, 2019). The adoption of the standard did not have a material impact on the Company's
consolidated statements of financial condition and results of operations.
In February 2018, the FASB issued ASU No. 2018-02 "Income Statement - Reporting Comprehensive Income (Topic 220)," which allows a reclassification for stranded tax effects from accumulated other comprehensive income to retained earnings, to eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments addressed concerns regarding the guidance that requires deferred tax assets and liabilities to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting periods that include the enactment date. The amendments of this
26
update are effective
for fiscal years beginning after December 15, 2018 (for the Company, the fiscal year ending March 31, 2020), and interim periods within those fiscal years. As the Company has provided a full valuation allowance against its net deferred tax assets, the change in tax rates resulted in a writedown of the deferred tax assets, which was offset by a reduction in the deferred tax valuation allowance.
In August 2018, the FASB issued ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," to improve the effectiveness of disclosures
in the notes to financial statements by facilitating clear communication of the information required by GAAP that is most important to users of an entity's financial statements. The amendments removed the disclosure requirements for (1) transfers between Levels 1 and 2 of the fair value hierarchy, (2) the policy for timing of transfers between levels, and (3) the valuation processes for Level 3 fair value measurements. Additionally, the amendments modified the disclosure requirements for investments in certain entities that calculate net asset value and measurement uncertainty. Finally, the amendments added disclosure requirements for (1) the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. The amendments in this update are effective for fiscal years beginning after December
15, 2019 (for the Company, the fiscal year ending March 31, 2021), and interim periods within those fiscal years. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted and an entity is permitted to early adopt any removed or modified disclosures upon issuance of the ASU and delay adoption of the additional disclosures until their effective date. The adoption of ASU 2018-13 is not expected to
have a material impact on the Company's consolidated statements of financial condition and results of operations.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995 which may be identified by the use of such words as “may,”“believe,”“expect,”“anticipate,”“should,”“plan,”“estimate,”“predict,”“continue,” and “potential” or the negative of these terms or other comparable terminology. Examples of forward-looking statements include, but are not limited to, estimates with respect to the Company's financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates. These factors include but are not limited to the following:
•
the
ability of the Bank to comply with the Formal Agreement ("Agreement") between the Bank and the Office of the Comptroller of the Currency, and the effect of the restrictions and requirements of the Formal Agreement on the Bank's non-interest expenses and net income;
•
the ability of the Company to obtain approval from the Federal Reserve Bank of Philadelphia (the "Federal Reserve Bank") to distribute all future interest payments owed to the holders of the Company's subordinated debt securities;
•
the
limitations imposed on the Company by board resolutions which require, among other things, written approval of the Federal Reserve Bank prior to the declaration or payment of dividends, any increase in debt by the Company, or the redemption of Company common stock, and the effect on operations resulting from such limitations;
•
the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for loan losses, write down assets, change our
regulatory capital position, limit our ability to borrow funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings;
•
restrictions set forth in the terms of the Series D preferred stock and in the exchange agreement with the United States Department of the Treasury (the "Treasury") that may limit our ability to raise additional capital;
•
national
and/or local changes in economic conditions, which could occur from numerous causes, including political changes, domestic and international policy changes, unrest, war and weather, or conditions in the real estate, securities markets or the banking industry, which could affect liquidity in the capital markets, the volume of loan originations, deposit flows, real estate values, the levels of non-interest income and the amount of loan losses;
27
•
adverse changes in the financial industry and the securities, credit, national and local real estate markets (including real estate values);
•
changes
in our existing loan portfolio composition (including reduction in commercial real estate loan concentration) and credit quality or changes in loan loss requirements;
•
changes in the level of trends of delinquencies and write-offs and in our allowance and provision for loan losses;
•
legislative or regulatory changes that may adversely affect the
Company’s business, including but not limited to new capital regulations, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements, regulatory fees and compliance costs, and the resources we have available to address such changes;
•
changes in the level of government support of housing finance;
•
changes to state rent control laws, which may impact the credit
quality of multifamily housing loans;
•
our ability to control costs and expenses;
•
risks related to a high concentration of loans to borrowers secured by property located in our market area;
•
changes
in interest rates, which may reduce net interest margin and net interest income;
•
increases in competitive pressure among financial institutions or non-financial institutions;
•
changes in consumer spending, borrowing and savings habits;
•
technological
changes that may be more difficult to implement or more costly than anticipated;
•
changes in deposit flows, loan demand, real estate values, borrowing facilities, capital markets and investment opportunities, which may adversely affect our business;
•
changes in accounting standards, policies and practices, as may be adopted or established by the regulatory agencies or the Financial Accounting Standards Board could negatively
impact the Company's financial results;
•
litigation or regulatory actions, whether currently existing or commencing in the future, which may restrict our operations or strategic business plan;
•
the ability to originate and purchase loans with attractive terms and acceptable credit quality; and
•
the
ability to attract and retain key members of management, and to address staffing needs in response to product demand or to implement business initiatives.
Because forward-looking statements are subject to numerous assumptions, risks and uncertainties, actual results or future events could differ possibly materially from those that the company anticipated in its forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and the Company assumes no obligation to, and expressly disclaims any obligation to, update these forward-looking statements to reflect actual results, changes
in assumptions or changes in other factors affecting such forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements, except as legally required.
Overview
Carver Bancorp, Inc. is the holding company for Carver Federal Savings Bank, a federally chartered savings bank. The Company is headquartered in New York, New York. The Company conducts business as a unitary savings and loan holding company, and the principal business of the
Company consists of the operation of Carver Federal. Carver Federal was founded in 1948 to serve African-American communities whose residents, businesses and institutions had limited access to mainstream financial services. The Bank remains headquartered in Harlem, and predominantly all of its eight branches and three stand-alone 24/7 ATM centers are located in low- to moderate-income neighborhoods. Many of these historically underserved communities
28
have experienced unprecedented growth and diversification of incomes, ethnicity and economic opportunity, after decades of public and private investment.
