201 9
ANNUAL REPORT
NASDAQ: CARV
SHAR E HOLDE RS MESSAGE 2019
We stand tall behind our mission and
reinvest approximately $0.80 of each deposit
dollar back into the community.
Robert R. Tarter
Chairman of the Board
Michael T. Pugh
President and CEO
We've provided financial education to
approximately 15,000 people in the Greater NYC
region over the past nine years.
Over the past three years, we've offered lending
solutions & invested approximately $85.2 million in
business loans to help stimulate growth in NYC.
During the past fiscal year, the Carver Bank team focused on
strengthening internal controls and driving new business within
prescribed risk management guidelines. This effort led to several
milestone achievements that will support the organization's continued
focus on driving operating efficiencies and improved earnings.
Carver's mission is to support the financial aspirations of our
communities in Greater New York City. We stand tall behind our
mission by reinvesting approximately 80 cents of each deposit dollar
back into our local markets. For Carver, banking goes well beyond
loans, deposits, and withdrawals. Financial education and small
business development remain a critical part of our mission. Over the
past nine years alone, we've provided financial education training to
approximately 15,000 people in Greater New York City. On top of
that, we've provided lending solutions and invested approximately
$85.2 million in business loans to help stimulate growth in our local
neighborhoods over the past three years.
to grow, community will expand beyond
We believe in all communities. The Bank defines community to
include all ethnicities and socioeconomic levels. As the Bank
continues
the
neighborhoods of our brick and mortar branches. Our passion for
community development enables us to honor employees and
strengthen the customer experience. The Bank understands that
positive customer experiences are a direct byproduct of happy and
engaged employees who feel appreciated by their organization.
Here at Carver we value all of our employees.
In 2018, like many other community banks, Carver was faced with
finding solutions to: (1) maintain strong capital levels and strong
asset quality, (2) manage regulatory priorities, (3) attract new
talent, and (4) grow deposits in a competitive environment—at
the same time being challenged with margin compression. While
confronting these noted priorities, we are pleased to share that
Carver's board of directors and management team achieved
progress in several key areas and we remained focused on further
improving operating efficiencies.
1825 Park Avenue 12th Floor, New York, NY 10035
Tel: (718) 230-29 00 www.carverban k.com
SHA RE HOLDE RS MESSAGE 2019
Our top-level achievements over the past 12-months for the fiscal-year ending March 31, 2019 include:
• The year-over-year Tier 1 Risk-Based Capital Ratio improved from 15.25% to 15.39% and Total Risk-Based
Capital Ratio improved from 16.45% to 16.58%. These efforts were achieved while actively managing loan growth
and loan performance;
• We’ve remained diligent about asset quality, resulting in the Bank’s Non-Owner Occupied Commercial Real Estate
Concentration ending the year at 304% of Total Risk-Based Capital, which strengthened the regulatory risk
management profile of the Bank;
• Our regulatory performance has been enhanced by delivering a Bank Secrecy Act Program that meets the demands
of the global banking industry; and
• We are successfully attracting and retaining talent to the organization in critical roles that are designed to further our
progression with technological improvements, consumer compliance, internal audit, and quality loan growth. These
leaders joined Carver because they believe in our mission and commitment to be the community bank of choice for both
Minority & Women Business Entrepreneurs (MWBEs) and consumers in Greater New York City. Our enhanced
leadership team is committed to driving operating efficiency for the company.
While these improvements in operating measures are a major step in the right direction, the Carver board and
management team recognize that we must return the Bank to earning a profit and grow our earnings stream if we are to
further reinvest in the business and deliver return levels that investors are looking for in a community bank such as Carver.
Accordingly, in the year ahead we will remain focused on growing earnings through diverse lending in our core footprint.
Our markets are well-established communities and our colleagues live in the communities that they serve. This makes
Carver uniquely positioned to offer solutions to our customers based on their needs.
Our team remains focused on growing our deposit base by expanding our online and digital banking services. Our
commitment to customers by encouraging saving for their financial future has been well received as evidenced by our
recent marketing campaign. The “Banking with Carver is the Right Thing to Do” campaign has stimulated more than $9
million dollars in new savings and money market deposits since the program was launched in January 2019.
Notably, we have consistently seen double-digit growth in the suite of online and digital services enrollment since
2017. This growth demonstrates the success of our commitment to providing access and the value our customers see in our
digital-banking franchise.
In closing, we remain optimistic about the future of community banking and recognize that mission-based banking comes
with challenges and great rewards. Carver's board and management team remain committed to our customers,
shareholders and the communities we serve. We invite you to visit our website at carverbank.com or give us a call to learn
more about what's in store as we forge ahead.
On behalf of the Carver board and family of colleagues, we thank you for your trust in us and continued support.
Sincerely,
Robert R. Tarter
Chairman of the Board
Carver Bancorp, Inc.
Michael T. Pugh
President and CEO
Carver Bancorp, Inc.
1825 Park Avenue 12th Floor, New York, NY 10035
Tel: (718) 230-2900 www.carverbank.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 001-13007
CARVER BANCORP, INC.
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
Delaware
13-3904174
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:
Common Stock, par value $.01 per share
(Title of Class)
NASDAQ Capital Market
(Name of each Exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
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.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be
submitted and posted 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 and post such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
As of March 31, 2019 there were 3,698,784 shares of common stock of the Registrant outstanding. The aggregate market value of the Registrant's common stock held by
non-affiliates, as of September 30, 2018 (based on the closing sales price of $4.31 per share of the registrant's common stock on September 28, 2018) was approximately
$15,941,759.
[This page intentionally left blank]
CARVER BANCORP, INC.
2019 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
BUSINESS
RISK FACTORS
ITEM 1.
ITEM 1A.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4.
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II
ITEM 5.
ITEM 6.
ITEM 7.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
ITEM 9.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
ITEM 9A.
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE
GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 16.
FORM 10-K SUMMARY
SIGNATURES
EXHIBIT INDEX
Page
2
2
26
32
32
33
33
33
33
34
36
48
49
96
96
97
98
98
98
98
98
98
98
98
98
100
100
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 Carver Bancorp,
Inc.'s (the "Company" or "Carver") 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 Carver Federal Savings 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;
adverse changes in the financial industry and the securities, credit, national and local real estate markets (including real
estate value);
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 Annual Report on Form 10-K are made as of the date of this Annual Report on Form 10-K,
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. For
a discussion of additional factors that could adversely affect the Company's future performance, see “Item 1A - Risk Factors” and
“Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.”
1
ITEM 1. BUSINESS.
OVERVIEW
PART I
Carver Bancorp, Inc., a Delaware corporation (the “Company”), is the holding company for Carver Federal Savings
Bank (“Carver Federal” or the “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 its wholly-owned subsidiary, 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 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 Office of the Comptroller of the
Currency (the "OCC") following its most recent Community Reinvestment Act (“CRA”) examination in January 2019. The
OCC found that approximately 75% of originated and purchased loans were within Carver Federal 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 $563.7 million in assets and 114 employees as of March 31, 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
commercial 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 that have entered
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
2
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. 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 New Markets Tax Credits ("NMTC"). CCDC won a second NMTC award of $65 million
in May 2009, and a third award of $25 million in August 2011. The NMTC award is used to stimulate economic development
in low- to moderate-income communities. The NMTC awards enable 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 where another investor entity provides funding and receives the tax
benefits of the award in exchange for the Bank receiving fee income. As of March 31, 2019, all three award allocations have
been fully utilized in qualifying projects. See "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" and footnotes to the financial statements for additional details on the NMTC activities.
GENERAL
Carver Bancorp, Inc.
The Company is the holding company for Carver Federal and its other active direct subsidiary, Carver Statutory Trust I
(the “Trust”), a Delaware trust.
The principal business of the Company consists of the operation of its wholly-owned subsidiary, the Bank. The Company's
administrative offices are located at 1825 Park Avenue, New York, New York 10034. The home office of the Bank is located at
75 West 125th Street, New York, New York 10027. The Company's telephone number is (718) 230-2900.
Carver Federal Savings Bank
Carver Federal was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a
federally chartered mutual savings and loan association, at which time it obtained federal deposit insurance and became a member
of the Federal Home Loan Bank of New York (the “FHLB-NY”). Carver Federal was founded as an African- and Caribbean-
American operated institution to provide residents of underserved communities the ability to invest their savings and obtain credit.
Carver Federal Savings and Loan Association converted to a federal savings bank in 1986 and changed its name at that time to
Carver Federal Savings Bank.
On March 8, 1995, Carver Federal formed CFSB Realty Corp. as a wholly-owned subsidiary to hold real estate acquired
through foreclosure pending eventual disposition. At March 31, 2019, this subsidiary had $2.3 million in total assets. During the
fourth quarter of the fiscal year ended March 31, 2003, Carver Federal formed Carver Asset Corporation (“CAC”), a wholly-
owned subsidiary which qualifies as a real estate investment trust (“REIT”) pursuant to the Internal Revenue Code of 1986, as
amended. This subsidiary may, among other things, be utilized by Carver Federal to raise capital in the future. As of March 31,
2019, CAC owned mortgage loans carried at approximately $12.5 million and total assets of $129.3 million. On August 18, 2005,
Carver Federal formed CCDC, a wholly-owned community development entity, to facilitate and develop innovative approaches
to financial literacy, address the needs of the unbanked and participate in local economic development and other community-based
activities. As part of its operations, CCDC monitors the portfolio of investments related to NMTC awards and makes application
for additional awards.
Carver Statutory Trust I
Carver Statutory Trust (the "Trust") was formed in 2003 for the purpose of issuing $13.0 million aggregate liquidation
amount of floating rate Capital Securities due September 17, 2033 (“Capital Securities”) and $0.4 million of common securities,
which are wholly owned by Carver Bancorp, Inc. and the sole voting securities of the Trust. The Company has fully and
unconditionally guaranteed the Capital Securities along with all obligations of the Trust under the trust agreement relating to the
Capital Securities. The Trust is not consolidated with the Company for financial reporting purposes in accordance with the Financial
Accounting Standards Board's Accounting Standards Codification (“ASC”) regarding the consolidation of variable interest entities
(formerly FIN 46(R)). Debenture interest payments on the Carver Statutory Trust I capital securities have been deferred beginning
with the December 2016 payment, which is permissible under the terms of the Indenture for up to twenty consecutive quarterly
periods, as the Company is prohibited from making payments without prior approval from the Federal Reserve Bank. During the
3
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. The total amount of deferred interest
was $1.7 million at March 31, 2019.
The Company 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 the Company, and the Board of Governors of the Federal Reserve
(the "FRB") regulates dividends paid by the Company. 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, Carver Federal is currently prohibited from paying any dividends without prior OCC approval, and, as such, has
suspended its regular quarterly cash dividend to the Company. There are no assurances that dividend payments to the Company
will resume.
Personnel
At fiscal year end 2019, the Company had 114 employees. None of the Company's employees are a member of a collective
bargaining agreement.
Available Information
The Company makes available on or through its internet website, http://www.carverbank.com, its annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. Such reports are available free of charge and as
soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and
Exchange Commission (“SEC”). The SEC maintains an internet website that contains reports, proxy and information statements
and other information regarding issuers that file electronically with the SEC, including the Company, at http://www.sec.gov.
In addition, certain other basic corporate documents, including the Company's Corporate Governance Principles, Code
of Ethics, Code of Ethics for Senior Financial Officers, the charters of the Company's Finance and Audit Committee, Compensation
Committee and Nominating/Corporate Governance Committee and the date of the Company's annual meeting are posted on the
Company's website. Printed copies of these documents are also available free of charge to any stockholder who requests them.
Stockholders seeking additional information should contact the Corporate Secretary's office by mail at 75 West 125th Street, New
York, New York 10027 or by e-mail at corporatesecretary@carverbank.com. Information provided on the Company's website is
not part of this annual report.
Lending Activities
General. Carver Federal's loan portfolio consists primarily of mortgage loans originated by the Bank's lending teams
and secured by commercial real estate including multifamily property and construction loans. Substantially all of the Bank's
mortgage loans are secured by properties located within the Bank's market area. From time to time, the Bank may purchase loans
that comply with the Bank's underwriting standards from other financial institutions or in contiguous market geographies to achieve
loan growth objectives and improve geographic diversity.
In recent years, Carver Federal had focused on the origination of commercial real estate loans, primarily multifamily and
mixed-use commercial loans. These loans generally have higher yields and shorter maturities than one-to-four family residential
properties, and include prepayment penalties that the Bank collects if the loans pay in full prior to the contractual maturity. The
Bank's increased emphasis on portfolio management and monitoring of the commercial real estate and multifamily residential
mortgage loans was required given the increase of the overall level of credit risk inherent in this market segment. Due to the
overall improvement in the loan portfolio, the Bank was able to recover provisions for loan losses in years 2013 to 2015. However,
the greater risk associated with commercial real estate, particularly multifamily residential loans, as well as the growth in this type
of loan, had required the Bank to increase its provisions for loan losses in fiscal years 2016 to 2018. In fiscal year 2019, the Bank's
recoveries on previously charged off loans exceeded its chargeoffs to such an extent that additional provisions were not necessary.
The Bank could be required to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance
currently maintained. Carver Federal continually reviews the composition of its mortgage loan portfolio and underwriting standards
to manage the risk in the portfolio. Per the requirements of the Formal Agreement, the Bank has reduced its commercial real estate
loan concentration as a percentage of risk-based capital to a level well below that mandated by its regulators.
4
Loan Portfolio Composition. Total loans receivable decreased $48.4 million, or 10.2%, to $425.8 million at March 31,
2019, compared to $474.2 million at March 31, 2018. Although total loans decreased, Carver Federal's total loans receivable as
a percentage of total assets increased to 75.5% at March 31, 2019, compared to 68.3% at March 31, 2018.
