CARVER BANCORP: MANAGEMENT REPORT AND ANALYSIS OF THE FINANCIAL POSITION AND OPERATING RESULTS. (form 10-K)
The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and Notes to Consolidated Financial Statements presented elsewhere in this report.
Carver concluded fiscal 2021 with a net loss of
$3.9 millioncompared to net loss of $5.4 millionfor the prior year period. The change in our results of operations was primarily driven by increases in non-interest income and non-interest expense. The business climate continues to present significant challenges as banks continue to absorb heightened regulatory costs and compete for limited loan demand. Carver continues to focus on diversifying its loan portfolio with C&I lending to local small businesses and strives to generate new loan production and to purchase loans at suitable prices. In addition, the Bank launched a program introducing new deposit products and expanded its digital online services into nine states across the Northeast and Washington D.C.COVID-19 continues to have a significant, negative effect on families and businesses in New Yorkand throughout the United States. While New York Statewent through a phased reopening upon expiration of an earlier executive order to shelter in place, maintain social distancing and close all non-essential businesses statewide, there remains a significant amount of uncertainty as certain geographic areas continue to experience surges in COVID-19 cases and governments at all levels continue to react to changes in circumstances. The prolonged pandemic, or any other epidemic of this sort that ultimately harms the global economy, the U.S.economy or the markets in which we operate could adversely affect Carver's operations. The long-term effects of COVID-19 on the Company's business cannot be ascertained as there remains significant uncertainty regarding the breadth and duration of business disruptions related to the virus. At this time, it is unknown if the easing of restrictions on individuals and businesses will continue and if and when businesses and their employees will be able to fully resume normal activities. In addition, new information may emerge regarding the severity of COVID-19 or the effectiveness of 39 -------------------------------------------------------------------------------- the vaccines developed, causing federal, state and local governments to take additional actions to contain COVID-19 or to treat its impact. Even after formal restrictions have been lifted, changes in the behavior of customers, businesses and their employees - including social distancing - as a result of the pandemic, are unknown. The Company is closely monitoring its asset quality, liquidity, and capital positions. Management is actively working to minimize the current and future impact of this unprecedented situation, and is making adjustments to operations where appropriate or necessary to help slow the spread of the virus. In addition, as a result of further actions that may be taken to contain or reduce the impact of the COVID-19 pandemic, the Company may experience changes in the value of collateral securing outstanding loans, reductions in the credit quality of borrowers and the inability of borrowers to repay loans in accordance with their terms. The Company is actively managing the credit risk in its loan portfolio, including reviewing the industries that the Company believes are most likely to be impacted by emerging COVID-19 events. These and similar factors and events may have substantial negative effects on the business, financial condition, and results of operations of the Company and its customers.
Critical accounting policies
Various elements of accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Carver's policy with respect to the methodologies used to determine the allowance for loan and lease losses, securities impairment, and assessment of the recoverability of the deferred tax asset are the most critical accounting policies. These policies are important to the presentation of Carver's financial condition and results of operations, and involve a high degree of complexity, requiring management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Such assumptions and estimates are susceptible to significant changes in today's economic environment. Changes in these judgments, assumptions or estimates could result in material differences in the Company's results of operations or financial condition.
Allowance for loan and rental 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 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's evaluating the risk to loss potential of homogeneous pools of loans based upon historical loss factors and a review of nine different environmental factors that are then applied to each pool. The main pools of loans ("Loan Type") are: â¢One-to-four family â¢Multifamily â¢Commercial Real Estate â¢Business Loans â¢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 40 -------------------------------------------------------------------------------- period that occurs after the earlier actual losses. During the period between the loss-causing events and the eventual confirmations of losses, conditions may have changed. There is always a time lag between the period over which average charge-off rates are calculated and the date of the financial statements. During that period, conditions may have changed. Another factor influencing the General Reserve is the Bank's loss emergence period ("LEP") assumptions which represent the Bank's estimate of the average amount of time from the point at which a loss is incurred to the point at which the loss is confirmed, either through the identification of the loss or a charge-off. Based upon adequate management information systems and effective methodologies for estimating losses, management has established a LEP floor of one year on all pools. In some pools, such as in its