Carver Federal is among the largest African-American operated banks in the United States. The Bank remains dedicated
to expanding wealth-enhancing opportunities in the communities it serves by increasing access to capital and other financial services for consumers, businesses and non-profit organizations, including faith-based institutions. A measure of its progress in achieving this goal includes the Bank's fifth consecutive "Outstanding" rating, issued by the OCC following its most recent Community Reinvestment Act (“CRA”) examination in January 2019. The OCC found that a substantial majority of originated and purchased loans were within Carver's assessment area, and the Bank has demonstrated excellent responsiveness to its assessment area's needs through its community development lending, investing and service activities. The Bank had approximately $587.0 million in assets and 108 employees as of September 30, 2019.
Carver
Federal engages in a wide range of consumer and commercial banking services. The Bank provides deposit products, including demand, savings and time deposits for consumers, businesses, and governmental and quasi-governmental agencies in its local market area within New York City. In addition to deposit products, Carver Federal offers a number of other consumer and commercial banking products and services, including debit cards, online banking, online bill pay and telephone banking. Carver Federal also offers a suite of products and services for unbanked and underbanked consumers, branded as Carver Community Cash. This includes check cashing, wire transfers, bill payment, reloadable prepaid cards and money orders.
Carver Federal offers loan products covering a variety of asset classes, including commercial and multifamily mortgages, and business loans. The Bank finances mortgage
and loan products through deposits or borrowings. Funds not used to originate mortgages and loans are invested primarily in U.S. government agency securities and mortgage-backed securities.
The Bank's primary market area for deposits consists of the areas served by its eight branches in the Brooklyn, Manhattan and Queens boroughs of New York City. The neighborhoods in which the Bank's branches are located have historically been low- to moderate-income areas. The Bank's primary lending market includes Kings, New York, Bronx and Queens Counties in New York City, and lower Westchester County, New York. Although the Bank's branches are primarily located in areas that were historically underserved by other financial institutions, the Bank faces significant competition for deposits and mortgage lending in its market areas. Management believes that this competition has become more
intense as a result of increased examination emphasis by federal banking regulators on financial institutions' fulfillment of their responsibilities under the CRA and more recently due to the decline in demand for loans. Carver Federal's market area has a high density of financial institutions, many of which have greater financial resources, name recognition and market presence, and all of which are competitors to varying degrees. The Bank's competition for loans comes principally from commercial banks, savings institutions and mortgage banking companies. The Bank's most direct competition for deposits comes from commercial banks, savings institutions and credit unions. Competition for deposits also comes from money market mutual funds, corporate and government securities funds, and financial intermediaries such as brokerage firms and insurance companies. Many of the Bank's competitors have substantially greater resources and offer a wider array of financial services
and products. This, combined with competitors' larger presence in the New York market, add to the challenges the Bank faces in expanding its current market share and growing its near-term profitability.
Carver Federal's 70-year history in its market area, its community involvement and relationships, targeted products and services and personal service consistent with community banking, help the Bank compete with competitors in its market.
The Bank formalized its many community focused investments on August 18, 2005, by forming Carver Community Development Corporation (“CCDC”). CCDC oversees the Bank's participation in local economic development and other community-based initiatives, including financial literacy activities. CCDC
coordinates the Bank's development of an innovative approach to reach the unbanked customer market in Carver Federal's communities. Importantly, CCDC spearheads the Bank's applications for grants and other resources to help fund these important community activities. In this connection, Carver Federal has successfully competed with large regional and global financial institutions in a number of competitions for government grants and other awards.
New Markets Tax Credit Award
The New Markets Tax Credit ("NMTC") award is used to stimulate economic development in low- to moderate-income communities. The NMTC award enables the Bank to invest with community and development partners in economic development projects with attractive terms including, in some cases, below market interest
rates, which may have the effect of attracting capital to underserved communities and facilitating revitalization of the community, pursuant to the goals of the NMTC program. NMTC awards provide a credit to Carver Federal against Federal income taxes when the Bank makes qualified investments. The credits are allocated over seven years from the time of the qualified investment. Alternatively, the Bank can utilize the award in projects
29
where another investor entity provides funding and receives the tax benefits of the award in exchange for the Bank receiving fee income.
In June 2006, CCDC was selected by the U.S. Department of Treasury, in a highly competitive process, to receive an award of $59 million in NMTC. CCDC
received a second NMTC award of $65 million in May 2009, and a third award of $25 million in August 2011. CCDC provides funding to underlying projects. While providing funding to investments in the NMTC eligible projects, CCDC has retained a 0.01% interest in other special purpose entities created to facilitate the investments, with the investors owning the remaining 99.99%. CCDC also provides certain administrative services to these entities and receives servicing fee income during the term of the qualifying projects. The Bank has determined that it and CCDC do not have the sole power to direct activities of these special purpose entities that significantly impact the entities' performance, and therefore are not the primary beneficiaries of these entities. The Bank has a contingent obligation to reimburse the investors for any loss or shortfall incurred as a result of the NMTC projects not being in compliance with certain regulations that would void the investors'
ability to otherwise utilize tax credits stemming from the award. As of September 30, 2019, all three award allocations have been fully utilized in qualifying projects.
The Bank's unconsolidated variable interest entities ("VIEs"), in which the Company holds significant variable interests or has continuing involvement through servicing a majority of assets in a VIE at September 30, 2019, are presented below.