The following is a summary of loans receivable, net of allowance for loan losses, as of:
$ in thousands
Gross loans receivable:
One-to-four family
Multifamily
Commercial real estate
Construction
Business
Consumer and other (1)
Total loans receivable
March 31, 2019
%
Amount
March 31, 2018
%
Amount
March 31, 2017
%
Amount
March 31, 2016
%
Amount
March 31, 2015
%
Amount
$108,363
86,177
130,812
—
96,430
4,023
$425,805
25.5% $121,233
20.2% 103,887
30.7% 141,835
—
22.7% 102,004
5,238
0.9%
100.0% $474,197
—%
25.6% $132,679
87,824
21.9
241,794
29.9
—
4,983
65,151
21.5
8,994
1.1
100.0% $541,425
24.5% $141,229
94,210
16.2
272,427
44.7
5,033
0.9
71,038
12.0
42
1.7
100.0% $583,979
24.2% $125,549
93,692
16.1
186,504
46.7
5,107
0.9
70,765
12.2
434
—
100.0% 482,051
26.0%
19.4
38.7
1.1
14.7
0.1
100.0%
Unamortized premiums, deferred
costs and fees, net
Allowance for loan losses
Total loans receivable, net
(1) Includes personal loans
3,023
3,556
4,127
4,649
1,711
(4,646)
$424,182
(5,126)
$472,627
(5,060)
$540,492
(5,232)
$583,396
(4,428)
$479,334
One-to-four Family Residential Lending. Carver Federal purchases first mortgage loans secured by one-to-four family
properties that serve as the primary residence of the owner. The Bank did not purchase any one-to-four family loans during fiscal
years 2019 and 2018. In fiscal 2017, the Bank purchased $13.9 million of one-to-four family loans. Approximately 18.7% of the
one-to-four family residential mortgage loans maturing in greater than one year at March 31, 2019 were adjustable rate and
approximately 81.3% were fixed-rate. One-to-four family residential real estate loans decreased $12.9 million, or 10.6%, to $108.4
million at March 31, 2019, compared to $121.2 million at March 31, 2018.
Carver Federal's fixed-rate, one-to-four family residential mortgage loans are underwritten in accordance with applicable
secondary market underwriting guidelines and requirements for sale. From time to time, the Bank has sold such loans to Fannie
Mae, the State of New York Mortgage Agency (“SONYMA”) and other third parties. Loans are generally sold with limited
recourse on a servicing retained basis except to SONYMA where the sale is made with servicing released. Carver Federal uses a
servicing firm to sub-service mortgage loans, whether held in portfolio or sold with servicing retained. At March 31, 2019, the
Bank, through its sub-servicer, serviced $18.8 million in loans for FNMA and $561 thousand for other third parties. The Bank
has recorded $180 thousand in related mortgage servicing rights.
The retention of adjustable-rate loans in Carver Federal's portfolio helps reduce Carver Federal's exposure to increases
in prevailing market interest rates. However, there are credit risks resulting from potential increases in costs to borrowers in the
event of upward repricing of adjustable-rate loans. It is possible that during periods of rising interest rates, the risk of default on
adjustable-rate loans may increase due to increases in interest costs to borrowers. Although adjustable-rate loans allow the Bank
to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest rate sensitivity is
limited by periodic and lifetime interest rate adjustment limitations. Accordingly, there can be no assurance that yields on the
Bank's adjustable-rate loans will fully adjust to compensate for increases in the Bank's cost of funds. Adjustable-rate loans increase
the Bank's exposure to decreases in prevailing market interest rates, although decreases in the Bank's cost of funds would tend to
offset this effect to an extent.
The Bank previously 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 March 31, 2019, the Bank had $5.4 million in
subprime loans, or 1.3% of its total loan portfolio, of which $1.6 million are non-performing loans.
Multifamily Real Estate Lending. Traditionally, Carver Federal originates and purchases multifamily loans. Multifamily
property lending entails additional risks compared to one-to-four family residential lending. For example, such loans are dependent
on the successful operation of such buildings and can be significantly impacted by supply and demand conditions in the market
5
for multifamily residential units. Carver Federal's multifamily real estate loan portfolio decreased $17.7 million, or 17.0%, to
$86.2 million in fiscal 2019, or 20.2% of Carver Federal's total loan portfolio at March 31, 2019.
In making multifamily real estate loans, the Bank primarily considers the property's ability to generate net operating
income sufficient to support the debt service, the financial resources, income level and managerial expertise of the borrower, the
marketability of the property and the Bank's lending experience with the borrower. Carver Federal's multifamily real estate product
guidelines generally require that the maximum loan-to-value ("LTV") at origination not exceed 75% based on the appraised value
of the mortgaged property on all such loans. The Bank generally requires a debt service coverage ratio at origination of at least
1.20 on multifamily real estate loans, which requires the properties to generate cash flow after expenses and allowances in excess
of the principal and interest payment. Carver Federal originates and purchases multifamily real estate loans, which are
predominantly adjustable rate loans that generally amortize on the basis of a 15-, 20-, 25-, or 30-year period and require a balloon
payment after the first five years, or the borrower may have an option to extend the loan for additional periods. The Bank
occasionally originates fixed rate loans with greater than five year terms. Personal guarantees may be obtained for additional
security from these borrowers.
To help ensure continued collateral protection and asset quality for the term of multifamily real estate loans, Carver
Federal employs a risk rating system for its loans. All commercial loans, including multifamily real estate loans, are risk rated
internally at the time of origination. Management continually monitors all commercial loans in order to update risk ratings when
necessary (see "Asset Classification and Allowance for Loan and Lease Losses" for additional information on asset classification
and risk ratings). In addition, to assist the Bank in evaluating changes in the credit profile of the borrower and the underlying
collateral, an independent consulting firm reviews and prepares a written report for a sample of our commercial loan relationships.
On a quarterly basis: i) all new/renewed loans greater than $500,000, ii) a sampling of loans $100,000 to $999,999, and iii) all
criticized and classified loans, are reviewed. In addition, on an annual basis, all loans greater than $500,000 and a sampling of
loans $100,000 to $499,999 are reviewed. Summary reports documenting the loan reviews are then reviewed by management for
changes in the credit profile of individual borrowers and the portfolio as a whole.
Commercial Real Estate Lending. Commercial real estate lending consists predominantly of originating loans for the
purpose of purchasing or refinancing office, mixed-use (properties used for both commercial and residential purposes but
predominantly commercial), retail and church buildings in the Bank's market area. Mixed-use loans are secured by properties
that are intended for both residential and business use and are classified as commercial real estate ("CRE"). Although Carver has
experienced favorable loss history associated with commercial real estate loans, these loans may entail additional risks compared
with one-to-four family residential and multifamily lending. For example, such loans typically involve larger loan balances to
single borrowers or groups of related borrowers and the payment experience on such loans typically is dependent on the successful
operation of the commercial property.
In originating CRE loans, the Bank primarily considers the ability of the net operating income generated by the real estate
to support the debt service, the financial resources, income level and managerial expertise of the borrower, the marketability of
the property and the Bank's lending experience with the borrower. Carver Federal's maximum LTV ratio on commercial real estate
mortgage loans at origination is generally 75% based on the latest appraised value of the mortgaged property. The Bank generally
requires a debt service coverage ratio at origination of at least 1.20 on commercial real estate loans. The Bank also requires the
assignment of rents of all tenants' leases in the mortgaged property and personal guarantees may be obtained for additional security
from these borrowers.
At March 31, 2019, commercial real estate mortgage loans totaled $130.8 million, or 30.7% of the total loan portfolio.
This balance reflects a year-over-year decrease of $11.0 million, or 7.8%, as the targeted reduction of the Bank's concentration in
commercial real estate mortgage loans, which occurred in fiscal years 2017 and 2018, affected the Bank's ability to originate new
loans in fiscal year 2019.
The Bank offers 5-year terms for our commercial mortgages. At times, we can offer greater than 5 years for terms of up
to 15 years and amortization schedules up to 25 years; however, the interest rate always resets every 5 years. Interest rates currently
offered by the Bank are adjusted at the beginning of each adjustment period and generally are based upon a fixed spread above
the FHLB-NY corresponding regular advance rate.
Historically, Carver Federal has been a New York City metropolitan area leader in the origination of loans to churches.
At March 31, 2019, loans to churches totaled $10.2 million, or 2.4% of the Bank's gross loan portfolio. These loans generally
have five-, seven-, or ten-year terms with 15-, 20- or 25-year amortization periods, a balloon payment due at the end of the term
and generally have no greater than a 70% LTV ratio at origination. The Bank has also provided construction financing for churches
and generally provides permanent financing upon completion of construction. There are currently seven church loans in the Bank's
loan portfolio.
6
Loans secured by real estate owned by faith-based organizations generally are larger and involve greater risks than one-
to-four family residential mortgage loans. Because payments on loans secured by such properties are often dependent on voluntary
contributions by members of the church's congregation, repayment of such loans may be subject to a greater extent to adverse
conditions in the economy. The Bank seeks to minimize these risks in a variety of ways, including reviewing the organization's
financial condition, limiting the size of such loans and establishing the quality of the collateral securing such loans. The Bank
determines the appropriate amount and type of security for such loans based in part upon the governance structure of the particular
organization, the length of time the church has been established in the community and a cash flow analysis to determine the church's
ability to service the proposed loan. Carver Federal will obtain a first mortgage on the underlying real property and often requires
personal guarantees of key members of the congregation and/or key person life insurance on the pastor. The Bank may also require
the church to obtain key person life insurance on specific members of the church's leadership. While asset quality in the church
loan category historically has been one of the strongest asset classes, recent economic conditions have produced higher
delinquencies in this portfolio. While management believes that Carver Federal will remain a leading lender to churches in its
market area, Carver Federal will continue to conduct disciplined underwriting and maintain focused portfolio management.
Construction Lending. The Bank has historically originated or participated in construction loans for new construction
and renovation of multifamily buildings, residential developments, community service facilities, churches, and affordable housing
programs. The Bank's construction loans generally have adjustable interest rates and are underwritten in accordance with the
same standards as the Bank's mortgage loans on existing properties. The loans provide for disbursement in stages as construction
is completed. Participation in construction loans may be at various stages of funding. Construction terms are usually from 12 to
24 months. The construction loan interest is capitalized as part of the overall project cost and is funded monthly from the loan
proceeds. Borrowers must satisfy all credit requirements that apply to the Bank's permanent mortgage loan financing for the
mortgaged property. Carver Federal has additional criteria for construction loans including an engineer's plan and periodic cost
reviews on all construction budgets for loans in excess of $250,000.
At March 31, 2019, the Bank had no construction loans outstanding. At this time, the Bank is not actively engaged in
the origination or purchase of construction loans.
Business Loans. Carver Federal's small business (Commercial and Industrial, or "C&I") lending portfolio decreased $5.6
million to $96.4 million, comprising 22.6% of the Bank's gross loan portfolio in fiscal 2019. In a strategic attempt to diversify
the Bank's loan portfolio, Carver Federal demonstrated a renewed emphasis on C&I lending, placing particular focus on organic
loan growth through the financing of local entrepreneurs during fiscal years 2018 and 2019. Carver Federal provides revolving
credit, working capital and term loan facilities to small businesses with annual sales of approximately $1 million to $25 million
in educational, health care, personal services, and light industrial and wholesale segments. Business loans are typically personally
guaranteed by the owners and may also be secured by additional collateral, including real estate, equipment and inventory.
Consumer and Other Loans. At March 31, 2019, the Bank had $4.0 million in consumer and other loans, or 0.9%, of
the Bank's gross loan portfolio, primarily comprised of $4.7 million of guaranteed graduate medical student loans purchased in
fiscal 2017.
Consumer loans are not typically secured by collateral and therefore involve more risk than first mortgage loans. Collection
of a delinquent loan is dependent on the borrower's continuing financial stability and is more likely to be adversely affected by
changes in employment, marital status, health and other personal financial factors. Further, the application of various federal and
state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered. These loans
may also give rise to claims and defenses by a borrower against Carver Federal, including claims and defenses that the borrower
has against the seller of the underlying collateral. In underwriting unsecured consumer loans other than secured credit cards,
Carver Federal considers the borrower's credit history, an analysis of the borrower's income, expenses and ability to repay the loan
and the value of the collateral. The underwriting for secured credit cards only takes into consideration the value of the underlying
collateral. See “Asset Quality-Non-performing Assets.”
Loan Processing. Carver Federal's loan originations are derived from a number of sources, including referrals by realtors,
builders, depositors, borrowers and mortgage brokers, as well as walk-in and telephone customers. Loans are originated by the
Bank's personnel who receive a base salary, commissions and other incentive compensation. Real estate, business and unsecured
loan applications are forwarded to the Bank's Lending Department for underwriting pursuant to standards established in Carver
Federal's loan policy. The underwriting and loan processing for residential one-to-four family loans are performed by an outsourced
third party loan originator using lending standards established by the Bank.
A commercial real estate loan application is completed for all multifamily and non-residential properties that the Bank
finances. Prior to loan approval, the property is inspected by a loan officer. As part of the loan approval process, consideration
7
is given to an independent appraisal, location, accessibility, stability of the neighborhood, environmental assessment, personal
credit history and the financial capacity of the applicant(s). Business loan applications are completed for all business loans. Most
business loans are secured by real estate, personal guarantees, and/or guarantees by the United States Small Business Administration
(“SBA”) or Uniform Commercial Code (“UCC”) filings. The loan approval process considers the credit history of the applicant,
collateral, cash flow and purpose and stability of the business.
Upon receipt of a completed loan application from a prospective borrower, a credit report and other verifications are
ordered to confirm specific information relating to the loan applicant's income and credit standing. It is the Bank's policy to obtain
an appraisal of the real estate intended to secure a proposed mortgage loan from an independent appraiser approved by the Bank.
It is Carver Federal's policy to record a lien on the real estate securing the loan and to obtain a title insurance policy that
insures that the property is free of prior encumbrances. Borrowers must also obtain hazard insurance policies prior to closing and,
when the property is in a flood plain as designated by the Department of Housing and Urban Development, obtain flood insurance.
Most borrowers are also required to advance funds on a monthly basis, together with each payment of principal and interest, to a
mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes and hazard insurance.
Written confirmation of the guarantee for SBA loans and evidence of the UCC filing is also required.
Loan Approval. Except for real estate and business loans in excess of $6.0 million, mortgage and business loan approval
authority has been delegated by the Bank's Board of Directors to the Board's Asset Liability and Interest Rate Risk Committee.
The Asset Liability and Interest Rate Risk Committee has delegated to the Bank's Management Loan Committee, which consists
of certain members of executive management, loan approval authority up to and including $1.0 million for real estate and business
loans. Real estate and business loans above $6.0 million must be approved by the full Board. Purchased loans are subject to the
same approval process as originated loans. One-to-four family mortgage loans that conform to FNMA, Federal Housing
Administration and Federal Home Loan Mortgage Corporation ("FHLMC") standards and limits may be approved by the outsourced
third party loan originator.