Commercial Real Estate, Multifamily and Business pools, the Bank demonstrates a LEP in excess of 12 months. The Bank also recognizes losses in accordance with regulatory charge-off criteria. Because actual loss experience may not adequately predict the level of losses inherent in a portfolio, the Bank reviews nine qualitative factors to determine if reserves should be adjusted based upon any of those factors. As the risk ratings worsen, some of the qualitative factors tend to increase. The nine qualitative factors the Bank considers and may utilize are: 1.Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses (Policy & Procedures). 2.Changes in relevant economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments (Economy). 3.Changes in the nature or volume of the loan portfolio and in the terms of loans (Nature & Volume). 4.Changes in the experience, ability, and depth of lending management and other relevant staff (Management). 5.Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans (Problem Assets). 6.Changes in the quality of the loan review system (Loan Review). 7.Changes in the value of underlying collateral for collateral dependent loans (Collateral Values). 8.The existence and effect of any concentrations of credit and changes in the level of such concentrations (Concentrations). 9.The effect of other external forces such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio (External Forces). Specific Reserve Allowance Carver also maintains a specific reserve allowance for criticized and classified loans individually reviewed for impairment in accordance with ASC Subtopic 310-10 guidelines. The amount assigned to the specific reserve allowance is individually determined based upon the loan. The ASC Subtopic 310-10 guidelines require the use of one of three approved methods to estimate the amount to be reserved and/or charged off for such credits. The three methods are as follows: 1.The present value of expected future cash flows discounted at the loan's effective interest rate, 2.The loan's observable market price; or 3.The fair value of the collateral if the loan is collateral dependent. The Bank may choose the appropriate ASC Subtopic 310-10 measurement on a loan-by-loan basis for an individually impaired loan, except for an impaired collateral dependent loan. Guidance requires impairment of a collateral dependent loan to be measured using the fair value of collateral method. A loan is considered "collateral dependent" when the repayment of the debt will be provided solely by the underlying collateral, and there are no other available and reliable sources of repayment. All substandard and doubtful loans and any other loans that the Chief Credit Officer deems appropriate for review, are identified and reviewed for individual evaluation for impairment in accordance with ASC Subtopic 310-10. 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. 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.
Debt in difficulty 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 restructured 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 41 -------------------------------------------------------------------------------- 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.
Interagency statement on loan modifications and reporting for financial institutions working with clients affected by coronavirus
March 22, 2020, the federal banking agencies issued an interagency statement to provide additional guidance to financial institutions who are working with borrowers affected by COVID-19. The statement provided that agencies will not criticize institutions for working with borrowers and will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings ("TDRs"). The agencies have confirmed with staff of the Financial Accounting Standards Boardthat short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. The statement further provided that working with borrowers that are current on existing loans, either individually or as part of a program for creditworthy borrowers who are experiencing short-term financial or operational problems as a result of COVID-19, generally would not be considered TDRs. For modification programs designed to provide temporary relief for current borrowers affected by COVID-19, financial institutions may presume that borrowers that are current on payments are not experiencing financial difficulties at the time of the modification for purposes of determining TDR status, and thus no further TDR analysis is required for each loan modification in the program.
The statement says that agency reviewers will use judgment when reviewing loan modifications, including TORs, and will not automatically risk negatively risking rate credits that are affected by COVID-19, including those considered as RDTs.
In addition, the statement noted that efforts to work with borrowers of one-to-four family residential mortgages, where the loans are prudently underwritten, and not past due or carried on nonaccrual status, will not result in the loans being considered restructured or modified for the purposes of their risk-based capital rules. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral.
The Coronavirus Aid, Relief and Economic Security Act (the âCARES Actâ)
The CARES Act, which became law on
March 27, 2020, provide emergency economic relief to combat the coronavirus ("COVID-19") and stimulate the economy. The law had several provisions relevant to financial institutions, including: â¢Allowing institutions not to characterize loan modifications relating to the COVID-19 pandemic as a troubled debt restructuring and also allowing them to suspend the corresponding impairment determination for accounting purposes. â¢The ability of a borrower of a federally backed mortgage loan ( VA, FHA, USDA, Freddie Mac and Fannie Mae) experiencing financial hardship due, directly or indirectly, to the COVID-19 pandemic to request forbearance from paying their mortgage by submitting a request to the borrower's servicer affirming their financial hardship during the COVID-19 emergency. Such a forbearance will be granted for up to 180 days, which can be extended for an additional 180-day period upon the request of the borrower. During that time, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the mortgage contract will accrue on the borrower's account. Except for vacant or abandoned property, the servicer of a federally backed mortgage is prohibited from taking any foreclosure action, including any eviction or sale action, for not less than the 60-day period beginning March 18, 2020. â¢The ability of a borrower of a multifamily federally backed mortgage loan that was current as of February 1, 2020, to submit a request for forbearance to the borrower's servicer affirming that the borrower is experiencing financial hardship during the COVID-19 emergency. A forbearance will be granted for up to 30 days, which can be extended for up to two additional 30-day periods upon the request of the borrower. During the time of the forbearance, the multifamily borrower cannot evict or initiate the eviction of a tenant or charge any late fees, penalties or other charges 42 -------------------------------------------------------------------------------- to a tenant for late payment of rent. Additionally, a multifamily borrower that receives a forbearance may not require a tenant to vacate a dwelling unit before a date that is 30 days after the date on which the borrower provides the tenant notice to vacate and may not issue a notice to vacate until after the expiration of the forbearance.
Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (the âCRRSA Actâ)
December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 ("CRRSA Act") was signed into law, which also contains provisions that could directly impact financial institutions including extending the time that insured depository institutions and depository institution holding companies have to comply with the current expected credit losses (CECL) account standing and extending the authority granted to banks under the CARES Act to elect to temporarily suspend the requirements under U.S.GAAP applicable to troubled debt restructurings for loan modifications related to the COVID-19 pandemic for any loan that was not more than 30 days past due as of December 31, 2019. The act directs financial regulators to support community development financial institutions and minority depository institutions and directs Congressto re-appropriate $429 billionin unobligated CARES Act funds. The PPP, which was originally established under the CARES Act, was also extended under the CRRSA Act. 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 securities that are classified as having other-than-temporary impairment in its investment portfolio at March 31, 2021.
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. On
June 29, 2011, the Company raised $55 millionof equity, which resulted in a $51.4 millionincrease 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 $870 thousand. A valuation allowance for net deferred tax asset of $23.7 millionhas been recorded. The valuation allowance was initially recorded during fiscal 2011, and has remained through March 31, 2021, 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 recorded as a deferred tax asset was $0at March 31, 2020. The AMT credit was $143 thousandas 43 --------------------------------------------------------------------------------
Asset / Liability Management
The Company's primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between the rates on interest-earning assets and interest-bearing liabilities, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and assets, and the credit quality of earning assets. Management's asset/liability objectives are to maintain a strong, stable net interest margin, to utilize the Company's capital effectively without taking undue risks, to maintain adequate liquidity and to manage its exposure to changes in interest rates. The economic environment is uncertain regarding 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.
Discussion of sensitivity analysis to market risk and interest rates
As a financial institution, the Bank's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company's assets and liabilities, and the market value of all interest-earning assets, other than those which are short-term in maturity. Based upon the Company's nature of operations, it is not subject to foreign currency exchange or commodity price risk. The Company does not own any trading assets. The Company seeks to manage its interest rate risk by monitoring and controlling the variation in repricing intervals between its assets and liabilities. To a lesser extent, it also monitors its interest rate sensitivity by analyzing the estimated changes in market value of its assets and liabilities assuming various interest rate scenarios. As discussed more fully below, there are a variety of factors that influence the repricing characteristics of any given asset or liability. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific period of time and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities and is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Generally, during a period of falling interest rates, a negative gap could result in an increase in net interest income, while a positive gap could adversely affect net interest income. Conversely, during a period of rising interest rates a negative gap could adversely affect net interest income, while a positive gap could result in an increase in net interest income. As illustrated below, the Company had a positive one-year gap equal to 17.64% of total rate sensitive assets at
March 31, 2021. As a result, the Company's net interest income may be positively affected by rising interest rates and may be negatively affected by falling interest rates. The following table sets forth information regarding the projected maturities, prepayments and repricing of the major rate-sensitive asset and liability categories of the Company as of March 31, 2021. Maturity repricing dates have been projected by applying estimated prepayment rates based on the current rate environment. The repricing and other assumptions are not necessarily representative of the Company's actual results. Classifications of items in the table below are different from those presented in other tables and the financial statements and accompanying notes included herein and do not reflect non-performing loans: 44 --------------------------------------------------------------------------------
Non-Interest $ in thousands <3 Mos. 3-12 Mos. 1-3 Yrs. 3-5 Yrs. 5-10 Yrs. 10+ Yrs. Bearing Total Rate Sensitive Assets: Loans