Involvement
with SPE (000's)
Funded Exposure
Unfunded Exposure
Total
$ in thousands
Recognized Gain (Loss) (000's)
Total Rights transferred
Significant unconsolidated VIE assets
Total Involvement with SPE asset
Debt Investments
Equity Investments
Funding
Commitments
Maximum exposure to loss
Carver Statutory Trust 1(1)
$
—
$
—
$
13,400
$
13,400
$
15,154
$
400
$
—
$
—
$
15,554
CDE
18*
600
13,254
—
—
—
—
—
5,169
5,169
CDE
19
500
10,746
11,113
11,113
—
1
—
4,191
4,192
CDE
20*
625
12,500
—
—
—
—
—
4,875
4,875
CDE
21
625
12,500
11,976
11,976
—
1
—
4,875
4,876
Total
$
2,350
$
49,000
$
36,489
$
36,489
$
15,154
$
402
$
—
$
19,110
$
34,666
* Entities
exited the NMTC projects during fiscal years 2018 and 2019 and remain on the above table pending final dissolution.
(1) Carver Statutory Trust I debt investment includes deferred interest of $2.2 million.
Critical Accounting Policies
Note 2 to the Company’s audited Consolidated Financial Statements for the year ended March 31, 2019 included in its Form 10-K for the year ended March 31,
2019, as supplemented by this report, contains a summary of significant accounting policies. The Company believes its policies, with respect to the methodologies used to determine the allowance for loan and lease losses, securities impairment, assessment of the recoverability of the deferred tax asset, and the fair value of financial instruments involve a high degree of complexity and require management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. The following description of these policies should be read in conjunction with the corresponding section of the Company’s Form 10-K for the year
ended March 31, 2019.
Allowance for Loan and Lease Losses
The adequacy of the Bank's ALLL is determined, in accordance with the Interagency Policy Statement on the Allowance for Loan and Lease Losses (the “Interagency Policy Statement”) released by the OCC on December 13, 2006 and in accordance with ASC Subtopics 450-20 "Loss Contingencies" and 310-10 "Accounting by Creditors for Impairment of a Loan." Compliance with the Interagency Policy Statement includes management's review of the Bank's loan portfolio, including the identification and review of individual problem situations that may affect a borrower's ability to repay.
In addition, management reviews the overall portfolio quality through an analysis of delinquency and non-performing loan data, estimates of the value of underlying collateral, current charge-offs and other factors that may affect the portfolio, including a review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and composition of the loan portfolio.
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. Further, any change in the size of the loan
30
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.
General Reserve Allowance
Carver's maintenance of a general reserve allowance in accordance with ASC Subtopic 450-20 includes the Bank evaluating the risk of potential loss on 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 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 Commercial Real Estate, Multifamily and Business, 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
The Bank 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
31
3.The fair value of the collateral if the loan is collateral dependent.
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.
Criticized and classified loans with at risk balances of $500,000 or more and loans below $500,000 that the Chief Credit Officer deems appropriate for review, are identified and reviewed for individual evaluation for impairment in accordance with ASC Subtopic 310-10. Carver also performs impairment analysis for all TDRs. If it is determined that it is probable the Bank will be unable to
collect all amounts due according with the contractual terms of the loan agreement, the loan is categorized as impaired.
If the loan is determined to not be impaired, it is then placed in the appropriate pool of criticized and classified loans to be evaluated collectively for impairment. Loans determined to be impaired are evaluated to determine the amount of impairment based on one of the three measurement methods noted above. In accordance with guidance, if there is no impairment amount, no reserve is established for the loan.
Troubled Debt Restructured Loans
TDRs are those loans whose terms have been modified because of deterioration in the financial condition of the borrower and a concession
is made. Modifications could include extension of the terms of the loan, reduced interest rates, capitalization of interest and forgiveness of accrued interest and/or principal. Once an obligation has been restructured because of such credit problems, it continues to be considered a TDR until paid in full. For cash flow dependent loans, the Bank records a specific valuation allowance reserve equal to the difference between the present value of estimated future cash flows under the restructured terms discounted at the loan's original effective interest rate, and the loan's original carrying value. For a collateral dependent loan, the Bank records an impairment charge when the current estimated fair value of the property that collateralizes the impaired loan, if any, is less than the recorded investment in the loan. TDR loans remain on nonaccrual status until they have performed in accordance with the restructured terms for a period of at least six months.
Securities
Impairment
The Bank’s available-for-sale securities portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive (loss) income. Securities that the Bank has the intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. The fair values of securities in the Bank's portfolio are based on published or securities dealers’ market values and are affected by changes in interest rates. On a quarterly basis, the Bank reviews and evaluates the securities portfolio to determine if the decline in the fair value of any security below its cost basis is other-than-temporary. The Bank generally views changes in fair value caused by changes in interest rates as temporary, which is consistent with its experience. The amount of an other-than-temporary impairment,
when there are credit and non-credit losses on a debt security which management does not intend to sell, and for which it is more likely than not that the Bank will not be required to sell the security prior to the recovery of the non-credit impairment, the portion of the total impairment that is attributable to the credit loss would be recognized in earnings, and the remaining difference between the debt security’s amortized cost basis and its fair value would be included in other comprehensive (loss) income. This guidance also requires additional disclosures about investments in an unrealized loss position and the methodology and significant inputs used in determining the recognition of other-than-temporary impairment. The Bank does not have any other securities that are classified as having other-than-temporary impairment in its investment portfolio at September 30, 2019.
Deferred
Tax Assets
The Company records income taxes in accordance with ASC 740 Topic “Income Taxes,” as amended, using the asset and liability method. Income tax expense (benefit) consists of income taxes currently payable/(receivable) and deferred income taxes. Temporary differences between the basis of assets and liabilities for financial reporting and tax purposes are measured as of the balance sheet date. Deferred tax liabilities or recognizable deferred tax assets are calculated on such differences, using current statutory rates, which result in future taxable or deductible amounts. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Where applicable, deferred tax assets are reduced by a valuation allowance for
any portion determined not likely to be realized. Management is continually reviewing the operation of the Company with a view to the future. Based on management's current analysis and the appropriate accounting literature, management is of the opinion that a full valuation allowance is appropriate. This valuation allowance could subsequently be adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant.