Loans-to-One-Borrower. Under the loans-to-one-borrower limits of the OCC, with certain limited exceptions, loans and
extensions of credit to a single or related group of borrowers outstanding at one time generally may not exceed 15% of the
unimpaired capital and surplus of a savings bank. See “Regulation and Supervision-Federal Banking Regulation-Loans-to-One-
Borrower Limitations.” At March 31, 2019, the maximum loans-to-one-borrower under this test was $10.2 million and the Bank
had no relationships that exceeded this limit.
Loan Originations and Purchases. Loan originations were $27.2 million in fiscal 2019 compared to $21.0 million in
fiscal 2018. There were no loan purchases during fiscal years 2019 and 2018.
The following table sets forth certain information with respect to Carver Federal's loan originations and advances,
purchases and sales for the fiscal years ended March 31:
2019
2018
2017
Amount
Percent
Amount
Percent
Amount
Percent
$ in thousands
Loans Originated:
One-to-four family
Multifamily
Commercial real estate
Business
Consumer and others (1)
$
—
1,700
9,319
15,769
450
27,238
—
27,238
(1,738)
25,500
—% $
6.2%
34.2%
57.9%
1.7%
100.0%
—%
100%
—
300
4,067
15,613
1,032
21,012
—
21,012
(2,436)
18,576
—% $
1.4%
19.4%
74.3%
4.9%
100.0%
—%
100%
—
—
25,153
11,268
498
36,919
22,484
59,403
(12,049)
47,354
Total loans originated
Loans purchased (2)
Total loans originated and purchased
Loans sold (3)
Net additions to loan portfolio
(1) Comprised of personal loans.
(2) Comprised of one-to-four family residential and student loans with a net book value of $22.5 million purchased from a third party in
$
$
$
2017.
(3) Comprised of primarily multifamily and one-to-four family loans in 2019, student loans in 2018, and commercial and business loans in
2017.
8
—%
—%
42.3%
19.0%
0.8%
62.1%
37.8%
100%
Loans purchased by the Bank entail certain risks not necessarily associated with loans the Bank originates. The Bank's
purchased loans are generally acquired without recourse to the seller, with certain exceptions related to the seller's compliance
with representations and warranties, and in accordance with the Bank's underwriting criteria for originations. In addition, purchased
loans have a variety of terms, including maturities, interest rate caps and indices for adjustment of interest rates, that may differ
from those offered at that time by the Bank. The Bank initially seeks to purchase loans in its market area. However, the Bank
may purchase loans secured by property outside its market area to meet its financial objectives. The market areas in which the
properties that secure the purchased loans are located may differ from Carver Federal's market area and may be subject to economic
and real estate market conditions that may significantly differ from those experienced in Carver Federal's market area. There can
be no assurance that economic conditions in these out-of-state markets will not deteriorate in the future, resulting in increased
loan delinquencies and loan losses among the loans secured by property in these areas.
In an effort to reduce risks, the Bank has sought to ensure that purchased loans satisfy the Bank's underwriting standards
and do not otherwise have a higher risk of collection or loss than loans originated by the Bank. A review of each loan is conducted
prior to purchase, and the Bank also requires appropriate documentation and further seeks to reduce its risk by requiring, in each
buy/sell agreement, a series of warranties and representations as to the underwriting standards and the enforceability of the related
legal documents. These warranties and representations remain in effect for the life of the loan. Any misrepresentation must be
cured within 90 days of discovery or trigger certain repurchase provisions in the buy/sell agreement.
Loan Maturity Schedule. The following table sets forth information at March 31, 2019 regarding the amount of loans
maturing in Carver Federal's portfolio, including scheduled repayments of principal, based on contractual terms to maturity.
Demand loans, loans having no schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or
less. The table below does not include any estimate of prepayments, which significantly shorten the average life of all mortgage
loans and may cause Carver Federal's actual repayment experience to differ significantly from that shown below:
$ in thousands
Gross loans receivable:
One-to-four family
Multifamily
Commercial real estate
Business
Consumer
Total
Loan Maturities
<1 Yr.
1-5 Yrs.
5-20+ Yrs.
Total
$
$
1
9,909
18,868
11,925
3,753
44,456
$
$
1,151
43,358
63,940
55,763
270
164,482
$
$
107,211
32,910
48,004
28,742
—
216,867
$
$
108,363
86,177
130,812
96,430
4,023
425,805
The following table sets forth as of March 31, 2019, amounts in each loan category that are contractually due after
March 31, 2020 and whether such loans have fixed or adjustable interest rates. Scheduled contractual principal repayments of
loans do not necessarily reflect the actual lives of such assets. The average life of long-term loans is substantially less than their
contractual terms due to prepayments. In addition, due-on-sale clauses in mortgage loans generally give Carver Federal the right
to declare a conventional loan due and payable in the event, among other things, that a borrower sells the real property subject to
the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan market
rates are higher than rates on existing mortgage loans and tends to decrease when current mortgage loan market rates are lower
than rates on existing mortgage loans:
$ in thousands
Gross loans receivable:
One-to-four family
Multifamily
Commercial real estate
Business
Consumer
Total
Due After March 31, 2020
Adjustable
Total
Fixed
$
$
88,145
12,292
23,827
17,816
270
142,350
$
$
20,217
63,976
88,117
66,689
—
238,999
$
$
108,362
76,268
111,944
84,505
270
381,349
9
Asset Quality
General. One of the Bank's key operating objectives continues to be to maintain a high level of asset quality. Through
a variety of strategies, including, but not limited to, monitoring loan delinquencies and borrower workout arrangements, the Bank
has been proactive in addressing problem loans and non-performing assets.
The underlying credit quality of the Bank's loan portfolio is dependent primarily on each borrower's ability to continue
to make required loan payments and, in the event a borrower is unable to continue to do so, the adequacy of the value of the
collateral securing the loan. For non-owner occupied non-residential real estate and multifamily real estate loans, the borrower's
ability to pay typically is dependent on rental income, which can be impacted primarily by vacancies and general market conditions.
For one-to-four family loans, a borrowers' ability to pay typically is dependent primarily on employment and other sources of
income. For owner occupied non-residential real estate, a borrower's ability to pay typically is dependent primarily on the success
of the borrower's business. For all of the Bank's loans, a borrower's ability to pay is also impacted by general economic and other
factors, such as unanticipated expenditures or changes in the financial markets. Collateral values, particularly real estate values,
are also impacted by a variety of factors, including general economic conditions, demographics, maintenance and collection or
foreclosure delays.
Non-performing Assets. Non-performing assets consist of nonaccrual loans, loans held-for-sale, and property acquired
in settlement of loans (OREO), 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 Small Business Administration (“SBA”). Loans that
remain delinquent are reviewed for reserve provisions and charge-off. 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 typically 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 performance
according to the restructured terms for a period of at least six months. At March 31, 2019, loans classified as TDR totaled $5.4
million, of which $2.2 million were classified as performing.
The following table sets forth information with respect to Carver Federal's non-performing assets, which includes
nonaccrual loans, loans held-for-sale, and property acquired in settlement of loans as of March 31:
$ in thousands
Loans accounted for on a nonaccrual basis (1):
Gross loans receivable:
One-to-four family
Multifamily
Commercial real estate
Business
Consumer
Total nonaccrual loans
Other non-performing assets (2)
Real estate owned
Loans held-for-sale
Total other non-performing assets
Total non-performing assets (3)
2019
2018
2017
2016
2015
$
$
4,488
3,214
476
2,051
65
10,294
404
—
404
10,698
$
$
4,561
964
502
635
—
6,662
1,145
—
1,145
7,807
$
$
3,899
1,602
993
1,922
2
8,418
990
944
1,934
10,352
$
$
2,947
1,769
5,338
3,896
—
13,950
1,008
2,436
3,444
17,394
$
$
3,664
1,053
2,817
861
—
8,395
4,341
2,665
7,006
15,401
1.74%
Non-performing loans to total loans
Non-performing assets to total assets
2.28%
(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.
1.39%
1.13%
2.40%
1.90%
2.37%
2.35%
1.54%
1.50%
(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.
10
(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. TDR loans
included in the nonaccrual category above totaled $3.2 million at 2019, $1.9 million at 2018, $2.5 million at 2017, $2.2 million at 2016, and
$3.6 million at 2015. TDR loans that have performed in accordance with their modified terms for a period of at least six months are generally
considered performing loans and are not presented in the table above. Performing TDR loans were $2.2 million at 2019, $3.8 million at 2018,
$3.9 million at 2017, $5.6 million at 2016, and $4.6 million at 2015.
At March 31, 2019, total non-performing assets increased by $2.9 million, or 37.0%, to $10.7 million, compared to $7.8
million at March 31, 2018 as a result of a $3.6 million increase in nonaccrual loans, partially offset by a $741 thousand decrease
in real estate owned, year over year. Nonaccrual loans at March 31, 2019 consisted of sixteen one-to-four family loans, nine small
business and SBA loans, five multifamily loans, four commercial real estate loans, and three consumer loans. The increase in
delinquent loans from the prior year is primarily due to an increase in impaired business and multifamily loans. Management
believes that there may be losses associated with certain delinquent loans in the future, but also notes that the amount of losses
may be reduced by the value of properties securing these delinquent loans and the Bank's loan loss reserves. Other non-performing
assets at year-end 2019 includes real estate owned assets consisting of four properties foreclosed upon. At March 31, 2019, Carver
had 14 loans secured by one-to-four family residential real estate properties in the process of foreclosure with a total outstanding
balance of $4.2 million.
Although we believe that substantially all risk elements at March 31, 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. For additional information about certain factors that may affect the future
performance of the Company's loan portfolio, please see "Item 1A - Risk Factors" and "Forward Looking Statements."
Asset Classification and Allowances for Losses. Federal regulations and the Bank's policies require the classification of
assets on the basis of credit quality on a quarterly basis. An asset is classified as “substandard” if it is determined to be inadequately
protected by the current net worth and paying capacity of the obligor or the current value of the collateral pledged, if any. An
asset is classified as “doubtful” if full collection is highly questionable or improbable. An asset is classified as “loss” if it is
considered uncollectible, even if a partial recovery could be expected in the future. The regulations also provide for a “special
mention” designation, described as assets that do not currently expose a savings institution to a sufficient degree of risk to warrant
substandard classification but do possess credit deficiencies or potential weaknesses deserving management's close
attention. Assets classified as substandard or doubtful result in a higher level of allowances for loan losses recorded in accordance
with ASC Subtopic 450-20 “Loss Contingencies.” If an asset or portion thereof is classified as a loss, a savings institution must
charge off any amount exceeding the fair value of collateral pursuant to loan impairment guidance in ASC Section 310-10-35. If
a savings institution does not agree with an examiner's classification of an asset, it may appeal this determination to the OCC
Regional Director.
The OCC, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the
allowance for loan losses and lease losses ("ALLL"). The policy statement provides guidance for financial institutions on both
the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency
examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that
institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze
all significant factors that affect the ability to collect the portfolio in a reasonable manner; and that management establish acceptable
allowance evaluation processes that meet the objectives set forth in the policy statement. Management is responsible for determining
the adequacy of the allowance for loan losses and the periodic provisioning for estimated losses included in the consolidated
financial statements. The evaluation process is undertaken on a quarterly basis, but may increase in frequency should conditions
arise that would require management's prompt attention, such as business combinations and opportunities to dispose of non-
performing and marginally performing loans by bulk sale or any development which may indicate an adverse trend. Although
management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent
upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary.
For additional information regarding Carver Federal's ALLL policy, refer to Note 2 of Notes to Consolidated Financial Statements,
“Summary of Significant Accounting Policies.”
The Board has designated the Credit Review Committee of management to perform a review on a quarterly basis of the
Bank's asset quality, determine and properly identify and monitor credit risk in the loan portfolio and determine that the Bank's
allowance for loan and lease losses is proper and appropriate and submit their report to the Board for review. Carver Federal's
methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in
connection with specific loans as well as losses that have not been identified but can be expected to occur. Further, management
reviews the ratio of allowances to total loans and recommends adjustments to the level of allowances accordingly. Although
11
management believes it uses the best information available to make determinations with respect to the allowances for losses, future
adjustments may be necessary if economic conditions differ from the economic conditions in the assumptions used in making the
initial determinations, or if circumstances pertaining to individual loans change, or new information pertaining to individual loans
or the loan portfolio is identified. The Bank has a centralized loan servicing structure that relies upon outside servicers, each of
which generates a monthly report of delinquent loans. The Asset Liability and Interest Rate Risk Committees of the Board establish
policy relating to internal classification of loans and also provides input to the Credit Review Committee in its review of classified
assets. In originating loans, Carver Federal recognizes that credit losses will occur and that the risk of loss will vary with, among
other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic
conditions and, in the case of a secured loan, the quality of the security for the loan.
It is management's policy to maintain a general allowance for loan losses based on, among other things, regular reviews
of delinquencies and loan portfolio quality, character and size, the Bank's and the industry's historical and projected loss experience
and current and forecasted economic conditions and certain qualitative factors. In addition, considerable uncertainty exists as to
the future improvement or deterioration of the real estate market. See “Lending Activities-Loan Purchases and Originations.”
Carver Federal increases its allowance for loan losses by charging provisions for possible losses against the Bank's income. General
allowances are established by management on at least a quarterly basis based on an assessment of risk in the Bank's loans, taking
into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, the
state of the real estate market and economic conditions generally. Specific allowances are provided for individual loans, or portions
of loans, when ultimate collection is considered improbable by management based on the current payment status of the loan and
the fair value or net realizable value of the security for the loan. A loan is deemed impaired when it is probable the Bank will be
unable to collect both principal and interest due according to the contractual terms of the loan agreement. Loans the Bank
individually classifies as impaired include multifamily mortgage loans, commercial real estate loans, construction loans and
business loans which have been classified by the Bank's credit review officer as substandard, doubtful or loss for which it is
probable that principal and interest will not be collected in accordance with the loan's contractual terms, and certain loans modified
in a troubled debt restructuring. A charge off is recognized on collateral dependent loans when the fair value of the property that
collateralizes the impaired loan, if any, is less than the recorded investment in the loan. A valuation allowance for cash flow
dependent loans is established when based upon a discounted cash flow analysis, impairment is demonstrated.