$ 42,284 $ 113,443 $ 152,620 $ 98,442 $ 60,115 $ 12,783$ - $ 479,687Short-term investments 72,305 - - - - - - 72,305 Long-term investments 2,217 8,546 23,948 11,097 26,094 17,662 - 89,564 Other assets - - - - - - 35,192 35,192 Total assets $ 116,806 $ 121,989 $ 176,568 $ 109,539 $ 86,209 $ 30,445 $ 35,192 $ 676,748Rate Sensitive Liabilities: Non-maturity deposits $ 3,143 $ 9,649 $ 24,403 $ 22,911 $ 51,337 $ 303,358$ - $ 414,801Term deposits 54,922 57,908 29,691 10,104 99 - - 152,724 Borrowings - - 23,705 13,403 - - - 37,108
Other liabilities - - - - - - 19,814 19,814 Equity - - - - - - 52,301 52,301
Total liabilities and equity
Interest sensitivity gap
$ 58,741 $ 54,432 $ 98,769 $ 63,121 $ 34,773 $ (272,913) $ (36,923)$ - Cumulative interest sensitivity gap $ 58,741 $ 113,173 $ 211,942 $275,063 $309,836 $ 36,923$ - $ - Ratio of cumulative gap to total rate sensitive assets 9.16 % 17.64 % 33.04 % 42.87 % 48.29 % 5.76 % - - The table above assumes that fixed maturity deposits are not withdrawn prior to maturity and that transaction accounts will decay as disclosed in the table above. Certain shortcomings are inherent in the method of analysis presented in the table above. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in the market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, generally have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Additionally, credit risk may increase as many borrowers may experience an inability to service their debt in the event of a rise in interest rate. Virtually all of the adjustable-rate loans in the Company's portfolio contain conditions that restrict the periodic change in interest rate. Economic Value of Equity ("EVE") Analysis. As part of its efforts to maximize net interest income while managing risks associated with changing interest rates, management also uses the EVE methodology. EVE is the present value of expected net cash flows from existing assets less the present value of expected cash flows from existing liabilities plus the present value of net expected cash inflows from existing financial derivatives and off-balance sheet contracts. At March 31, 2021, the Company did not report any holdings in financial derivative contracts. Under this methodology, interest rate risk exposure is assessed by reviewing the estimated changes in EVE that would hypothetically occur if interest rates rapidly rise or fall along the yield curve. Projected values of EVE at both higher and lower interest rate risk scenarios are compared to base case values (no change in rates) to determine the sensitivity to changing interest rates. Presented below, as of March 31, 2021, is an analysis of the Company's interest rate risk as measured by changes in EVE for instantaneous parallel shifts of +400/-200 basis points change in market interest rates. Such limits have been established with consideration of the impact of various rate changes and the Compamy's current capital position. 45 --------------------------------------------------------------------------------
$ in thousands Economic Value of Equity Change in Rate $ Amount $ Change % Change +400 bps 109,000 40,000 58.0 % +300 bps 104,000 35,000 50.7 % +200 bps 96,000 27,000 39.1 % +100 bps 85,000 16,000 23.2 % 0 bps 69,000 -100 bps 43,000 (26,000) (37.7) % -200 bps 8,000 (61,000) (88.4) % Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE require the making of certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the models presented assume that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the EVE table provides an indication of the Company's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Company's net interest income and may differ from actual results.
Average balance, interest and yields and average rates
The following table sets forth certain information relating to Carver Federal's average interest-earning assets and average interest-bearing liabilities, and their related average yields and costs for the years ended
March 31, 2021, 2020, and 2019. The table also presents information for the fiscal years indicated with respect to the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, or "interest rate spread," which savings institutions have traditionally used as an indicator of profitability. Another indicator of an institution's profitability is its "net interest margin," which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income: 46 --------------------------------------------------------------------------------
2021 2020 2019 Average Average Average Average Yield/ Average Yield/ Average Yield/ $ in thousands Balance Interest Cost Balance Interest Cost Balance Interest Cost Interest-Earning Assets: Loans (1)
$ 456,112 $ 18,5524.07 % $ 423,454 $ 18,9594.48 % $ 442,218 $ 19,4704.40 % Mortgage-backed securities 41,513 708 1.71 % 49,407 1,230 2.49 % 52,002 1,265 2.43 % Investment securities 50,727 953 1.88 % 37,717 868 2.30 % 51,505 1,252 2.43 % Other investments 90,857 94 0.10 % 32,364 570 1.76 % 63,555 1,243 1.96 % Total interest-earning assets 639,209 20,307 3.18 % 542,942 21,627 3.99 % 609,280 23,230 3.81 % Non-interest-earning assets 27,704 30,207 10,135 Total assets $ 666,913 $ 573,149 $ 619,415Interest-Bearing Liabilities: Deposits Interest-bearing checking $ 37,313 $ 300.08 % $ 23,765 $ 290.12 % $ 25,159 $ 300.12 % Savings and clubs 107,820 235 0.22 % 97,453 256 0.26 % 100,838 265 0.26 % Money market 125,867 525 0.42 % 100,796 533 0.53 % 98,061 466 0.48 % Certificates of deposit 192,637 2,974 1.54 % 188,285 3,799 2.02 % 250,260 4,427 1.77 % Mortgagors deposits 2,257 6 0.27 % 2,219 23 1.04 % 2,142 44 2.05 % Total deposits 465,894 3,770 0.81 % 412,518 4,640 1.12 % 476,460 5,232 1.10 % Borrowed money 38,005 650 1.71 % 21,600 991 4.59 % 17,521 909 5.19 % Total interest-bearing liabilities 503,899 4,420 0.88 % 434,118 5,631 1.30 % 493,981 6,141 1.24 %