32
On June 29, 2011, the Company raised $55 million of capital, which resulted in a $51.4 million increase
in equity after considering the effect of various expenses associated with the capital raise. The capital raise triggered a change in control under Section 382 of the Internal Revenue Code. Generally, Section 382 limits the utilization of an entity's net operating loss carryforwards, general business credits, and recognized built-in losses, upon a change in ownership. The Company is currently subject to an annual limitation of approximately $900 thousand. A valuation allowance for the net deferred tax asset of $21.8 million has been recorded as of September 30, 2019. The valuation allowance was initially recorded during fiscal year 2011, and has remained through September 30, 2019, as management concluded and continues to conclude that
it is "more likely than not" that the Company will not be able to fully realize the benefit of its deferred tax assets. However, tax legislation passed during the Company's fiscal year 2018 now permits a corporation to receive refunds for AMT credits even if there is no taxable income As a result, at March 31, 2018, the valuation allowance was reduced by $340 thousand, the amount of the Company's AMT credits. The amount of the AMT credits was $127 thousand at September 30, 2019, and $170 thousand at March 31,
2019.
Stock Repurchase Program
On August 6, 2002, the Company announced a stock repurchase program to repurchase up to 15,442 shares of its outstanding common stock. As of September 30, 2019, 11,744 shares of its common stock have been repurchased in open market transactions at an average price of $235.80 per share (as adjusted for 1-for-15 reverse stock split that occurred on October 27, 2011). The
Company reissued shares as restricted stock in accordance with their management recognition plan. No shares were repurchased during the three months ended September 30, 2019. As a result of the Company's participation in the TARP CDCI, the U.S. Treasury's prior approval is required to make further repurchases. On October 28, 2011, the U.S. Treasury converted its preferred stock into common stock, which the U.S. Treasury continues to hold. The Company continues to be bound by the TARP CDCI restrictions so long as the U.S. Treasury is a common stockholder.
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 regulatory 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. The Bank was in compliance with this policy as of September 30, 2019.
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 $12.1 million, or 56.8%, to $33.6 million at September 30, 2019, compared to $21.4 million at March 31, 2019 as the Bank secured $12 million additional short-term borrowings from the FHLB during the period in order to fund lending activities. In addition, the Bank entered into a $0.2 million finance lease during the period. At September 30, 2019, the Bank had a $20 million FHLB 3-month advance outstanding. At September 30,
2019, based on available collateral held at the FHLB-NY, Carver Federal had the ability to borrow from the FHLB-NY an additional $41.1 million on a secured basis, utilizing mortgage-related loans and securities as collateral.
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 September 30, 2019 and March 31, 2019, assets qualifying for short-term liquidity, including cash and cash equivalents, totaled $38.2 million and $31.2 million,
respectively.
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 of deposit outflows due to a competitive interest rate environment.
33
The
Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During the six months ended September 30, 2019, total cash and cash equivalents increased $7.0 million to $38.2 million at September 30, 2019, compared to $31.2 million at March 31, 2019, reflecting cash provided by financing activities of $5.1 million, cash provided by operating activities of $1.6 million and cash provided by investing activities
of $372 thousand. Net cash provided by financing activities of $5.0 million was due to an increase of $12.1 million in FHLB-NY advances and other borrowings, partially offset by net decreases in deposits of $7.1 million. The Bank secured additional FHLB short-term borrowings to fund lending activities during the period. The net decrease in deposits was primarily due to a strategic decision to not renew non-relationship institutional certificates of deposit as loan demand was weak and renewal rates exceeded the earnings rate on the Bank's cash deposit at the Federal Reserve. Net cash provided by investing activities of $372 thousand was primarily attributable to net loan principal repayments and investment paydowns. This was offset by $20.9
million in loan purchases during the second quarter. Net cash used in operating activities totaled $1.6 million.
Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. In common with all U.S. banks, Carver’s capital adequacy is measured in accordance with the Basel III regulatory framework governing capital adequacy, stress testing, and market liquidity risk. The final rule, which became effective for the Bank on January 1, 2015, established a minimum Common Equity Tier 1 (CET1) ratio, a minimum leverage ratio and increases in the Tier 1 and Total risk-based capital ratios. The rule also limits a banking organization's capital distributions and certain discretionary bonus
payments if the banking organization does not hold a "capital conservation buffer" consisting of 2.5% of CET1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was phased in annually beginning January 1, 2016. On January 1, 2019, the full capital conservation buffer requirement of 2.5% became effective, making its minimum CET1 plus buffer 7%, its minimum Tier 1 capital plus buffer 8.5% and its minimum total capital plus buffer 10.5%. 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 Tier1 leverage ratio and 12% for its total risk-based capital
ratio.
In accordance with the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies have adopted, effective January 1, 2020, a final rule whereby financial institutions and financial institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, will be eligible to opt into a “Community Bank Leverage Ratio” framework. The framework will first be available for use in the Bank’s March 31, 2020 Call Report. Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally
applicable risk-based and leverage capital requirements in the agencies’ capital rules and will be considered to have met the “well capitalized” ratio requirements under the Prompt Corrective Action statutes. The agencies reserved the authority to disallow the use of the Community Bank Leverage Ratio by a financial institution or holding company based on the risk profile of the organization.