At the date of foreclosure or other repossession, the Bank transfers the property to real estate acquired in settlement of
loans, or other real estate owned ("OREO"), at fair value less estimated selling costs. Fair value is defined as the amount in cash
or cash-equivalent value of other consideration that a real estate parcel would yield in a current sale between a willing buyer and
a willing seller. Any amount of cost in excess of fair value is charged off against the allowance for loan losses prior to the transfer
of the property into OREO. Carver Federal records an allowance for estimated selling costs of the property immediately after
foreclosure. Subsequent to taking possession of the property, management periodically evaluates the property and an allowance
is established if the estimated fair value of the property, less estimated costs to sell, declines. If, upon ultimate disposition of the
property, net sales proceeds exceed the net carrying value of the property, a gain on sale of real estate is recorded, providing the
Bank did not provide financing for the sale.
The following table sets forth an analysis of Carver Federal's allowance for loan losses at and for the years ended
March 31:
12
$ in thousands
Balance at beginning of year
Less Charge-offs:
One-to-four family
Multifamily
Commercial real estate
Construction
Business
Consumer and other
Total Charge-offs
Add Recoveries:
One-to-four family
Multifamily
Commercial real estate
Construction
Business
Consumer and other
Total Recoveries
Net loans charged off
Provision for (recovery of) losses
Balance at end of year
Ratios:
Net charge-offs to average loans outstanding
Allowance to total loans
Allowance to non-performing loans
2019
$ 5,126
2018
$ 5,060
2017
$ 5,232
2016
$ 4,428
2015
$ 7,366
(151)
(164)
—
—
(964)
(19)
$ (1,298)
190
158
—
—
705
35
$ 1,088
(210)
(270)
$ 4,646
(96)
(104)
—
—
(81)
(33)
(314)
$
—
131
20
—
87
7
245
(69)
135
$ 5,126
$
(106)
(338)
—
—
—
(85)
(529)
$
—
—
20
—
304
4
328
(201)
29
$ 5,060
$
(389)
(340)
—
—
(176)
(517)
$ (1,422)
113
—
9
—
578
31
731
(691)
1,495
$ 5,232
$
(687)
(132)
—
—
(320)
(498)
$ (1,637)
380
82
256
—
816
7
$ 1,541
(96)
(2,842)
$ 4,428
(0.05)%
1.08 %
45.13 %
(0.01)%
1.07 %
76.94 %
(0.04)%
0.93 %
60.11 %
(0.13)%
0.89 %
37.51 %
(0.02)%
0.92 %
52.75 %
The following table allocates the allowance for loan losses by asset category at March 31:
2019
2018
2017
2016
2015
$ in thousands
One-to-four family
Multifamily
Commercial real estate
Construction
Business
Consumer and other
Unallocated
Total Allowance
Amount
1,274
$
885
766
—
1,330
154
237
4,646
$
% of
Total
ALLL
Amount
1,210
1,819
1,052
—
1,003
18
24
5,126
27.4% $
19.1%
16.5%
0.0%
28.6%
3.3%
5.1%
100% $
% of
Total
ALLL
Amount
1,663
1,213
1,496
106
573
9
—
5,060
23.6% $
35.5%
20.5%
0.0%
19.6%
0.4%
0.5%
100% $
% of
Total
ALLL
Amount
1,697
622
1,808
62
1,022
21
—
5,232
32.9% $
24.0%
29.6%
2.1%
11.3%
0.2%
0.0%
100% $
% of
Total
ALLL
Amount
1,970
502
1,029
99
813
15
—
4,428
32.4% $
11.9%
34.6%
1.2%
19.5%
0.4%
0.0%
100% $
% of
Total
ALLL
44.5%
11.3%
23.2%
2.2%
18.4%
0.3%
0.0%
100%
The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
Investment Activities
General. 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. Securities are classified into one of three categories: trading, held-to-maturity, and
available-for-sale. Securities that are bought and held principally for the purpose of selling them in the near term are classified
as trading securities and are reported at fair value with unrealized gains and losses included in earnings. Debt securities for which
13
the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. All
other securities not classified as trading or held-to-maturity are classified as available-for-sale and reported at fair value with
unrealized gains and losses included, on an after-tax basis, in a separate component of stockholders' equity. At March 31, 2019,
the Bank had no securities classified as trading. At March 31, 2019, $79.8 million, or 87.3% of the Bank's mortgage-backed and
other investment securities, were classified as available-for-sale. The remaining $11.1 million, or 12.2%, were classified as held-
to-maturity.
The following table sets forth the amortized cost, fair value and weighted average yields of the Bank's investment portfolio
at March 31, 2019, categorized by remaining period to contractual maturity:
Due < 1 Year
Due 1 - 5 Years
Due 5 - 10 Years
Due after 10 Years
Amortized
Cost
Fair
Value
Weighted
Average
Yield
Amortized
Cost
Fair
Value
Weighted
Average
Yield
Amortized
Cost
Fair
Value
Weighted
Average
Yield
Amortized
Cost
Fair
Value
Weighted
Average
Yield
$
— $ —
—% $
— $ —
—% $
1,725
$ 1,642
1.87% $
2,718
$ 2,740
2.64%
—%
—%
—%
—%
—
—
—%
697
680
1.43%
10,407
10,345
2.89%
2,114
2,040
—
—
1.73%
—%
3,136
3,101
2.28%
21,844
21,467
—
—
—%
—
—
2.58%
—%
2,114
2,040
1.73%
5,558
5,423
2.05%
34,969
34,552
2.68%
Corporate Bonds
1,005
999
—%
1.65%
4,145
2,020
4,086
1,989
1.70%
1.76%
10,188
10,177
2,029
1,989
3.27%
2.79%
18,757
18,590
—
—
Total available-for-sale
$
1,005
$ 999
1.65% $
8,279
$ 8,115
1.72% $
17,775
$ 17,589
2.84% $
53,726
$ 53,142
$ in thousands
Available-for-Sale:
Mortgage-backed
securities:
Government National
Mortgage Association
Federal Home Loan
Mortgage Corporation
Federal National
Mortgage Association
Other
Total mortgage-
backed securities
U.S. Government Agency
Securities
—
—
—
—
—
—
—
—
—
—
Held-to-Maturity:
Mortgage-backed
securities:
Government National
Mortgage Association
Federal National
Mortgage Association
Total held-to-maturity
mortgage-backed
securities
Corporate Bonds
—
—
—
—
—
—
—
—
—% $
— $ —
—% $
492
$
501
3.58% $
722
$
753
4.34%
—%
4,555
4,530
2.40%
2,889
2,858
2.42%
1,479
1,448
2.15%
—%
—%
4,555
4,530
—
—
2.40%
—%
3,381
1,000
3,359
1,017
2.59%
5.75%
2,201
2,201
—
—
Total held-to-maturity
$
— $ —
—% $
4,555
$ 4,530
2.40% $
4,381
$ 4,376
3.31% $
2,201
$ 2,201
Mortgage-Backed Securities. The Bank has invested in mortgage-backed securities to help achieve its asset/liability
management goals and collateral needs. Although mortgage-backed securities generally yield less than whole loans, they present
substantially lower credit risk, are more liquid than individual mortgage loans and may be used to collateralize obligations of the
Bank. Because Carver Federal receives regular payments of principal and interest from its mortgage-backed securities, these
investments provide more consistent cash flows than investments in other debt securities, which generally only pay principal at
maturity. Mortgage-backed securities also help the Bank meet certain definitional tests for favorable treatment under federal
banking and tax laws. See “Regulation and Supervision-Federal Banking Regulation-Qualified Thrift Lender Test” and “Federal
and State Taxation.”
Mortgage-backed securities constituted 9.3% of total assets at March 31, 2019, compared to 6.2% at March 31, 2018.
Carver Federal maintains a portfolio of mortgage-backed securities in the form of Government National Mortgage Association
(“GNMA”) pass-through certificates, FNMA, FHLMC participation certificates and commercial mortgage-backed
securities. GNMA pass-through certificates are guaranteed as to the payment of principal and interest by the full faith and credit
of the United States Government, while FNMA and FHLMC certificates are each guaranteed by their respective agencies as to
principal and interest. Mortgage-backed securities generally entitle Carver Federal to receive a pro-rata portion of the cash flows
from an identified pool of mortgages. The cash flows from such pools are segmented and paid in accordance with a predetermined
priority to various classes of securities issued by the entity. Carver Federal has also invested in pools of loans guaranteed as to
principal and interest by the SBA.
14
2.90%
—%
2.76%
2.87%
—%
2.87%
The Bank seeks to manage interest rate risk by investing in adjustable-rate mortgage-backed securities, which at March 31,
2019, constituted $3.6 million, or 7.0%, of the mortgage-backed securities portfolio. Mortgage-backed securities, however, expose
Carver Federal to certain unique risks. In a declining rate environment, accelerated prepayments of loans underlying these securities
expose Carver Federal to the risk that it will be unable to obtain comparable yields upon reinvestment of the proceeds. In the
event the mortgage-backed security has been funded with an interest-bearing liability with maturity comparable to the original
estimated life of the mortgage-backed security, the Bank's interest rate spread could be adversely affected. Conversely, in a rising
interest rate environment, the Bank may experience a lower than estimated rate of repayment on the underlying mortgages,
effectively extending the estimated life of the mortgage-backed security and exposing the Bank to the risk that it may be required
to fund the asset with a liability bearing a higher rate of interest. For additional information regarding Carver Federal's mortgage-
backed securities portfolio and its maturities refer to Note 3 of Notes to Consolidated Financial Statements, “Investment Securities.”
Other Investment Securities. In addition to mortgage-backed securities, the Bank also invests in assets such as government
and agency obligations, corporate bonds and mutual funds. Carver Federal is permitted under federal law to make certain
investments, including investments in securities issued by various federal agencies and state and municipal governments, deposits
at the FHLB-NY, certificates of deposit in federally insured institutions, certain bankers' acceptances and federal funds. The Bank
may also invest, subject to certain limitations, in commercial paper having one of the two highest investment ratings of a nationally
recognized credit rating agency, and certain other types of corporate debt securities and mutual funds (See Note 3 of Notes to
Consolidated Financial Statements).
Other Earning Assets. Federal regulations require the Bank to maintain an investment in FHLB-NY stock and a sufficient
amount of liquid assets which may be invested in cash and specified securities. For additional information, see “Regulation and
Supervision-Federal Banking Regulation-Liquidity.”
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 income (loss). 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. Following FASB guidance, 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. The
remaining difference between the debt security’s amortized cost basis and its fair value would be included in other comprehensive
income (loss). 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. During the fiscal
year ended March 31, 2018, the Bank recognized an impairment of less than $500 on a mortgage-backed security. The Bank did
not have any securities that were classified as having other-than-temporary impairment in its investment portfolio at March 31,
2019.
Sources of Funds
General. Deposits are the primary source of Carver Federal's funds for lending and other investment purposes. In addition
to deposits, Carver Federal derives funds from loan principal repayments, loan and investment interest payments, maturing
investments and fee income. Loan and mortgage-backed securities repayments and interest payments are a relatively stable source
of funds, while deposit inflows and outflows are significantly influenced by prevailing market interest rates, pricing of deposits,
competition and general economic conditions. Borrowed money may be used to supplement the Bank's available funds, and from
time to time the Bank borrows funds from the FHLB-NY and has borrowed funds through trust preferred debt securities.
Deposits. Carver Federal attracts deposits from consumers, businesses, non-profit organizations and public entities
through its eight branches principally from within its market area by offering a variety of deposit instruments, including passbook
and statement accounts and certificates of deposit, which range in term from 91 days to five years. Deposit terms vary, principally
on the basis of the minimum balance required, the length of time the funds must remain on deposit and the interest rate. Carver
Federal also offers Individual Retirement Accounts. Carver Federal's policies are designed primarily to attract deposits from local
residents and businesses through the Bank's branches. Carver Federal also holds deposits from various governmental agencies or
authorities and corporations.
15
Carver Federal utilizes brokered deposits as an additional funding source and to assist in the management of the Bank's
interest rate risk. Carver Federal has obtained brokered certificates of deposit when the interest rate on these deposits is below
the prevailing interest rate for non-brokered certificates of deposit with similar maturities in our market, or when obtaining them
allowed us to extend the maturities of our deposits at favorable rates compared to borrowing funds with similar maturities, when
we are seeking to extend the maturities of our funding to assist in the management of our interest rate risk. Carver has obtained
brokered deposits from a variety of brokerage firms. In addition, Carver has obtained brokered deposits through the Depository
Trust Company. This allows us to better manage the maturity of our deposits and our interest rate risk. Carver Federal has also
utilized brokers to obtain money market account deposits. The rate we pay on brokered money market accounts is the same or
below the rate we pay on non-brokered money market accounts. These accounts are similar to brokered certificates of deposit
accounts in that we only maintain one account for the total deposit per broker, with the broker maintaining the detailed records of
each depositor. As of March 31, 2019, Carver had a total of $85.0 million in brokered deposits, compared to $126.4 million as of
March 31, 2018.
As of March 31, 2019, the Bank has $48.3 million of reciprocal deposits acquired through its participation in the Certificate
of Deposit Account Registry Service (“CDARS”). The Bank's CDARS deposits totaled $48.2 million as of March 31, 2018. The
CDARS network arranges for placement of Carver Federal's customer funds into certificate of deposit accounts issued by other
CDARS member banks. The certificate of deposit accounts are in increments of less than the individual FDIC insurance limit
amount, to ensure that both principal and interest are eligible for full FDIC deposit insurance. This allows the Bank to maintain
its customer relationship while still providing its customers with FDIC insurance for the full amount of their deposits, up to $50
million per customer. In exchange, Carver Federal receives from other member banks their customers' deposits in like amounts.
Depositors are allowed to withdraw funds early, with a penalty, from these accounts. Carver Federal may elect to participate in
the program by making or receiving deposits without making or receiving a reciprocal deposit. As a result of the Dodd-Frank
Act, the standard maximum deposit insurance amount is $250,000.
Deposit interest rates, maturities, service fees and withdrawal penalties on deposits are established based on the Bank's
funds acquisition and liquidity requirements, the rates paid by the Bank's competitors, current market rates, the Bank's growth
goals and applicable regulatory restrictions and requirements. For additional information regarding the Bank's deposit accounts
and the related weighted average interest rates paid, and amount and maturities of certificates of deposit in specified weighted
average interest rate categories, refer to Note 7 of the Notes to Consolidated Financial Statements, “Deposits.”