Non-interest bearing debts:
Demand deposits 85,890 58,548 59,525 Other liabilities 29,818 28,874 19,989 Total liabilities 619,607 521,540 573,495 Stockholders' equity 47,306 51,609 45,920 Total liabilities & equity
$ 666,913 $ 573,149 $ 619,415Net interest income $ 15,887 $ 15,996 $ 17,089Average interest rate spread 2.30 % 2.69 % 2.57 % Net interest margin 2.49 % 2.95 % 2.80 % Ratio of average interest-earning assets to interest-bearing liabilities 126.85 % 125.07 % 123.34 % (1) Includes nonaccrual loans. (2) Includes FHLB-NY stock. Rate/Volume Analysis The following table sets forth information regarding the extent to which changes in interest rates and changes in volume of interest related assets and liabilities have affected the Company's interest income and expense during the fiscal years ended March 31, 2021, 2020, and 2019 (in thousands). For each category of interest-earning assets and interest-bearing liabilities, information is provided for changes attributable to: (1) changes in volume (changes in volume multiplied by prior rate); (2) changes in rate (change in rate multiplied by old volume). Changes in rate/volume variance are allocated proportionately between changes in rate and changes in volume. 47 --------------------------------------------------------------------------------
2021 vs. 2020 2020 vs. 2019 Increase (Decrease) due to Increase (Decrease) due to $ in thousands Volume Rate Total Volume Rate Total Interest-Earning Assets: Loans
$ 1,463 $ (1,870) $ (407) $ (827) $ 316 $ (511)Mortgage-backed securities (196) (326) (522) (63) 28 (35) Investment securities 299 (214) 85 (335) (49) (384) Other investments 1,031 (1,507) (476) (611) (62) (673) Total interest-earning assets 2,597 (3,917) (1,320) (1,836) 233 (1,603) Interest-Bearing Liabilities: Deposits Interest-bearing checking 17 (16) 1 (1) - (1) Savings and clubs 27 (48) (21) (9) - (9) Money market savings 132 (140) (8) 13 54 67 Certificates of deposit 88 (913)
(825) (1,096) 468 (628) Mortgagors deposits - (17) (17) 2 (23) (21) Total deposits 264 (1,134) (870) (1,091) 499 (592) Borrowed money 753 (1,094) (341) 211 (129) 82 Total interest-bearing liabilities 1,017 (2,228) (1,211) (880) 370 (510) Net change in net interest income
$ 1,580 $ (1,689) $ (109) $ (956) $ (137) $ (1,093)
Comparison of financial position to
March 31, 2021, total assets were $676.7 million, reflecting an increase of $97.9 million, or 16.9%, from total assets of $578.8 millionat March 31, 2020. The increase was attributable to a $28.1 millionincrease in cash and cash equivalents, and increases of $54.6 millionand $18.3 millionin the Bank's net loan and investment portfolios, respectively. Total cash and cash equivalents increased $28.1 million, or 59.2%, from $47.5 millionat March 31, 2020to $75.6 millionat March 31, 2021, primarily due to an increase in total deposits of $67.8 millionand a $23.6 millionincrease in advances from the FHLB and other borrowings. These increases were partially offset by investment purchases and loan originations and purchases. Total investment securities increased $18.3 million, or 24.1%, to $94.3 millionat March 31, 2021, compared to $76.0 millionat March 31, 2020. The Bank sold $37.8 millionof securities out of the available-for-sale portfolio, recognizing gains of $1.2 millionduring the current fiscal year. The proceeds were reinvested along with excess cash towards new securities purchases with a higher yield as part of management's strategy to restructure the Bank's investment portfolio and to improve its overall mix and duration. Gross portfolio loans increased $54.8 millionto $483.5 millionat March 31, 2021, compared to $428.7 millionat March 31, 2020, primarily due to new loan originations of $114.5 million, of which $41.9 millionwere part of the SBA's Paycheck Protection Program ("PPP"), and $26.8 millionwere from loan pool purchases. The new volume was partially offset by attrition and payoffs of $86.5 million, primarily in residential and non-owner occupied commercial real estate mortgage loans. Liabilities and Equity Liabilities
Total liabilities increased
$67.8 million, or 13.9%, to $556.6 millionat March 31, 2021, compared to $488.8 millionat March 31, 2020, due primarily to PPP loan funds deposited by the program borrowers into their accounts at the Bank and new 48 --------------------------------------------------------------------------------
deposit account relationships established when the Bank launched a new product introduction program and expanded its online digital account openings in nine northeastern states and
Advances from the FHLB-NY and other borrowed money increased
$23.6 millionto $37.2 millionat March 31, 2021, compared to $13.6 millionat March 31, 2020as the Bank secured advances on its PPP liquidity facility ("PPPLF") at the Federal Reserveto fund PPP loans. At March 31, 2021, the Bank had no outstanding borrowings from the FHLB-NY.