34
The table below presents the capital position of the Bank at September 30, 2019:
Excess
over individual minimum capital requirement
14,211
2.45
%
Common equity Tier 1
Regulatory
capital
$
66,504
15.75
%
Minimum capital requirement
29,559
7.00
%
Excess
36,945
8.75
%
Tier
1 risk-based capital
Regulatory capital
$
66,504
15.75
%
Minimum capital requirement
35,893
8.50
%
Excess
30,611
7.25
%
Total
risk-based capital
Regulatory capital
$
71,382
16.90
%
Individual minimum capital requirement
50,673
12.00
%
Minimum
capital requirement
44,339
10.50
%
Excess over individual minimum capital requirement
20,709
4.90
%
Bank
Regulatory Matters
On October 23, 2015, the Board of Directors of Carver Bancorp, Inc., in response to the FRB’s Bank Holding Company Report of Inspection issued on April 14, 2015, adopted a Board Resolution (“the Resolution”) as a commitment by the Company’s Board to address certain supervisory concerns noted in the Reserve Bank‘s Report. The supervisory concerns are related to the Company’s leverage, cash flow and accumulated deferred interest. As a result of those concerns, the Company is prohibited from paying
any dividends without the prior written approval of the Reserve Bank.
On May 24, 2016, the Bank entered into a Formal Agreement with the OCC to undertake certain compliance-related and other actions as further described in the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission (“SEC”) on May 27, 2016. As a result of the Formal Agreement, the Bank must obtain the approval of the OCC prior to effecting any change in its directors or senior executive officers. The Bank may not declare or pay dividends or make any other capital distributions, including to the Company,
without first filing an application with the OCC and receiving the prior approval of the OCC. Furthermore, the Bank must seek the OCC's written approval and the FDIC's written concurrence before entering into any "golden parachute payments" as that term is defined under 12 U.S.C. § 1828(k) and 12 C.F.R. Part 359.
At September 30, 2019, the Bank's capital level exceeded the regulatory requirements and its IMCR requirements with a Tier 1 leverage capital ratio of 11.45%, Common Equity Tier 1 capital ratio of 15.75%, Tier 1 risk-based capital ratio of 15.75%, and a total risk-based capital ratio of 16.90%.
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 Federal National Mortgage Association (“FNMA”). The loans were sold to FNMA with the standard representations and warranties for loans sold to the Government Sponsored Entities ("GSEs"). 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.
Through
fiscal 2011 none of the loans sold to FNMA were repurchased by the Bank. During the periods from fiscal 2012 through 2015, 20 loans that had been sold to FNMA were repurchased by the Bank. No loans have been repurchased by the Bank
35
subsequent to fiscal 2015. At September 30, 2019, the Bank continues to service 108 loans with a principal balance of $18.5 million for FNMA that had been sold with standard representations and warranties.
The following table presents information on open requests from FNMA. The amounts presented are based
on outstanding loan principal balances.
(1) The open claims include all open requests received by the Bank where either FNMA has requested loan files for review, where FNMA
has not formally rescinded the repurchase request or where the Bank has not agreed to repurchase the loan. The amounts reflected in this table are the unpaid principal balance and do not incorporate any losses the Bank would incur upon the repurchase of these loans.
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 Bank has not received a request to repurchase any of these loans since the second quarter of fiscal 2015, and there have not been any additional requests from FNMA for loans to be reviewed. The reserves totaled $234 thousand as of September 30,
2019. The table below summarizes changes in our representation and warranty reserves during the six months ended September 30, 2019:
At September 30, 2019, total
assets were $587.0 million, reflecting an increase of $23.3 million, or 4.1%, from total assets of $563.7 million at March 31, 2019. The increase is attributible to the adoption of ASU 2016-02 "Leases (Topic 842)," a new accounting standard which requires lessees to establish a right-of-use ("ROU") asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. For the Company, this primarily applied to property leases and a ROU asset totaling $20 million was established on April 1, 2019. In addition, the increase
in total assets reflected a $4.5 million increase in the loan portfolio, net of the allowance for loan losses, which was offset by a $5.2 million decrease in the Bank's investment portfolio.
Total cash and cash equivalents increased $7.0 million, or 22.4%, from $31.2 million at March 31, 2019 to $38.2 million at September 30, 2019. The increase in cash was primarily due to $21.5 million
in scheduled loan and securities paydowns and payoffs that was partially offset by the strategic management of intended non-relationship deposit outflows during the period, as the decline in loan demand no longer warranted the maintenance of certain higher cost time deposits. The Bank secured additional short-term advances from the FHLB to fund loan originations and purchases during the current period.
Total investment securities decreased $5.2 million, or 5.7%, to $85.8 million at September 30, 2019, compared to $91.0 million at March 31,
2019 due to scheduled principal payments received.
Gross portfolio loans increased $4.5 million, or 1.0%, to $433.3 million at September 30, 2019, compared to $428.8 million at March 31, 2019 due to the purchase of a residential loan pool and growth in commercial mortgage and business loans from organic loan originations. This increase was partially offset by attrition and payoffs of non-owner occupied commercial real estate mortgage loans. The Bank has achieved its goal of maintaining
a concentration level of commercial real estate loans commensurate with its risk profile.
Liabilities and Equity
Total liabilities increased $19.1 million, or 3.7%, to $535.7 million at September 30, 2019, compared to $516.6 million at March 31, 2019, primarily due to the initial recognition of the $20 million operating lease liabilities as a result of the adoption of ASU 2016-02. The Bank secured additional borrowings
during the period, which were partially offset by the Bank's managed decline in deposits.
Deposits decreased $7.1 million, or 1.5%, to $473.1 million at September 30, 2019, compared to $480.2 million at March 31, 2019, due primarily to declines in brokered certificate of deposit accounts. The Company did not actively pursue the retention of certain non-relationship deposits as it has been seeking to reduce its overall level
of brokered deposits. Also, the Company's balance sheet management plan called for a lower level of deposits due to weaker loan demand.
Advances from the Federal Home Loan Bank of New York and other borrowed money increased $12.2 million, or 57.0%, to $33.6 million at September 30, 2019, compared to $21.4 million at March 31, 2019 as the Bank secured FHLB short-term borrowings during the period to fund lending activities. The
Bank had a $20 million FHLB 3-month advance outstanding at September 30, 2019.