Borrowed Funds. While deposits are the primary source of funds for Carver Federal's lending, investment and general
operating activities, Carver Federal is authorized to use advances from the FHLB-NY and securities sold under agreements to
repurchase (“Repos”) from approved primary dealers to supplement its supply of funds and to meet deposit withdrawal
requirements. The FHLB-NY functions as a central bank providing credit for savings institutions and certain other member
financial institutions. As a member of the FHLB system, Carver Federal is required to own stock in the FHLB-NY and is authorized
to apply for advances. Advances are made pursuant to several different programs, each of which has its own interest rate and
range of maturities. Advances from the FHLB-NY are secured by Carver Federal's stock in the FHLB-NY and a pledge of Carver
Federal's mortgage loan and mortgage-backed and agency securities portfolios. The Bank takes into consideration the term of
borrowed money with the repricing cycle of the mortgage loans on the balance sheet. At March 31, 2019, Carver had $8.0 million
in FHLB-NY advances outstanding.
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 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, with a rate of 5.7% at March 31, 2019. 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.
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 the Company, and the FRB regulates dividends paid by the
Company. 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
16
to meet the OCC minimum capital requirements. In accordance with the Agreement, Carver Federal is currently prohibited from
paying any dividends without prior OCC approval, and, as such, has suspended its regular quarterly cash dividend to the Company.
There are no assurances that dividend payments to Carver will resume.
REGULATION AND SUPERVISION
Enforcement Actions
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 (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 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.
General
The Bank is subject to extensive regulation, examination and supervision by its primary regulator, the OCC. The Bank's
deposit accounts are insured up to applicable limits by the FDIC under the Deposit Insurance Fund (“DIF”), and is a member of
the FHLB. The Bank must file reports with the OCC concerning its activities and financial condition, and it must obtain regulatory
approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The
Company, as a unitary savings and loan holding company, is subject to regulation, examination and supervision by the FRB and
is required to file certain reports with, and otherwise comply with, the rules and regulations of the FRB and of the SEC under the
federal securities laws. The OCC periodically performs safety and soundness examinations of the Bank and tests compliance with
various regulatory requirements. The OCC has primary enforcement responsibility over federally chartered savings banks and
has substantial discretion to impose enforcement action on an institution that fails to comply with applicable regulatory
requirements, particularly with respect to its capital requirements. In addition, the FDIC has the authority to recommend to the
Director of the OCC that enforcement action be taken with respect to a particular federally chartered savings bank and, if action
is not taken by the Director, the FDIC has authority to take such action under certain circumstances.
The description of statutory provisions and regulations applicable to federally chartered savings banks and their holding
companies and of tax matters set forth in this document does not purport to be a complete description of all such statutes and
regulations and their effects on the Bank and the Company. Any change in such laws and regulations whether by the OCC, the
FDIC, the FRB or through legislation could have a material adverse impact on the Bank and the Company and their operations
and stockholders.
Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act') made extensive
changes in the regulation of federal savings banks. As part of the Dodd-Frank Act, the OCC became primarily responsible for the
supervision and regulation of federal savings banks. Likewise, the FRB became responsible for supervision of savings and loan
holding companies. Additionally, the Dodd-Frank Act created the Consumer Financial Protection Bureau as an independent bureau
of the FRB. The Consumer Financial Protection Bureau assumed responsibility for the implementation of the federal financial
consumer protection and fair lending laws and regulations. However, institutions of less than $10 billion in assets, such as Carver
Federal Savings Bank, continue to be examined for compliance with consumer protection and fair lending laws and regulations
by, and are subject to the primary enforcement authority of, their prudential regulator rather than the Consumer Financial Protection
Bureau.
The Dodd-Frank Act, among other things, also required changes in the way that institutions were assessed for deposit
insurance, mandated the imposition of consolidated capital requirements on savings and loan holding companies, required that
originators of securitized loans retain a percentage of the risk for the transferred loans, directed the FRB to regulate pricing of
certain debit card interchange fees, reduced the federal preemption afforded to federal savings associations and contained a number
17
of reforms related to mortgage originations. Many of the provisions of the Dodd-Frank Act contained delayed effective dates and/
or required the issuance of regulations. As a result, it will be some time before their impact on operations can be fully assessed
by management. However, there is a significant possibility that the Dodd-Frank Act will, at a minimum, result in an increased
regulatory burden and higher compliance, operating, and possibly, interest costs for the Bank and the Company.
Capital and Liquidity
Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the OCC is authorized and, in
some cases, required to take supervisory actions against undercapitalized savings banks. For this purpose, a savings bank would
be placed in one of the following five categories based on the bank's regulatory capital: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized or critically undercapitalized.
The severity of the action authorized or required to be taken under the prompt corrective action regulations increases as
a bank's capital decreases within the three undercapitalized categories. All banks are prohibited from paying dividends or other
capital distributions or paying management fees to any controlling person if, following such distribution, the bank would be
undercapitalized. Generally, a capital restoration plan must be filed with the OCC within 45 days of the date a bank receives
notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” In addition, various mandatory
supervisory actions become immediately applicable to the institution, including restrictions on growth of assets and other forms
of expansion. Under OCC regulations, as amended, a federally chartered savings bank is treated as well-capitalized if its total
risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 8% or greater, its common equity Tier 1 capital ratio
is 6.5% or greater, and its leverage ratio is 5% or greater, and it is not subject to any order or directive by the OCC to meet a
specific capital level. In assessing an institution's capital adequacy, the OCC takes into consideration not only these numeric
factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions
as they deem necessary.
The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, required that the OCC and other federal
banking agencies revise their risk-based capital standards, with appropriate transition rules, to ensure that they take into account
IRR concentration of risk and the risks of non-traditional activities. The OCC regulations do not include a specific IRR component
of the risk-based capital requirement. However, the OCC monitors the IRR of individual institutions through a variety of means,
including an analysis of the change in net portfolio value ("NPV"). NPV is defined as the net present value of the expected future
cash flows of an entity's assets and liabilities and, therefore, hypothetically represents the value of an institution's net worth. The
OCC has also used this NPV analysis as part of its evaluation of certain applications or notices submitted by thrift institutions. In
addition, OCC Bulletin 2010-1 provides guidance on the management of IRR and the responsibility of boards of directors in that
area. The OCC, through its general oversight of the safety and soundness of savings associations, retains the right to impose
minimum capital requirements on individual institutions to the extent the institution is not in compliance with certain written
guidelines established by the OCC regarding NPV analysis.
Carver Federal's Capital Position. Carver Federal, as a matter of prudent management, targets as its goal the maintenance
of capital ratios which exceed minimum requirements and are consistent with Carver Federal's risk profile. At March 31, 2019,
Carver Federal exceeded the capital regulatory requirements and its Individual Minimum Capital Requirements with a common
equity Tier 1 ratio of 15.39%, Tier 1 leverage ratio of 10.77%, total risk-based capital ratio of 16.58% and a Tier 1 risk-based
capital ratio of 15.39%.
The OCC and the other federal bank regulatory agencies issued a final rule effective January 1, 2015 that revised their
leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with
agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act.
The final rule generally applies to all depository institutions, and top-tier bank and savings and loan holding companies with total
consolidated assets of $3 billion or more. Among other things, the rule established a minimum Common Equity Tier 1 (CET1)
capital requirement (4.5% of risk-weighted assets), increased the minimum Tier 1 capital to risk-based assets requirement (from
4% to 6% of risk-weighted assets) and assigned a higher risk weight (150%) to exposures that are more than 90 days past due or
are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction
of real property. The final rule also required unrealized gains and losses on certain “available-for-sale” securities holdings to be
included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. Carver Federal has chosen to opt-
out. Additional constraints are also imposed on the inclusion in regulatory capital of certain mortgage-servicing assets, deferred
tax assets and minority interests. The rule 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. As noted, the final rule
became effective for the Bank on January 1, 2015. 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. The final rule
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adjusted the prompt corrective action categories described above to incorporate the increased capital standards and established
the "well-capitalized" threshold described above.
Legislation enacted in May 2018 requires the federal banking agencies, including the OCC, to establish for institutions
with assets of less than $10 billion a “community bank leverage ratio” of between 8 to 10%. Institutions with capital meeting the
specified requirement and electing the alternative framework will be considered to comply with the applicable regulatory capital
requirements, including the risk-based requirements and the prompt corrective action categories would be adjusted accordingly.
The establishment of the community bank leverage ratio is subject to notice and comment rulemaking by the federal regulators
and the regulators proposed a rule in December 2018 that would set the community bank leverage ratio at 9%.
Limitation on Capital Distributions. There are various restrictions on a bank's ability to make capital distributions,
including cash dividends, payments to repurchase or otherwise acquire its shares and other distributions charged against capital.
A savings institution that is the subsidiary of a savings and loan holding company, such as the Bank, must file a notice with the
FRB at least 30 days before making a capital distribution. The Bank must also file an application or notice for prior approval with
the OCC if the total amount of its capital distributions (including each proposed distribution), for the applicable calendar year
would exceed the Bank's net income for that year plus the Bank's retained net income for the previous two years, if the Bank is
not an "eligible savings association" as defined in OCC regulations or the capital distributions would violate a prohibition contained
in any statute, regulation or agreement.
The Bank may be prohibited from making capital distributions and its application or notice disapproved if:
(1) the Bank would be undercapitalized following the distribution;
(2) the proposed capital distribution raises safety and soundness concerns; or
(3) the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
Liquidity. The Bank maintains liquidity levels to meet operational needs. In the normal course of business, the levels
of liquid assets during any given period are dependent on operating, investing and financing activities. Cash and due from banks,
federal funds sold and repurchase agreements with maturities of three months or less are the Bank's most liquid assets. The Bank
maintains a liquidity policy to maintain sufficient liquidity to ensure its safe and sound operations. 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.
Standards for Safety and Soundness
Standards for Safety and Soundness. The OCC has adopted guidelines prescribing safety and soundness standards. The
guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In
general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. OCC regulations authorize the OCC to order an institution that has been given notice that it is not
satisfying these safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to
submit an acceptable compliance plan, or fails in any material respect to implement an accepted compliance plan, the OCC must
issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an
undercapitalized association is subject under the “prompt corrective action” provisions of federal law. If an institution fails to
comply with such an order, the OCC may seek to enforce such order in judicial proceedings and to impose civil money penalties.
Enforcement. The OCC has primary enforcement responsibility over the Bank. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and
officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or
unsound practices.
TARP
The Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law on October 3, 2008 and authorizes
the U.S. Department of the Treasury (“Treasury”) to establish the Troubled Asset Relief Program (“TARP”) to purchase certain
troubled assets from financial institutions, including banks and thrifts. Under the TARP, the Treasury could purchase residential
and commercial mortgages, and securities, obligations or other instruments based on such mortgages, originated or issued on or
before March 14, 2008 that the Secretary of the Treasury determines promotes market stability, as well as any other financial
19
instrument that the Treasury, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, or
FRB, determined the purchase of which is necessary to promote market stability. In the case of a publicly-traded financial institution
that sold troubled assets into the TARP, the Treasury must have received a warrant giving the Treasury the right to receive nonvoting
common stock or preferred stock in such financial institution, or voting stock with respect to which the Treasury agreed not to
exercise voting power, subject to certain de minimis exceptions. In addition, all financial institutions that sold troubled assets to
the TARP and met certain conditions were also subject to certain executive compensation restrictions, which differed depending
on how the troubled assets were acquired under the TARP.
On October 14, 2008, the Treasury announced that it would purchase equity stakes in a wide variety of banks and thrifts.
Under this program, known as the Troubled Asset Relief Program Capital Purchase Program (the "TARP CPP"), the Treasury
made $250 billion of capital available (from the $700 billion authorized by the EESA) to U.S. financial institutions in the form
of preferred stock. In conjunction with the purchase of preferred stock, the Treasury received warrants to purchase common stock
with an aggregate market price equal to 15% of the preferred investment. Participating financial institutions were required to
adopt the Treasury's standards for executive compensation and corporate governance for the period during which the Treasury
held equity issued under the TARP CPP. On January 20, 2009, the Company announced that it completed the sale of $18.98 million
in preferred stock to the Treasury in connection with Carver's participation in the TARP CPP. Importantly, Carver is exempt from
the requirement to issue a warrant to the Treasury to purchase shares of common stock, as the Bank is a certified Community
Development Financial Institution (“CDFI”) conducting most of its depository and lending activities in disadvantaged communities.
Therefore, the investment did not dilute common stockholders. As a participant in TARP CPP, the Company was subject to certain
obligations currently in effect, such as compensation restrictions, a luxury expenditure policy, the requirement the Company include
a “say on pay” proposal in the proxy statement and certain certifications. The Company was also subject to additional restrictions
or obligations as may be imposed under TARP CPP for as long as the Company participates in TARP CPP.
The Treasury announced in February 2010 the implementation of the Community Development Capital Initiative
(“CDCI”). This new capital program invested lower cost capital in CDFIs that lend to small businesses in the country's most
economically depressed communities. CDFI banks and thrifts are eligible to receive investments of capital with an initial dividend
rate of 2%, compared to the 5% rate offered under the CPP. CDFIs could apply to receive capital up to 5% of risk-weighted assets.
To encourage repayment while recognizing the unique circumstances facing CDFIs, the dividend rate increased to 9% after eight
years, compared to five years under TARP preferred stock. On August 27, 2010, Carver completed with the Treasury the exchange
of the $18.98 million of TARP preferred stock for an equivalent amount of CDCI Series B preferred stock. As stated above, on
October 28, 2011, the U.S. Treasury exchanged the CDCI Series B preferred stock for 2,321,286 shares of Company common
stock.
Other Supervision and Regulation
Activity Powers. The Bank derives its lending and investment powers from the Home Owners' Loan Act (“HOLA”), as
amended, and federal regulations. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential
and commercial real estate, commercial and consumer loans, certain types of debt securities and certain other assets. The Bank
may also establish service corporations that may engage in certain activities not otherwise permissible for the Bank, including
certain real estate equity investments and securities and insurance brokerage. The Bank's authority to invest in certain types of
loans or other investments is limited by federal law. These investment powers are subject to various limitations, including (1) a
prohibition against the acquisition of any corporate debt security that is not rated in one of the four highest rating categories, (2)
a limit of 400% of an association's capital on the aggregate amount of loans secured by non-residential real estate property, (3) a
limit of 20% of an association's assets on commercial loans, with the amount of commercial loans in excess of 10% of assets being
limited to small business loans, (4) a limit of 35% of an association's assets on the aggregate amount of consumer loans and
acquisitions of certain debt securities, (5) a limit of 5% of assets on non-conforming loans (loans in excess of the specific limitations
of HOLA), and (6) a limit of the greater of 5% of assets or an association's capital on certain construction loans made for the
purpose of financing what is or is expected to become residential property.