Total equity increased
$3.4 million, or 7.0%, to $52.3 millionat March 31, 2021, compared to $48.9 millionat March 31, 2020. The increase was primarily due to capital raised from several equity transactions that were completed outside of the ordinary course of business during the fiscal year. These were partially offset by an increase of $4.1 millionin unrealized losses on securities available-for-sale and a net loss of $3.9 millionfor the fiscal year.
Comparison of operating results for the years ended
The Company reported a net loss of
$3.9 millionfor fiscal year 2021, compared to net loss of $5.4 millionfor the prior year period. The change in our results was primarily driven by an increase in non-interest income and recoveries of loan losses compared to a provision for loan loss in the prior year, which were partially offset by an increase in non-interest expense and decline in net interest income compared to the prior fiscal year.
Net interest income
Net interest income decreased
Interest income decreased
$1.3 million, or 6.0%, to $20.3 million, compared to $21.6 millionfor the prior year period. Interest income on mortgage-backed securities decreased $0.5 milliondue to a decline in average balances and rates compared to the prior year. Interest income on money market investments decreased $0.5 millionas the $58.9 millionincrease in the average balance of the Bank's interest-bearing account at the Federal Reserve Bankwas offset by a 1.77% decrease in interest rates. Interest income on loans decreased $0.4 million, or 2.1%, comprised of a decrease of $1.9 milliondue to a 41 basis-point decline in the overall yield of the loan portfolio resulting primarily from attrition of above market-rate purchased residential loans, which also caused acceleration of premiums. This was partially offset by an increase in interest income of $1.5 milliondue to a $32.7 millionincrease in average loan balances. Interest expense decreased $1.2 million, or 21.4%, to $4.4 millioncompared to $5.6 millionfor the prior year period. Interest expense on deposits decreased $0.8 million, or 17.4%, primarily due to a decrease in the average rates of certificates of deposit. Interest expense on borrowings decreased $0.3 million, or 30.0%, from the prior fiscal year despite an increase in the average borrowings as the Bank secured advances on the PPPLF at the Federal Reserveat a lower cost to borrow of 35 basis points in order to support its PPP program.
Allowance for loan losses
The Bank recorded a
$0.1 millionrecovery of loan loss for fiscal year 2021, compared to a $19 thousandprovision for loan losses for the prior year period. The prior year provision was primarily related to overdraft deposit chargeoffs. For the year ended March 31, 2021, net recoveries of $294 thousandwere recognized, compared to net recoveries of $281 thousandin the prior year period. Total chargeoffs of $78 thousandwere recognized for fiscal year 2021, compared to total chargeoffs of $183 thousandfor the prior fiscal year. At March 31, 2021, nonaccrual loans totaled $7.2 million, or 1.1% of total assets, compared to $6.8 million, or 1.2% of total assets at March 31, 2020. The ALLL was $5.1 millionat March 31, 2021, which represents a ratio of the ALLL to nonaccrual loans of 71.5%, compared to 73.0% at March 31, 2020. The ratio of the allowance for loan losses to total loans receivable was 1.06% at March 31, 2021, compared to 1.15% at March 31, 2020.
Income other than interest
Non-interest income for the twelve months ended
March 31, 2021increased $2.5 million, or 67.6%, to $6.2 millioncompared to $3.7 millionin the prior year period. Other non-interest income for the current fiscal year included $1.2 million49 -------------------------------------------------------------------------------- fees earned from a new correspondent banking relationship and $0.5 milliongrant income provided by UBSfor the Company to extend working capital loans and financial education to small businesses owned and operated by minorities. In addition, non-interest income included $1.2 milliongains recognized from the sales of securities during the fiscal year, as management restructured the Bank's investment portfolio. These increases were partially offset by lower depository fees compared to the prior fiscal year due to the negative impact of the COVID-19 pandemic on branch activities.
Non-interest expense for the twelve months ended
March 31, 2021increased $1.0 million, or 4.0%, to $26.1 millioncompared to $25.1 millionfor the the prior year period. Net equipment and data processing costs were higher compared to the prior fiscal year due to new hardware/software contracts related to technology upgrades required to facilitate the infrastructure for a remote work environment due to the ongoing pandemic, and one-time conversion costs associated with the Bank's upgrade to a new core banking system. In addition, FDICpremiums were lower in the prior year since the Bank was eligible for the FDICsmall bank assessment credit.
The Company did not have any federal, state and local income tax expense as of
March 31, 2021and 2020. State and local capital tax expenses of $0.1 millionand $0.2 millionfor fiscal years 2021 and 2020, respectively, were included in other non-interest expense on the statements of operations.