Other liabilities decreased $5.2 million, or 34.7%, to $9.8 million at September 30, 2019, compared to $15.0 million at March 31, 2019, due primarily to the $5.3 million recognition of the deferred gain on sale/leaseback of buildings as a cumulative effect adjustment to equity as a result of
the adoption of ASU 2016-02.
Total equity increased $4.2 million, or 8.9%, to $51.3 million at September 30, 2019, compared to $47.1 million at March 31, 2019. The increase was primarily due to the recognition of the $5.3 million deferred gain on sale/leaseback of buildings, as discussed above. In addition, a decrease of $1.0 million in unrealized losses on securities available-for-sale was partially offset by a net
loss of $2.2 million for the six month period.
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
37
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 future interest rate trends. Management monitors the Company's cumulative gap position, which is the difference between the sensitivity to rate changes on the Company's interest-earning assets and interest-bearing liabilities. 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.
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
following table reflects the Bank's outstanding lending commitments and contractual obligations as of September 30, 2019:
$ in thousands
Commitments to fund commercial and consumer loans
$
5,767
Lines of credit
1,397
Commitment
to fund private equity investment
640
Total
$
7,804
Comparison of Operating Results for the Three and Six Months Ended September 30, 2019 and 2018
Overview
The
Company reported a net loss of $1.1 million for the three months ended September 30, 2019, compared to a net loss of $2.0 million for the comparable prior year quarter. For the six months ended September 30, 2019, the Company reported a net loss of $2.2 million, compared to a net loss of $3.0 million for the prior year period. The change in our results was primarily driven by a decrease in non-interest expense, offset by lower net interest income in the current periods compared to the prior year periods.
38
The following table reflects selected operating ratios for the three and six months ended September 30, 2019 and 2018 (unaudited):
Three
Months Ended September 30,
Six Months Ended
September 30,
Selected Financial Data:
2019
2018
2019
2018
Return
on average assets (1)
(0.73
)%
(1.28
)%
(0.76
)%
(0.94
)%
Return
on average stockholders' equity (2) (8)
(8.02
)%
(16.29
)%
(8.32
)%
(12.55
)%
Return
on average stockholders' equity, excluding AOCI (2) (8)
(8.03
)%
(15.52
)%
(8.28
)%
(11.88
)%
Net
interest margin (3)
2.81
%
2.78
%
2.94
%
2.75
%
Interest
rate spread (4)
2.55
%
2.55
%
2.67
%
2.52
%
Efficiency
ratio (5)
120.69
%
135.25
%
121.44
%
126.14
%
Operating
expenses to average assets (6)
4.21
%
4.62
%
4.29
%
4.34
%
Average
stockholders' equity to average assets (7) (8)
9.05
%
7.84
%
9.14
%
7.46
%
Average
stockholders' equity, excluding AOCI, to average assets (7) (8)
9.04
%
8.23
%
9.18
%
7.88
%
Average
interest-earning assets to average interest-bearing liabilities
1.25
x
1.23
x
1.25
x
1.22
x
(1)Net
income (loss), annualized, divided by average total assets.
(2)Net income (loss), annualized, divided by average total stockholders' equity.
(3)Net
interest income, annualized, 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, annualized, divided by average total assets.
(7)Total
average stockholders' equity divided by total average assets for the period.
(8)See Non-GAAP Financial Measures disclosure 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. Further, the efficiency ratio is used by management in its assessment of financial performance, including non-interest expense control.
Return on equity measures how efficiently we generate profits from the resources provided by our net assets. Return on average stockholders' equity is calculated by dividing annualized net income (loss) attributable to Carver by average stockholders' equity, excluding AOCI. Management believes that this performance measure explains the results of the Company's ongoing businesses in a manner that allows for a better understanding of the underlying trends in the Company's current businesses. 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.
Three Months Ended September 30,
Six
Months Ended
September 30,
$ in thousands
2019
2018
2019
2018
Average Stockholders' Equity
Average
Stockholders' Equity
$
52,358
$
49,522
$
52,619
$
48,546
Average
AOCI
71
(2,446
)
(228
)
(2,738
)
Average Stockholders' Equity, excluding AOCI
$
52,287
$
51,968
$
52,847
$
51,284
Return
on Average Stockholders' Equity
(8.02
)%
(16.29
)%
(8.32
)%
(12.55
)%
Return on Average
Stockholders' Equity, excluding AOCI
(8.03
)%
(15.52
)%
(8.28
)%
(11.88
)%
Average
Stockholders' Equity to Average Assets
9.05
%
7.84
%
9.14
%
7.46
%
Average Stockholders'
Equity, excluding AOCI, to Average Assets
9.04
%
8.23
%
9.18
%
7.88
%
39
Analysis of Net Interest Income
The Company’s profitability is primarily dependent upon net interest income and is also affected by the provision for loan losses, non-interest income, non-interest expense and income taxes. Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned and paid. The Company’s net interest income is significantly impacted
by changes in interest rate and market yield curves. Net interest income decreased $0.5 million, or 11.6%, to $3.8 million for the three months ended September 30, 2019, compared to $4.3 million for the same quarter last year. Net interest income decreased $0.8 million, or 9.1%, to $8.0 million for the six months ended September 30, 2019, compared to $8.8 million for the prior year period.
The
following table sets forth certain information relating to the Company’s average interest-earning assets and average interest-bearing liabilities, and their related average yields and costs for the three and six months ended September 30, 2019 and 2018. Average yields are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods shown. Average balances are derived from daily or month-end balances as available and applicable. Management does not believe that the use of average monthly balances instead of average daily balances represents a material difference in information presented. The average balance of loans includes
loans on which the Company has discontinued accruing interest. The yield includes fees, which are considered adjustments to yield.