Loans-to-One Borrower Limitations. The Bank is generally subject to the same limits on loans-to-one borrower as a
national bank. With specified exceptions, the Bank's total loans or extension of credit to a single borrower or group of related
borrowers may not exceed 15% of the Bank's unimpaired capital and unimpaired surplus, which does not include accumulated
other comprehensive income. The Bank currently complies with applicable loans-to-one borrower limitations. At March 31,
2019, the Bank's limit on loans-to-one borrower based on its unimpaired capital and surplus was $10.2 million.
Qualified Thrift Lender Test. Under HOLA, the Bank must comply with a Qualified Thrift Lender (“QTL”) test. Under
this test, the Bank is required to maintain at least 65% of its “portfolio assets” in certain “qualified thrift investments” on a monthly
basis in at least nine months of the most recent twelve-month period. “Portfolio assets” means, in general, an association's total
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assets less the sum of (a) specified liquid assets up to 20% of total assets, (b) goodwill and other intangible assets and (c) the value
of property used to conduct the Bank's business. “Qualified thrift investments” include various types of loans made for residential
and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities and consumer
loans. If the Bank fails the QTL test, it must operate under certain restrictions on its activities. The Dodd-Frank Act made
noncompliance potentially subject to agency enforcement action for violation of law. At March 31, 2019, the Bank maintained
approximately 98.8% of its portfolio assets in qualified thrift investments. The Bank had also met the QTL test in each of the
prior 12 months and was, therefore, a qualified thrift lender.
Branching. Subject to certain limitations, federal law permits the Bank to establish branches in any state of the United
States. The authority for the Bank to establish an interstate branch network would facilitate a geographic diversification of the
Bank's activities. This authority under federal law and regulations preempts any state law purporting to regulate branching by
federal savings associations.
Community Reinvestment. Under CRA, as amended, as implemented by OCC regulations, the Bank has a continuing
and affirmative obligation to help meet the credit needs of its entire community, including low and moderate income
neighborhoods. CRA does not establish specific lending requirements or programs for the Bank nor does it limit the Bank's
discretion to develop the types of products and services that it believes are best suited to its particular community. CRA does,
however, require the OCC, in connection with its examination of the Bank, to assess the Bank's record of meeting the credit needs
of its community and to take such record into account in its evaluation of certain applications by the Bank.
In particular, the system focuses on three tests:
(1) a lending test, to evaluate the institution's record of making loans in its assessment areas;
(2) an investment test, to evaluate the institution's record of investing in community development projects, affordable
housing and programs benefiting low or moderate income individuals and businesses; and
(3) a service test, to evaluate the institution's delivery of banking services through its branches, ATM centers and other
offices.
CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received an “Outstanding”
CRA rating in its most recent examination conducted in January 2019.
Regulations require that Carver Federal publicly disclose certain agreements that are in fulfillment of CRA. The Company
has no such agreements in place at this time.
Transactions with Related Parties. The Bank's authority to engage in transactions with its “affiliates” is limited by federal
regulations and by Sections 23A, 23B of the Federal Reserve Act (“FRA”). In general, these transactions must be on terms which
are as favorable to the Bank as comparable transactions with non-affiliates. Additionally, certain types of these transactions are
restricted to an aggregate percentage of the Bank's capital. Collateral in specified amounts must usually be provided by affiliates
to receive loans from the Bank. In addition, OCC regulations prohibit a savings bank from lending to any of its affiliates that is
engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate other
than a subsidiary.
The Bank's authority to extend credit to its directors, executive officers, and 10% shareholders ("insiders"), as well as to
entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation
O of the Federal Reserve Board. Among other things, these provisions require that all loans or extensions of credit to insiders (a)
be made on terms that are substantially the same as and follow credit underwriting procedures that are not less stringent than those
prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment
or present other unfavorable features and (b) not exceed certain limitations, individually and in the aggregate, which limits are
based, in part, on the amount of the Bank's capital. In addition, extensions of credit in excess of certain limits must be approved
by the Bank's Board. The aggregate amount of related party deposits were $5.0 million and there was 1 related party loan totaling
$80 thousand at March 31, 2019.
Assessment. The OCC charges assessments to recover the cost of examining savings associations and their
affiliates. These assessments are based on three components: the size of the association, on which the basic assessment is based;
the association's supervisory condition, which results in an additional assessment based on a percentage of the basic assessment
for any savings institution with a composite rating of 3, 4, or 5 in its most recent safety and soundness examination; and the
complexity of the association's operations, which results in an additional assessment based on a percentage of the basic assessment
21
for any savings association that managed over $1 billion in trust assets, serviced for others loans aggregating more than $1 billion,
or had certain off-balance sheet assets aggregating more than $1 billion. For fiscal 2019, Carver paid $314 thousand in regulatory
assessments.
Insurance of Deposit Accounts
Under the FDIC's risk-based assessment system, institutions deemed less risky pay lower assessments. Assessments for
institutions of less than $10 billion of assets are now based on financial measures and supervisory ratings derived from statistical
modeling estimating the probability of an institution's failure within three years. That system, effective July 1, 2016, replaced the
previous system under which institutions were placed into risk categories.
The Dodd-Frank Act required the FDIC to revise its procedures to base assessments upon each insured institution's total
assets less tangible equity instead of deposits. The FDIC finalized a rule, effective April 1, 2011, that set the assessment range at
2.5 to 45 basis points of total assets less tangible equity. In conjunction with the Deposit Insurance Fund's reserve ratio achieving
1.15%, the assessment range (inclusive of possible adjustments) was reduced for insured institutions of less than $10 billion of
total assets to 1.5 basis points to 30 basis points, effective July 1, 2016.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits
to 1.35% of estimated insured deposits. The Federal Deposit Insurance Corporation must seek to achieve the 1.35% ratio by
September 30, 2010. The Dodd-Frank Act requires insured institutions with assets of $10 billion or more to fund the increase
from 1.15% 5o 1.35% and, effective July 1, 2016, such institutions were subject to a surcharge to achieve that goal. The FDIC
has indicated that the 1.35% ratio was exceeded in November 2018. Insured institutions of less than $10 billion of assets will
receive credits for their portion of assets that contributed to raising the reserve ratio from 1.15% to 1.35%. The Dodd-Frank Act
eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation, and
the Federal Deposit Insurance Corporation has exercised that discretion by establishing a long-range fund ratio of 2%.
The FDIC has authority to further increase insurance assessments and therefore management cannot predict what insurance
assessment rates will be in the future. A significant increase in insurance premiums may have an adverse effect on the operating
expenses and results of operations of the Bank. For fiscal 2019, Carver paid $638 thousand in FDIC insurance.
Anti-Money Laundering and Customer Identification
The Bank is subject to federal regulations implementing the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”). The USA PATRIOT Act gives the federal
government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers,
increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy
Act (BSA), Title III of the USA PATRIOT Act took measures intended to encourage information sharing among bank regulatory
agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under
the United States Commodity Exchange Act of 1936, as amended.
Title III of the USA PATRIOT Act and the related federal regulations imposed the following requirements with respect
to financial institutions:
•
•
•
•
•
•
Establish a Board approved policy and perform a risk assessment of BSA, Anti-Money Laundering and
OFAC;
Designate a qualified BSA officer;
Establish an effective training program;
Establish anti-money laundering programs;
Establish a program specifying procedures for obtaining identifying information from customers seeking to
open new accounts, including verifying the identity of customers within a reasonable period of time;
Establish enhanced due diligence policies, procedures and controls designed to detect and report money
laundering; and
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•
Prohibit correspondent accounts for foreign shell banks and compliance with record keeping obligations with
respect to correspondent accounts of foreign banks
In addition, bank regulators were directed to consider a holding company's effectiveness in combating money laundering
when ruling on certain corporate applications.
Federal Home Loan Bank System
The Bank is a member of the FHLB-NY, which is one of the eleven regional banks composing the FHLB System. Each
regional bank provides a central credit facility primarily for its member institutions. The Bank, as a FHLB-NY member, is required
to acquire and hold shares of capital stock in the FHLB-NY in specified amounts. The Bank was in compliance with this requirement
with an investment in the capital stock of the FHLB-NY at March 31, 2019 of $926 thousand. Any advances from the FHLB-NY
must be secured by specified types of collateral, and all long-term advances may be obtained only for the purpose of providing
funds for residential housing finance.
FHLB-NY is required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing
programs. These requirements could reduce the amount of earnings that the FHLB-NY can pay as dividends to its members and
could also result in the FHLB-NY imposing a higher rate of interest on advances to its members. If dividends were reduced, or
interest on future FHLB-NY advances increased, the Bank's net interest income would be adversely affected. Dividends from
FHLB-NY to the Bank amounted to $42 thousand and $109 thousand for fiscal years 2019 and 2018, respectively. The dividend
rate paid on FHLB-NY stock at March 31, 2019 was 6.4%.
Federal Reserve System
FRB regulations require federally chartered savings associations to maintain non-interest-earning cash reserves against
their transaction accounts (primarily interest-bearing checking and demand deposit accounts). A reserve of 3% is to be maintained
against aggregate transaction accounts between $16.3 million and $124.2 million (subject to adjustment annually by the FRB)
plus a reserve of 10% (subject to adjustment by the FRB between 8% and 14%) against that portion of total transaction accounts
in excess of $124.2 million. The first $16.3 million of otherwise reservable balances (subject to adjustment annually by the FRB)
is exempt from the reserve requirements. The Bank is in compliance with the foregoing requirements. Since required reserves
must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through
account as defined by the FRB, the effect of this reserve requirement is to reduce Carver Federal's interest-earning assets. FHLB
System members are also authorized to borrow from the Federal Reserve “discount window,” but FRB regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank.
Privacy Protection
Carver Federal is subject to OCC regulations implementing the privacy protection provisions of federal law. These
regulations require the Bank to disclose its privacy policy, including identifying with whom it shares “nonpublic personal
information” to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require
the Bank to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In
addition, to the extent its sharing of such information is not exempted, the Bank is required to provide its customers with the ability
to opt-out of having the Bank share their nonpublic personal information with unaffiliated third parties before they can disclose
such information, subject to certain exceptions.
The Bank is subject to regulatory guidelines establishing standards for safeguarding customer information. These
regulations implement certain provisions of the Gramm-Leach-Bliley Act, as amended ("GLB"). The guidelines describe the
agencies' expectations for the creation, implementation and maintenance of an information security program, which would include
administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope
of its activities. The standards set forth in the guidelines are intended to insure the security and confidentiality of customer records
and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against
unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any
customer. The Bank has a policy to comply with the foregoing guidelines.
Holding Company Regulation
The Company is a savings and loan holding company regulated by the FRB. As such, the Company is registered with
and subject to FRB examination and supervision, as well as certain reporting requirements. The FRB has enforcement authority
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over the Company and its subsidiaries. Among other things, this authority permits the FRB to restrict or prohibit activities that
are determined to be a serious risk to the financial safety, soundness or stability of a subsidiary savings institution.
GLB restricts the powers of new unitary savings and loan holding companies. Unitary savings and loan holding companies
that are “grandfathered,” i.e., unitary savings and loan holding companies in existence or with applications filed with the regulator
on or before May 4, 1999, such as the Company, retain their authority under the prior law. All other unitary savings and loan
holding companies are limited to financially related activities permissible for financial holding companies and certain other
activities specified by FRB regulations. GLB also prohibits nonfinancial companies from acquiring grandfathered unitary savings
and loan holding companies.
Restrictions Applicable to All Savings and Loan Holding Companies. Federal law prohibits a savings and loan holding
company, including the Company, directly or indirectly, from acquiring:
(1)
(2)
control (as defined under the Home Owners' Loan Act ("HOLA") of 1933, as amended), of another
savings institution (or a holding company parent) without prior FRB approval;
through merger, consolidation, or purchase of assets, another savings institution or a holding company
thereof, or acquiring all or substantially all of the assets of such institution (or a holding company),
without prior FRB approval; or
(3)
control of any depository institution not insured by the FDIC.
A savings and loan holding company may not acquire as a separate subsidiary an insured institution that has a principal
office outside of the state where the principal office of its subsidiary institution is located, except:
(1)
(2)
(3)
in the case of certain emergency acquisitions approved by the FDIC;
if such holding company controls a savings institution subsidiary that operated a home or branch
office in such additional state as of March 5, 1987; or
if the laws of the state in which the savings institution to be acquired is located specifically authorize
a savings institution chartered by that state to be acquired by a savings institution chartered by the
state where the acquiring savings institution or savings and loan holding company is located or by a
holding company that controls such a state chartered association.
In evaluating applications by holding companies to acquire savings associations, the FRB must consider issues such as
the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance fund, the convenience and needs of the community and competitive factors.
Savings and loan holding companies have not historically been subjected to consolidated regulatory capital requirements.
The Dodd-Frank Act, however, required the FRB to promulgate consolidated capital requirements for depository institution holding
companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to their
subsidiary depository institutions. Instruments such as cumulative preferred stock and trust-preferred securities, which were
previously includable within Tier 1 capital by bank holding companies within certain limits, are no longer be includable as Tier
1 capital, subject to certain grandfathering. The previously discussed final rule regarding regulatory capital requirements
implemented the Dodd-Frank Act as to savings and loan holding companies. However, pursuant to subsequent legislation, the
FRB extended the applicability of the “Small Bank Holding Company” exception of its consolidated capital requirements to
savings and loan holding companies and increased the threshold for the exception to $1.0 billion, effective May 15, 2015. As a
result, savings and loan holding companies with less than $1.0 billion in consolidated assets are not subject to the capital
requirements unless otherwise advised by the FRB. Additional subsequent legislation directed the Federal Reserve Board to
expand the applicability of the exception to holding companies up to $3.0 billion in consolidated assets; that change was effective
in August 2018.
The Dodd-Frank Act extends the “source of strength” doctrine to savings and loan holding companies. The FRB
promulgated regulations implementing the “source of strength” policy that requires holding companies act as a source of strength
to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
The FRB has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock
by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the policy
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provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the
holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory
guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the
company’s net income for the past four quarters, net of dividends’ previously paid over that period, is insufficient to fully fund
the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall
financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes
undercapitalized. The policy statement also provides for regulatory consultation prior to a holding company redeeming or
repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses or redeeming or
repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount
of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred.