Liquidity and capital resources
Liquidity is a measure of the Bank's ability to generate adequate cash to meet its financial obligations. The principal cash requirements of a financial institution are to cover potential deposit outflows, fund increases in its loan and investment portfolios and ongoing operating expenses. The Bank's primary sources of funds are deposits, borrowed funds and principal and interest payments on loans, mortgage-backed securities and investment securities. While maturities and scheduled amortization of loans, mortgage-backed securities and investment securities are predictable sources of funds, deposit flows and loan and mortgage-backed securities prepayments are strongly influenced by changes in general interest rates, economic conditions and competition. Carver Federal monitors its liquidity utilizing guidelines that are contained in a policy developed by its management and approved by its Board of Directors.
Carver Federal'sseveral liquidity measurements are evaluated on a frequent basis. Management believes Carver Federal's short-term assets have sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash requirements, including interest payments on our subordinated debt securities. Additionally, Carver Federal has other sources of liquidity including the ability to borrow from the Federal Home Loan Bank of New York("FHLB-NY") utilizing unpledged mortgage-backed securities and certain mortgage loans, the sale of available-for-sale securities and the sale of certain mortgage loans. Net borrowings increased $23.6 millionduring fiscal year 2021 as the Bank secured advances on the PPP liquidity facility ("PPPLF") at the Federal Reserveat a rate of 35 basis points to fund PPP loans. The Bank had no advances outstanding from the FHLB-NY at March 31, 2021. At March 31, 2021, based on available collateral held at the FHLB-NY, Carver Federal had the ability to borrow an additional $42.7 millionon a secured basis, utilizing mortgage-related loans and securities as collateral. The bank has the ability to pledge additional loans as collateral in order to borrow up to 30% of its total assets.
The most liquid assets of the Bank are cash and short-term investments. The level of these assets depends on the Bank’s operating, investing and financing activities during a given period. AT
The most significant potential liquidity challenge the Bank faces is variability in its cash flows as a result of mortgage refinance activity. When mortgage interest rates decline, customers' refinance activities tend to accelerate, causing the cash flow from both the mortgage loan portfolio and the mortgage-backed securities portfolio to accelerate. In contrast, when mortgage interest rates increase, refinance activities tend to slow, causing a reduction of liquidity. However, in a rising rate environment, customers generally tend to prefer fixed rate mortgage loan products over variable rate products. Carver Federal is also at risk to deposit outflows due to a competitive interest rate environment. The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During fiscal year 2021, total cash and cash equivalents increased
$28.1 millionto $75.6 millionreflecting cash provided by financing activities of $102.8 millionand cash provided by operating activities of $2.2 million, partially offset by cash used in investing activities of $77.0 million. Net cash provided by financing activities of $102.8 millionresulted from net 50 -------------------------------------------------------------------------------- increases in deposits and borrowings of $67.7 millionand $23.7 million, respectively. The net increase in deposits was primarily due to PPP loan funds deposited by the program borrowers into their accounts at the Bank and new deposit account relationships established across the Northeast as the Bank launched a program introducing new products and expanded its digital online account openings into nine states and Washington D.C.The $23.7 millionincrease in other borrowings was attributable to advances secured on the Bank's PPP liquidity facility at the Federal Reserveto fund PPP loans. In addition, the Company raised capital through the issuance of common and preferred shares. Net cash used in investing activities of $77.0 millionwas attributable to securities purchases and loan originations and purchases, net of principal repayments and payoffs.
Potential mortgage representation and guarantee responsibilities
During the period 2004 through 2009, the Bank originated 1-4 family residential mortgage loans and sold the loans to the
FNMA. The loans were sold to FNMAwith the standard representations and warranties for loans sold to the GSE's. The Bank may be required to repurchase these loans in the event of breaches of these representations and warranties. In the event of a repurchase, the Bank is typically required to pay the unpaid principal balance as well as outstanding interest and fees. The Bank then recovers the loan or, if the loan has been foreclosed, the underlying collateral. The Bank is exposed to any losses on repurchased loans after giving effect to any recoveries on the collateral. Through fiscal 2011, none of the loans sold to FNMAwere repurchased by the Bank. During the periods from fiscal 2012 through 2015, 20 loans that had been sold to FNMAwere repurchased by the Bank. No loans have been repurchased by the Bank subsequent to fiscal 2015. At March 31, 2021the Bank continues to service 100 loans with a principal balance of $16.4 millionfor FNMAthat were sold with standard representations and warranties. Management has established a representation and warranty reserve for losses associated with the repurchase of mortgage loans sold by the Bank to FNMAthat 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 FNMAfor loans to be reviewed. The reserves totaled $181 thousandas of March 31, 2021. The table below summarizes changes in our representation and warranty reserves in fiscal 2021: $ in thousands March 31, 2021 Representation and warranty repurchase reserve, as of March 31, 2020 (1) $ 226 Net adjustment to reserve for repurchase losses (2) (45)
Representation and guarantee surrender reserve, from
$ 181 (1) Reported in consolidated statements of financial condition as a component of other liabilities. (2) Component of other non-interest expense. Additional information related to the representation and warranty reserve, including factors that may impact the adequacy of the reserves and the ultimate amount of losses incurred is found in "Note 15 Commitments and Contingencies."