Interest income decreased $0.6 million, or 10.2%, to $5.3 million for the three months ended September 30, 2019, compared to $5.9 million for the prior year quarter. For the six months ended September 30, 2019, interest income decreased $1.1 million, or 9.2%, to $10.9 million compared to $12.0 million for the prior year
period. Interest income on loans decreased $342 thousand, or 6.9%, for the three months ended September 30, 2019, due to a decline in average balances in the current period of $18.2 million, and a 14 basis-point decline in the overall average yield. For the six months ended September 30, 2019, interest income on loans decreased $705 thousand, or 7.0%, due to a decrease in average balances in the current period of $33.1 million. The decrease in the average loans outstanding is a result of the Bank's focused
efforts to reduce the concentration level of commercial real estate loans during the prior fiscal years. Interest income on money market investments decreased $207 thousand, or 54.5%, and $483 thousand, or 58.7%, for the three and six months ended September 30, 2019, respectively, primarily due to a decline in the Bank's interest-bearing account at the Federal Reserve Bank.
Interest Expense
Interest expense decreased $0.2 million, or 12.5%,
to $1.4 million for the three months ended September 30, 2019, compared to $1.6 million for the prior year quarter. For the six months ended September 30, 2019, interest expense decreased
41
$369 thousand, or 11.4%, to $2.9 million compared to the prior year period. Interest expense on deposits decreased $0.2 million and $0.4 million,
or 14.3%, for the three and six months ended September 30, 2019, primarily due to a decrease in the average balances of certificates of deposit. This decrease was partially offset by higher rates on certificate of deposit accounts.
Provision for Loan Losses and Asset Quality
The Bank maintains an ALLL that management believes is adequate to absorb inherent and probable losses in its loan portfolio. The adequacy of the ALLL is determined by management’s continuous review of the Bank’s loan portfolio, including the identification and review of individual problem situations that may affect a borrower’s ability to repay. Management reviews the overall
portfolio quality through an analysis of delinquency and non-performing loan data, estimates of the value of underlying collateral, current charge-offs and other factors that may affect the portfolio, including a review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and composition of the loan portfolio. 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. 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.
The Bank’s provision for loan loss methodology is consistent with the Interagency Policy Statement on the Allowance for Loan and Lease Losses (the
“Interagency Policy Statement”) released by the OCC on December 13, 2006. For additional information regarding the Bank’s ALLL policy, refer to Note 2 of the Notes to Consolidated Financial Statements, “Summary of Significant Accounting Policies” included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019.
The following table summarizes the activity in the ALLL for the six month periods ended September 30, 2019 and 2018
and the fiscal year ended March 31, 2019:
Net
charge-offs to average loans outstanding (annualized)
(0.01
)%
(0.05
)%
(0.17
)%
Allowance to total loans
1.07
%
1.08
%
1.11
%
Allowance
to non-performing loans
59.85
%
45.13
%
51.28
%
The Company recorded a $7 thousand provision for loan loss
for the three months ended September 30, 2019, compared to a $49 thousand provision for loan loss for the prior year quarter. Net charge-offs of $52 thousand were recognized during the second quarter, compared to net charge-offs of $444 thousand for the prior year quarter. For the six months ended September 30, 2019, the Company recorded an $8 thousand provision for loan loss, compared to a $54 thousand provision for loan loss for the prior year period. Net charge-offs
of $29 thousand were recognized for the six months ended September 30, 2019, compared to net charge-offs of $388 thousand in the prior year period.
At September 30, 2019, nonaccrual loans totaled $7.7 million, or 1.3% of total assets, compared to $10.3 million, or 1.8% of total assets at March 31, 2019. The ALLL was $4.6
million at September 30, 2019, which represents a ratio of the ALLL to nonaccrual loans of 59.8% compared to a ratio of 45.1% at March 31, 2019. The ratio of the allowance for loan losses to total loans was 1.07% at September 30, 2019, compared to 1.08% at March 31, 2019.
Non-performing Assets
Non-performing
assets consist of nonaccrual loans, loans held-for-sale and property acquired in settlement of loans, including foreclosure. When a borrower fails to make a payment on a loan, the Bank and/or its loan servicers take prompt steps to have the delinquency cured and the loan restored to current status. This includes a series of actions such as phone calls, letters, customer visits and, if necessary, legal action. In the event the loan has a guarantee, the Bank may seek to recover on the guarantee, including, where applicable, from the SBA. Loans that remain delinquent are reviewed for reserve provisions and charge-off.
42
The Bank’s collection efforts continue after the loan is charged off, except when a determination is made that collection efforts have been exhausted or are not productive.
The
Bank may from time to time agree to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). Loans modified in a TDR are placed on nonaccrual status until the Bank determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for a period of at least six months. At September 30, 2019, loans classified as TDR totaled $4.5 million, of which $2.0 million were classified as performing. At March 31, 2019,
loans classified as TDR totaled $5.4 million, of which $2.2 million were classified as performing.
At September 30, 2019, non-performing assets totaled $7.8 million, or 1.3% of total assets compared to $10.7 million, or 1.9% of total assets at March 31, 2019. The following table sets forth information with respect to the Bank’s non-performing assets at the dates indicated:
Accruing
loans contractually past maturity > 90 days (4)
—
35
—
—
—
Non-performing
loans to total loans
1.78
%
2.19
%
2.40
%
2.32
%
2.17
%
Non-performing
assets to total assets
1.34
%
1.67
%
1.90
%
1.76
%
1.56
%
Allowance
to total loans
1.07
%
1.11
%
1.08
%
1.12
%
1.11
%
Allowance
to non-performing loans
59.85
%
50.57
%
45.13
%
48.43
%
51.28
%
(1)
Nonaccrual status denotes any loan where the delinquency exceeds 90 days past due, or in the opinion of management, the collection of contractual interest and/or principal is doubtful. Payments received on a nonaccrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on assessment of the ability to collect on the loan.