These regulatory policies could affect the ability of the Company to pay dividends, repurchase shares of common stock or otherwise
engage in capital distributions.
Federal Securities Laws
The Company is subject to the periodic reporting, proxy solicitation, tender offer, insider trading restrictions and other
requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Delaware Corporation Law
The Company is incorporated under the laws of the State of Delaware. Thus, it is subject to regulation by the State of
Delaware and the rights of its shareholders are governed by the General Corporation Law of the State of Delaware.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank currently file consolidated federal income tax returns, report their income for tax
return purposes on the basis of a taxable year ending March 31st, using the accrual method of accounting and are subject to federal
income taxation in the same manner as other corporations with some exceptions, including in particular the Bank's tax reserve for
bad debts. The bank has a subsidiary which files a REIT tax return which reports its income for tax purposes on the basis of a
taxable year ending December 31st. The REIT does not join in the consolidated return and it pays tax on its undistributed taxable
income. The REIT has and intends to continue to distribute its taxable income and therefore not pay tax at the REIT level. The
following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the
tax rules applicable to the Bank or the Company.
Distributions. To the extent that the Bank makes “non-dividend distributions” to shareholders, such distributions will be
considered to result in distributions from the Bank's “base year reserve,” i.e., its reserve as of March 31, 1988, to the extent thereof
and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in the
Bank's taxable income. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings
and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out
of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not constitute non-
dividend distributions and, therefore, will not be included in the Bank's taxable income.
The amount of additional taxable income created from a non-dividend distribution is an amount that, when reduced by
the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately 1.2 times the non-dividend
distribution would be includable in gross income for federal income tax purposes, assuming a 21% federal corporate income tax
rate.
In December 2017, "The Tax Cuts and Jobs Act" was signed into law. At March 31, 2018, the Company made a reasonable
estimate and recorded a remeasurement of the Company’s net deferred income tax assets and liabilities based on the new reduced
U.S. corporate income tax rate. The impact on the net deferred tax asset before valuation allowances was a reduction of $3.1
million, which was offset by a corresponding decrease in the valuation allowance of the same amount. The Company recorded a
benefit of $0.3 million for alternative minimum tax credits which, under the new tax law, are refundable. As of March 31, 2019,
the valuation allowance was reduced by $170 thousand, the amount of the AMT credits.
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State and Local Taxation
State of New York. The Bank and the Company (including the REIT) file tax returns on a combined basis and are subject
to New York State franchise tax on their entire net income or one of several alternative bases, whichever results in the highest
tax. “Entire net income” means federal taxable income with adjustments. If, however, the application of an alternative tax (based
on taxable net assets allocated to New York or a fixed minimum fee) results in a greater tax, the alternative tax will be imposed. The
Company was subject to tax based upon capital for New York State for fiscal 2019. In addition, New York State imposes a tax
surcharge of 28% of the New York State Franchise Tax allocable to business activities carried on in the Metropolitan Commuter
Transportation District. For fiscal 2019, the New York State franchise tax rate computed on capital was 0.075%.
On March 31, 2014, New York State tax legislation was signed into law in connection with the approval of the New York
State 2014-2015 budget. Portions of the new legislation resulted in significant changes in the calculation of income taxes imposed
on banks and thrifts operating in New York State, including changes to (1) future period New York State tax rates, (2) rules related
to sourcing of revenue for New York State tax purposes and (3) the New York State taxation of entities within one corporate
structure, among other provisions. In recent years, the Company has been subject to taxation based upon assets in New York State.
The new legislation revised that method to a measurement based on net assets.
New York City. The Bank and the Company (including the REIT) file on a combined basis and are also subject to a
similarly calculated New York City banking corporation tax on assets allocated to New York City. For fiscal 2019, the New York
City banking corporation tax rate computed on capital is 0.15%. On April 13, 2015, New York State legislation was signed
changing the New York City tax law to conform to the New York State law that was adopted in 2014, with some minor differences.
As a result of the impact of the 2014 legislation effecting both the New York State and New York City tax law, there was
a decrease to the Company's gross deferred tax asset of $1.2 million in fiscal 2015 with no impact to current income due to the
full valuation allowance.
Delaware Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempted from
Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware.
ITEM 1A. RISK FACTORS.
The following is a summary of risk factors relevant to the Company's operations which should be carefully
reviewed. These risk factors do not necessarily appear in the order of importance.
Changes in interest rates may adversely affect our profitability and financial condition.
We derive our income mainly from the difference or “spread” between the interest earned on loans, securities and other
interest-earning assets and interest paid on deposits, borrowings and other interest-bearing liabilities. In general, the larger the
spread, the more we earn. When market rates of interest change, the interest we receive on our assets and the interest we pay on
our liabilities will fluctuate. This can cause decreases in our spread and can adversely affect our income. From an interest rate
risk perspective, we have generally been liability sensitive, which indicates that liabilities generally re-price faster than assets.
In response to improving economic conditions, the FRB’s Open Market Committee has slowly increased its federal funds
rate target from a range of 0.00% - 0.25% that was in effect for several years to the current target range of 2.25% - 2.50% that was
in effect at March 31, 2019. Given our liability sensitivity, our net interest rate spread and net interest margin are at risk of being
reduced due to potential increases in our cost of funds that may outpace any increases in our yield on interest-earning assets.
Interest rates also affect how much money we lend. For example, when interest rates rise, the cost of borrowing increases
and loan originations tend to decrease. In addition, changes in interest rates can affect the average life of loans and securities. For
example, a reduction in interest rates generally results in increased prepayments of loans and mortgage-backed securities, as
borrowers refinance their debt in order to reduce their borrowing cost. This causes reinvestment risk, because we generally are
not able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities in a declining
rate environment.
Changes in market interest rates also impact the value of our interest-earning assets and interest-bearing liabilities. In
particular, the unrealized gains and losses on securities available for sale are reported, net of taxes, as accumulated other
comprehensive income which is a component of stockholders’ equity. Consequently, declines in the fair value of these instruments
resulting from changes in market interest rates may adversely affect stockholders’ equity.
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Changes to LIBOR may adversely impact the interest rate paid on our subordinated notes, and may also impact some of
our assets.
On July 27, 2017, the U.K Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade
or compel banks to submit rates for the calculation of LIBOR to the LIBOR administrator after 2021. The announcement also
indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this
time, it is not possible to predict whether and to what extent banks will continue to provide LIBOR submissions to the LIBOR
administrator or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Similarly, it is
not possible to predict whether LIBOR will continue to be viewed as an acceptable benchmark for certain loans and liabilities
including our subordinated notes, what rate or rates may become accepted alternatives to LIBOR or the effect of any such changes
in views or alternatives on the values of the loans and liabilities, whose interest rates are tied to LIBOR.
Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of
LIBOR, or other reforms may adversely affect the value of, and the return on our loans, and our subordinated notes.
Our loan portfolio exhibits a high degree of risk.
We have a significant amount of commercial real estate loans that have a higher risk of default and loss than single-family
residential mortgage loans. Commercial real estate loans amount to $130.8 million, or 30.7% of our loan portfolio at March 31,
2019. Commercial real estate loans generally are considered to involve a higher degree of risk due to a variety of factors, including
generally larger loan balances and loan terms which often do not require full amortization of the loan over its term and, instead,
provide for a balloon payment at the stated maturity date. Repayment of commercial real estate loans generally is dependent on
income being generated by the rental property or underlying business in amounts sufficient to cover operating expenses and debt
service. Failure to adequately underwrite and monitor these loans may result in significant losses to Carver Federal.
Failure to comply with the Formal Agreement could adversely affect our business, financial condition and operating results.
In May 2016, the Bank entered into a Formal Agreement with the OCC. The Formal Agreement requires the Bank to
reduce its concentration of commercial real estate and requires that the Bank undertake several actions to improve compliance
matters and overall profitability. Failure to comply with the Formal Agreement could result in additional supervisory and
enforcement actions against the Bank, its directors, or senior executive officers, including the issuance of a cease and desist order
or the imposition of civil money penalties. The Bank's compliance efforts may have an adverse impact on its non-interest expense
and net income.
Carver is subject to more stringent capital requirements, which may adversely impact the Company's return on equity,
or constrain it from paying dividends or repurchasing shares.
In July 2013, the FDIC and the FRB approved a new rule that substantially amended the regulatory risk-based capital
rules applicable to the Bank and the Company. The final rule implements the “Basel III” regulatory capital reforms and changes
required by the Dodd-Frank Act.
The final rule includes new minimum risk-based capital and leverage ratios, which became effective for the Bank and
the Company on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios.
The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets
capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage
ratio of 4%. The final rule also established a “capital conservation buffer” of 2.5%, and the following minimum ratios: (i) a
common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of
10.5%. The new capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted
assets and increased each year until fully implemented in January 2019. An institution will be subject to limitations on paying
dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These
limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.
There can be no assurance that our regulator will approve payment of our deferred interest on our outstanding trust
preferred securities.
Carver is a unitary savings and loan association holding company regulated by the FRB and almost all of its operating
assets are owned by Carver Federal. Carver relies primarily on dividends from the Bank to pay cash dividends to its stockholders,
27
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 the Bank to the Company, and the FRB regulates dividends paid by the
Company. 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 the Bank’s failure to
meet the OCC minimum capital requirements. In accordance with the Agreement, the Bank is currently prohibited from paying
any dividends without prior OCC approval, and, as such, has suspended its regular quarterly cash dividend to the Company. There
are no assurances that dividend payments to the Company will resume.
Debenture interest payments on the Carver Statutory Trust I capital securities have been deferred, which is permissible
under the terms of the Indenture for up to twenty consecutive quarterly periods, as the Company is prohibited from making payments
without prior approval from the Federal Reserve Bank. 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 beginning with the December 2016 payment have been deferred.
Carver's results of operations may be adversely affected by loan repurchases from U.S. Government Sponsored entities
(“GSE's”).
In connection with the sale of loans, Carver as the loan originator is required to make a variety of representations and
warranties regarding the originator and the loans that are being sold. If a loan does not comply with the representations and
warranties, Carver may be obligated to repurchase the loans, and in doing so, incur any loss directly. Prior to December 31, 2009,
the Bank originated and sold loans to the FNMA. During fiscal years 2012 through 2015, the Bank has been obligated to repurchase
20 loans previously sold to FNMA. The Bank has not received any repurchase requests for these loans since the second quarter
of fiscal year 2015. There is no assurance that the Bank will not be required to repurchase additional loans in the future. Accordingly,
any repurchase obligations to FNMA could materially and adversely affect the Bank's results of operations and earnings in the
future.
Carver's results of operations are affected by economic conditions in the New York metropolitan area.
At March 31, 2019, a significant majority of the Bank's lending portfolio was concentrated in the New York metropolitan
area. As a result of this geographic concentration, Carver's results of operations are largely dependent on economic conditions in
this area. Decreases in real estate values could adversely affect the value of property used as collateral for loans to our
borrowers. Adverse changes in the economy caused by inflation, recession, unemployment, state or local real estate laws and
regulations or other factors beyond the Bank's control may also continue to have a negative effect on the ability of borrowers to
make timely mortgage or business loan payments, which would have an adverse impact on earnings. Consequently, deterioration
in economic conditions in the New York metropolitan area could have a material adverse impact on the quality of the Bank's loan
portfolio, which could result in increased delinquencies, decreased interest income results as well as an adverse impact on loan
loss experience with probable increased allowance for loan losses. Such deterioration also could adversely impact the demand
for products and services, and, accordingly, further negatively affect results of operations.
The soundness of other financial institutions could negatively affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness
of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other
relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial
services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other
institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition,
our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient
to recover the full amount of the financial instrument exposure due us. There is no assurance that any such losses would not
materially and adversely affect our results of operations.
The allowance for loan losses could be insufficient to cover Carver's actual loan losses.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness
of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In
determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we
evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover losses
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inherent in our loan portfolio, resulting in additions to our allowance. Material additions to the allowance would materially decrease
net income.
In addition, the OCC periodically reviews the allowance for loan losses and may require us to increase our provision for
loan losses or recognize further loan charge-offs. A material increase in the allowance for loan losses or loan charge-offs as required
by the regulatory authorities would have a material adverse effect on the Company's financial condition and results of operations.
A new accounting standard will likely require us to increase our allowance for loan losses and may have a material adverse
effect on our financial condition and results of operations.
The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for the Company
for our first fiscal year after December 15, 2019. This standard, referred to as Current Expected Credit Loss (“CECL”) will require
financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit
losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable,
which would likely require us to increase our allowance for loan losses, and to increase the types of data we would need to collect
and review to determine the appropriate level of the allowance for loan losses. Any increase in our allowance for loan losses or
expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our
financial condition and results of operations.
Strong competition within the Bank's market areas could adversely affect profits and slow growth.
The New York metropolitan area has a high density of financial institutions, of which many are significantly larger than
Carver Federal and with greater financial resources. Additionally, various large out-of-state financial institutions may continue
to enter the New York metropolitan area market. All are considered competitors to varying degrees.
Carver Federal faces intense competition both in making loans and attracting deposits. Competition for loans, both locally
and in the aggregate, comes principally from mortgage banking companies, commercial banks, savings banks and savings and
loan associations. Most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations
and credit unions. The Bank also faces competition for deposits from money market mutual funds and other corporate and
government securities funds, as well as from other financial intermediaries, such as brokerage firms and insurance
companies. Market area competition is a factor in pricing the Bank's loans and deposits, which could reduce net interest
income. Competition also makes it more challenging to effectively grow loan and deposit balances. The Company's profitability
depends upon its continued ability to successfully compete in its market areas.
Failure to maintain effective systems of internal and disclosure controls could have a material adverse effect on the
Company’s results of operation and financial condition.
Effective internal and disclosure controls are necessary for the Company to provide reliable financial reports and
effectively prevent fraud, and to operate successfully as a public company. If the Company cannot provide reliable financial
reports or prevent fraud, its reputation and operating results would be harmed. As part of the Company’s ongoing monitoring of
internal controls, it may discover material weaknesses or significant deficiencies in its internal controls that require remediation.
A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented
or detected on a timely basis.
The Company continually works on improving its internal controls. However, the Company cannot be certain that these
measures will ensure that it implements and maintains adequate controls over its financial processes and reporting. Any failure
to maintain effective controls or to timely implement any necessary improvement of the Company’s internal and disclosure controls
could, among other things, result in losses from fraud or error, harm the Company’s reputation, or cause investors to lose confidence
in the Company’s reported financial information, all of which could have a material adverse effect on the Company’s results of
operation and financial condition.