Off-balance sheet provisions and contractual obligations
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and in connection with its overall investment strategy. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are not recorded in the consolidated financial statements. Such instruments primarily include lending obligations, including commitments to originate mortgage and consumer loans and to fund unused lines of credit. The Bank also has contractual obligations related to operating leases. See Note 15 of Notes to Consolidated Financial Statements for the Bank's outstanding lending commitments and contractual obligations at
March 31, 2021. 51 --------------------------------------------------------------------------------
The Bank has contractual obligations to
Payments due per period
Less than 1 - 3 3 - 5 More than Contractual Obligations Total 1 year years years 5 years Certificates of deposit
$ 152,751 $ 114,045 $ 28,351 $ 10,259 $ 96Debt obligations: Other borrowings 23,895 72 23,820 3 - Guaranteed preferred beneficial interest in junior subordinated debentures 16,513 - - - 16,513 Total debt obligations 40,408 72 23,820 3 16,513 Operating lease obligations: Lease obligations for rental properties 18,564 2,748 5,293 4,907 5,616 Total contractual obligations $ 211,723 $ 116,865
Entities with variable rights holders (âVIEsâ)
The Company's subsidiary, Carver Statutory Trust I, is not consolidated with
Carver Bancorp Inc.for financial reporting purposes in accordance with the FASB's ASC Topic 810 regarding the consolidation of variable interest entities. Carver Statutory Trust I was formed in 2003 for the purpose of issuing $13 millionaggregate liquidation amount of floating rate Capital Securities due September 17, 2033("Capital Securities") and $0.4 millionof common securities (which are the only voting securities of Carver Statutory Trust I), which are 100% owned by Carver Bancorp Inc., and using the proceeds to acquire junior subordinated debentures issued by Carver Bancorp, Inc. Carver Bancorp, Inc.has fully and unconditionally guaranteed the Capital Securities along with all obligations of Carver Statutory Trust I under the trust agreement relating to the Capital Securities. The Bank's subsidiary, CCDC, was formed to facilitate its participation in local economic development and other community-based activities. In June 2006, CCDC was selected by the U.S. Department of Treasury, in a highly competitive process, to receive an award of $59 millionin NMTC. CCDC won a second NMTC award of $65 millionin May 2009, and a third award of $25 millionin August 2011. The 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 awards in projects where another investor entity provides funding and receives the tax benefits of the award in exchange for the Bank receiving fee income. CCDC provides funding to underlying projects. While providing funding to investments in the NMTC eligible projects, CCDC 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 the 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 project not being in compliance with certain regulations that would void the investor's ability to otherwise utilize tax credits stemming from the award. The NMTC compliance period was completed for all these entities, which were dissolved upon exiting the NMTC projects. The Bank's unconsolidated VIEs, in which the Company holds significant variable interests or has continuing involvement through servicing a majority of assets in a VIE are presented in the table below. Involvement with SPE (000s) Funded Exposure Unfunded Exposure Total Significant Recognized Gain Total Rights unconsolidated VIE Total Involvement Equity Maximum exposure to (Loss) (000's) transferred assets with SPE asset Debt Investments Investments Funding Commitments loss Carver Statutory Trust I(1) $ - $ - $ 13,400 $ 13,400$ 16,110 $ 400 $ - $ - $ 16,510.
Regulatory capital position
52 -------------------------------------------------------------------------------- The Bank must satisfy minimum capital standards established by the OCC. For a description of the OCC capital regulation, see "Item 1-Regulation and Supervision-Federal Banking Regulation-Capital Requirements." Regardless of Basel III's minimum requirements, Carver, as a result of the Formal Agreement, was issued an Individual Minimum Capital Ratio letter by the OCC, which requires the Bank to maintain minimum regulatory capital levels of 9% for its Tier 1 leverage ratio and 12% for its total risk-based capital ratio. At
March 31, 2021, the Bank had a common equity Tier 1 ratio, Tier 1 leverage ratio, Tier 1 risk-based capital ratio, and total risk-based capital ratio of 14.41%, 10.01%, 14.41% and 15.56%, respectively. For additional information regarding Carver Federal's Regulatory Capitaland Ratios, refer to Note 12 of Notes to Consolidated Financial Statements, "Stockholders' Equity."
Impact of inflation and price trends
The financial statements and accompanying notes appearing elsewhere herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of Carver Federal's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a greater impact on Carver Federal's performance than do the effects of the general level of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ON MARKET RISK.
See the analysis of sensitivity to market risk and to interest rates in point 7. Management’s analysis and analysis of the financial position and operating results.
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