(2) Other non-performing assets generally represent loans that the Bank is in the process of selling and has designated held-for-sale or property acquired by the Bank in settlement of loans less costs to sell (i.e., through foreclosure, repossession or as an in-substance foreclosure). These assets are recorded at the lower of their cost or fair value.
(3) Troubled
debt restructured loans performing in accordance with their modified terms for less than six months and those not performing in accordance with their modified terms are considered nonaccrual and are included in the nonaccrual category in the table above. At September 30, 2019, there were $2.0 million TDR loans that have performed in accordance with their modified terms for a period of at least six months. These loans are generally considered performing loans and are not presented in the table above.
(4) Loans 90 days or more past maturity and still accruing, which were not included in the non-performing category, are presented in the above table.
Subprime Loans
In
the past, the Bank originated or purchased a limited amount of subprime loans (which are defined by the Bank as those loans where the borrowers have FICO scores of 660 or less at origination). At September 30, 2019, the Bank had $4.7 million in subprime loans, or 1.1% of its total loan portfolio, of which $1.2 million are non-performing loans.
Non-Interest Income
Non-interest income increased $119 thousand, or 11.0%, to $1.2 million for the three months ended September 30, 2019,
compared to $1.1 million for the prior year quarter. Other non-interest income for the current quarter included $188 thousand
43
gain on sales of real estate owned, compared to $23 thousand for the prior year quarter. For the six months ended September 30, 2019, non-interest income decreased $225 thousand, or 9.4%, to $2.2 million, compared to $2.4 million for the prior year period. Non-interest income in the prior year included gain on sale of building of $154 thousand
and $308 thousand, for the three and six months ended September 30, 2019, respectively. The total deferred gain on sale/leaseback of buildings was recognized as a cumulative effect adjustment to equity effective April 1, 2019 with the transition to ASU 2016-02. In addition, other non-interest income decreased from the prior year due to the completion of NMTC projects. These decreases were partially offset by higher gains recognized on sales of real estate owned compared to the prior periods.
Non-Interest Expense
Non-interest expense decreased $1.2 million,
or 16.4%, to $6.1 million for the three months ended September 30, 2019, compared to $7.3 million for the prior year quarter. For the six months ended September 30, 2019, non-interest expense decreased $1.7 million, or 12.1%, to $12.4 million, compared to $14.1 million for the prior year period. The Company's employee compensation and benefits expense decreased $302
thousand and $752 thousand for the three and six months ended September 30, 2019, compared to the prior year periods due to a strategic reduction in force. In addition, FDIC premiums were significantly lower in the current fiscal year ($335 thousand and $497 thousand, respectively, for the three and six month periods) as a result of the Bank's commitment to improve its regulatory position. The Bank was also eligible for the FDIC small bank assessment credit that was applied beginning in the current quarter. Operating efficiencies and improvement in the control environment and in the regulatory infrastructure created additional year-over-year savings in the Bank's regulatory assessment, audit expense, legal fees,
insurance and various others. In addition, outsourced service fees declined in both comparative periods as Company personnel became knowledgeable in and assumed responsibility for various processes formerly performed by external vendors.
Item 3.
Quantitative and Qualitative Disclosure about Market Risk
Not applicable, as the Company is a smaller reporting company.
Item
4.
Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. As of September 30, 2019, the
Company’s management, including the Company's Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Accounting Officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as amended. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must necessarily reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls
and procedures relative to their costs.
Based on the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2019.
(b) Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting during the fiscal quarter to which this report relates, that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
44
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
From time to time, the Company and the Bank or one of its wholly-owned subsidiaries
are parties to various legal proceedings incident to their business. At September 30, 2019, certain claims, suits, complaints and investigations (collectively “proceedings”) involving the Company and the Bank or a subsidiary, arising in the ordinary course of business, have been filed or are pending. The Company is unable at this time to determine the ultimate outcome of each proceeding, but believes, after discussions with legal counsel representing the Company and the Bank or the subsidiary in these proceedings, that it has meritorious defenses to each proceeding and appropriate measures have been taken to
defend the interests of the Company, Bank or subsidiary. There were no legal proceedings pending or known to be contemplated against us that in the opinion of management, would be expected to have a material adverse effect on the financial condition or results of operations of the Company or the Bank.
Item 1A.
Risk Factors
In addition to the other information
set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A - Risk Factors" in our most recent Annual Report on Form 10-K, which could materially affect the Company's business, financial condition, or future operating results. The risks described in this form are not the only risks presently facing the Company. Additional risks and uncertainties not currently known to the Company, or currently deemed to be immaterial, also may materially adversely affect the Company's business, financial condition, and/or operating results. There were no material changes in risk factors in the
Company's second quarter ended September 30, 2019.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Second Amended and Restated Bylaws of Carver Bancorp, Inc. (3)
4.1
Stock Certificate of Carver Bancorp, Inc. (1)
4.2
Certificate
of Designations of Mandatorily Convertible Non-Voting Participating Preferred Stock, Series C, and Convertible Non-Cumulative Non-Voting Participating Preferred Stock, Series D (4)
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in XBRL (Extensive Business Reporting Language): (i) Consolidated Statements of Financial Condition as of September 30, 2019 (unaudited) and March 31, 2019; (ii) Consolidated Statements of Operations for the three and six months ended September 30, 2019 and 2018 (unaudited); (iii) Consolidated Statements
of Comprehensive Loss for the three and six months ended September 30 2019 and 2018 (unaudited); (iv) Consolidated Statements of Changes in Equity for the three and six months ended September 30, 2019 and 2018 (unaudited); (v) Consolidated Statements of Cash Flows for the six months ended September 30, 2019 and 2018 (unaudited); and (vi) Notes to Consolidated Financial Statements.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