The Company and the Bank operate in a highly regulated industry, which limits the manner and scope of business activities.
Carver Federal is subject to extensive supervision, regulation and examination by the OCC, as the Bank's chartering
authority and, to a lesser extent, by the FDIC, as insurer of its deposits. The Company is subject to extensive supervision, regulation
and examination by the FRB, as regulator of the holding company. As a result, Carver Federal and the Company are limited in
the manner in which Carver Federal and the Company conducts its business, undertakes new investments and activities and obtains
financing. This regulatory structure is designed primarily for the protection of the deposit insurance funds and depositors, and not
29
to benefit the Company's stockholders. This regulatory structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination policies, including policies with respect to capital
levels, the timing and amount of dividend payments, the classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. In addition, Carver Federal must comply with significant anti-money laundering and anti-terrorism laws.
Government agencies have substantial discretion to impose significant monetary penalties on institutions which fail to comply
with these laws.
The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation
and so-called “golden parachute” payments. It also provides that the listing standards of the national securities exchanges shall
require listed companies to implement and disclose “clawback” policies mandating the recovery of incentive compensation paid
to executive officers in connection with accounting restatements. The legislation also directs the FRB to promulgate rules
prohibiting excessive compensation paid to bank holding company executives.
The Financial Accounting Standards Board, the SEC and other regulatory entities, periodically change the financial
accounting and reporting guidance that governs the preparation of the Company's consolidated financial statements. These changes
can be difficult to predict and can materially impact how the Company records and reports its financial condition and results of
operations. In some cases, the Company could be required to apply new or revised guidance retroactively.
Restrictions on the Company and the Bank stemming from the Treasury's equity interest in the Company may have a
material effect on results of operations.
On January 20, 2009, the Company became a TARP CPP participant by completing the sale of $18.98 million in preferred
stock to the Treasury. As a participant, among other things, the Company must adopt the Treasury's standards for executive
compensation and corporate governance for the period during which the Treasury holds equity issued under this program. These
standards would generally apply to the Company's CEO, CFO and the three next most highly compensated officers (“Senior
Executive”). The standards include (1) ensuring that incentive compensation for Senior Executives does not encourage unnecessary
and excessive risks that threaten the value of the financial institution; (2) required claw-back of any bonus or incentive compensation
paid to a Senior Executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate;
(3) prohibition on making golden parachute payments to Senior Executives; and (4) agreement not to deduct for tax purposes
executive compensation in excess of $500,000 for each Senior Executive. In particular, the change to the deductibility limit on
executive compensation would likely increase slightly the overall cost of the Company's compensation programs. the Company
also had to adopt certain monitoring and reporting processes.
On August 27, 2010, the Company redeemed the preferred stock and issued $18.98 million in Series B preferred stock
in connection with the Company's changing its participation from TARP CPP to TARP CDCI. On October 25, 2011 Carver's
shareholders approved the conversion of TARP CDCI Series B preferred stock to common stock. On October 28, 2011, the Treasury
converted the CDCI Series B preferred stock to Carver common stock. Under the terms of the agreement between the Treasury
and the Company, the Company agreed that so long as the Treasury has an equity interest in the Company, it will continue to be
bound by all of the current restrictions and requirements that the Treasury may choose to implement. The Company is unable to
determine the impact that future restrictions and/or requirements resulting from the Treasury's ownership interest may have on
the Company's results of operations.
The Company is subject to certain risks with respect to liquidity.
Liquidity refers to the Company's ability to generate sufficient cash flows to support its operations and to fulfill its
obligations, including commitments to originate loans, to repay wholesale borrowings and other liabilities, and to satisfy the
withdrawal of deposits by its customers.
The Company's primary sources of liquidity are the cash flows generated through the repayment of loans and securities,
cash flows from the sale of loans and securities, deposits gathered organically through the Bank's branch network, from socially
motivated depositors, city and state agencies and deposit brokers and borrowed funds, primarily in the form of wholesale borrowings
from the FHLB-NY. In addition, and depending on current market conditions, the Company has the ability to access the capital
markets from time to time.
Deposit flows, calls of investment securities and wholesale borrowings, and prepayments of loans and mortgage-related
securities are strongly influenced by such external factors as the direction of interest rates, whether actual or perceived, local and
national economic conditions and competition for deposits and loans in the markets the Bank serves. Furthermore, changes to the
FHLB-NY's underwriting guidelines for wholesale borrowings may limit or restrict the Bank's ability to borrow, and could therefore
have a significant adverse impact on liquidity.
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A decline in available funding could adversely impact the Bank's ability to originate loans, invest in securities, and meet
expenses, or to fulfill such obligations as repaying borrowings or meeting deposit withdrawal demands.
Carver may not be able to utilize its income tax benefits.
The Company's ability to utilize the deferred tax asset generated by New Markets Tax Credit income tax benefits as well
as other deferred tax assets depends on its ability to meet the NMTC compliance requirements and its ability to generate sufficient
taxable income from operations in the future. Since the Bank has not generated sufficient taxable income to utilize tax credits as
they were earned, a deferred tax asset has been recorded in the Company's financial statements. For additional information
regarding Carver's NMTC, refer to Item 7, "Variable Interest Entities."
The future recognition of Carver's deferred tax asset is highly dependent upon Carver's ability to generate sufficient
taxable income. A valuation allowance is required to be maintained for any deferred tax assets that we estimate are more likely
than not to be unrealizable, based on available evidence at the time the estimate is made. In assessing Carver's need for a valuation
allowance, we rely upon estimates of future taxable income. Although we use the best available information to estimate future
taxable income, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances
influencing our projections. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, statutory
rates, and future taxable income levels. The Company determined that it would not be able to realize all of its net deferred tax
assets in the future, as such a charge to income tax expense in the second quarter of fiscal 2011 was made. Conversely, if the
Company were to determine that it would be able to realize its deferred tax assets in the future in excess of the net carrying amounts,
the Company would decrease the recorded valuation allowance through a decrease in income tax expense in the period in which
that determination was made.
On June 29, 2011, the Company raised $55 million of equity. 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 carry
forwards, general business credits, and recognized built-in losses upon a change in ownership. The Company is subject to an
annual limitation of approximately $0.9 million. The Company has a net deferred tax asset (“DTA”) of approximately $24.1
million. Based on management's calculations, the Section 382 limitation has resulted in previous reductions of the deferred tax
asset of $5.8 million. The Company also continues to maintain a valuation allowance for the remaining net deferred tax asset of
$23.9 million. The Company is unable to determine how much, if any, of the remaining DTA will be utilized.
Risks Associated with Cyber-Security Could Negatively Affect Our Earnings.
The financial services industry has experienced an increase in both the number and severity of reported cyber attacks aimed
at gaining unauthorized access to bank systems as a way to misappropriate assets and sensitive information, corrupt and destroy
data, or cause operational disruptions
We have established policies and procedures to prevent or limit the impact of security breaches, but such events may still
occur or may not be adequately addressed if they do occur. Although we rely on security safeguards to secure our data, these
safeguards may not fully protect our systems from compromises or breaches.
We also rely on the integrity and security of a variety of third party processors, payment, clearing and settlement systems,
as well as the various participants involved in these systems, many of which have no direct relationship with us. Failure by these
participants or their systems to protect our customers' transaction data may put us at risk for possible losses due to fraud or
operational disruption.
Our customers are also the target of cyber attacks and identity theft. Large scale identity theft could result in customers'
accounts being compromised and fraudulent activities being performed in their name. We have implemented certain safeguards
against these types of activities but they may not fully protect us from fraudulent financial losses.
The occurrence of a breach of security involving our customers' information, regardless of its origin, could damage our
reputation and result in a loss of customers and business and subject us to additional regulatory scrutiny, and could expose us to
litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and
results of operations.
System failure or breaches of Carver’s network security could subject it to increased operating costs as well as litigation
and other liabilities.
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The computer systems and network infrastructure Carver and its third-party service providers use could be vulnerable to
unforeseen problems. Carver’s operations are dependent upon its ability to protect its computer equipment against damage from
physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial
of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an
interruption in Carver’s operations could have a material adverse effect on its financial condition and results of operations. Computer
break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through
Carver’s computer systems and network infrastructure, which may result in significant liability to Carver and may cause existing
and potential customers to refrain from doing business with Carver. Although Carver, with the help of third-party service providers,
intends to continue to implement security technology and establish operational procedures designed to prevent such damage, its
security measures may not be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography
or other developments could result in a compromise or breach of the algorithms Carver and its third-party service providers use
to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on
Carver’s financial condition and results of operations.
It is possible that a significant amount of time and money may be spent to rectify the harm caused by a breach or hack.
While Carver has general liability insurance, there are limitations on coverage as well as dollar amount. Furthermore, cyber
incidents carry a greater risk of injury to Carver’s reputation. Finally, depending on the type of incident, banking regulators can
impose restrictions on Carver’s business and consumer laws may require reimbursement of customer loss.
The Company's business could suffer if it fails to retain skilled people.
The Company's success depends on its ability to attract and retain key employees reflecting current market opportunities
and challenges. Competition for the best people is intense, and the Company's size and limited resources may present additional
challenges in being able to retain the best possible employees, which could adversely affect the results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
ITEM 2.
PROPERTIES.
The Bank currently conducts its business through one administrative office and eight branches (including the Harlem
West 125th Street Main branch) and three separate ATM locations. During fiscal year 2018, the Bank entered into a sale and
leaseback transaction of its Harlem headquarters location. The Bank leased a portion of the property to continue to maintain its
Main Office branch at the same location, and the administrative offices were relocated to a nearby facility. The following table
sets forth certain information regarding Carver Federal's offices and other material properties at March 31, 2019. The Bank believes
that such facilities are suitable and adequate for its operational needs.
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Branches
Main Branch
Address
75 West 125th Street
City/State
New York, NY
Crown Heights Branch
1009-1015 Nostrand Avenue
Brooklyn, NY
St. Albans Branch
115-02 Merrick Boulevard
Jamaica, NY
Malcolm X Blvd. Branch
142 Malcolm X Boulevard
Atlantic Terminal Branch
4 Hanson Place
300 West 145th Street
833 Flatbush Avenue
1392 Fulton Street
New York, NY
Brooklyn, NY
New York, NY
Brooklyn, NY
Brooklyn, NY
Year
Opened
Owned or
Leased
1996
1975
1996
2001
2003
2004
2009
2009
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Lease
Expiration
Date
2/2028
12/2025
2/2021
4/2021
4/2024
1/2020
8/2022
10/2023
1950 Fulton Street
Brooklyn, NY
2005
Leased
1/2020
Bradhurst Branch
Flatbush Branch
Restoration Plaza
ATM Centers
Fulton Street
ATM Machines
Atlantic Terminal Mall
139 Flatbush Avenue
Atlantic Center
625 Atlantic Avenue
Brooklyn, NY
Brooklyn, NY
2004
2006
Leased
Leased
4/2024
3/2020
Administrative Office
1825 Park Avenue
1825 Park Avenue
New York, NY
2018
Leased
12/2028
ITEM 3.
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 March 31, 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 4. MINE SAFETY DISCLOSURES.
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
The Company's common stock was transferred from The Nasdaq Global Market to The Nasdaq Capital Market effective
December 2, 2011. The stock had been listed on the Nasdaq Global Market under the symbol “CARV” since July 10, 2008. At
March 31, 2019, there were 3,698,784 shares of common stock outstanding, held by 591 stockholders of record. The following
table shows the high and low per share sales prices of the common stock and the dividends declared for the quarters indicated.
High
Low
Dividend
High
Low
Dividend
Fiscal Year 2019
June 30, 2018
September 30, 2018
December 31, 2018
March 31, 2019
$
$
$
$
11.94
7.50
6.67
6.05
$
$
$
$
2.51
3.40
2.62
2.93
$
$
$
$
Fiscal Year 2018
June 30, 2017
September 30, 2017
December 31, 2017
March 31, 2018
—
—
—
—
$
$
$
$
6.61
3.45
7.95
4.01
$
$
$
$
3.11
2.12
2.01
2.40
$
$
$
$
—
—
—
—
33
As previously disclosed in a Current Report on Form 8-K filed with the SEC on October 29, 2010, the Company’s Board
of Directors announced that, based on highly uncertain economic conditions and the desire to preserve capital, Carver suspended
payment of the quarterly cash dividend on its common stock.
Under OCC regulations, the Bank will not be permitted to pay dividends to the Company on its capital stock if its regulatory
capital would be reduced below applicable regulatory capital requirements or if its stockholders' equity would be reduced below
the amount required to be maintained for the liquidation account, which was established in connection with the Bank's conversion
to stock form. The OCC capital distribution regulations applicable to savings institutions (such as the Bank) that meet their
regulatory capital requirements permit, after not less than 30 days prior notice to and non-objection by the FRB, capital distributions
during a calendar year that do not exceed the Bank's net income for that year plus its retained net income for the prior two years.
For information concerning the Bank's liquidation account, see Note 11 of the Notes to the Consolidated Financial Statements.
In addition, the Company is subject to restrictions under the Agreement that affect their ability to pay dividends. See Item 1 -
Overview - Enforcement Actions.
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 March 31, 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 intends to use repurchased shares to fund its stock-based benefit and compensation plans and for any other
purpose the Board deems advisable in compliance with applicable law. No shares were repurchased during fiscal 2019. As a
result of the Company's participation in the TARP CDCI, the Treasury's prior approval is required to make further repurchases.
As discussed below, the Treasury converted its preferred stock into common stock, which the Treasury continues to hold. The
Company continues to be bound by the TARP CDCI restrictions so long as the Treasury is a common stockholder.
Carver has the following equity compensation plans:
(1) The 2006 Stock Incentive Plan became effective in September of 2006 and provides for discretionary option grants,
stock appreciation rights and restricted stock to those employees and directors so selected by the Compensation Committee.
(2) The Carver Bancorp, Inc. 2014 Equity Incentive Plan became effective in September 2014 and provides for
discretionary option grants, stock appreciation rights and restricted stock to those officers and directors selected by the Company’s
Compensation Committee.
Additional information regarding Carver's equity compensation plans is incorporated by reference from the section entitled
"Securities Authorized for Issuance Under Equity Compensation Plans" in the Proxy Statement (as defined below in Item 10).
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
See Item 1 - Overview - Recapitalization - Transactions. As previously disclosed in a Current Report on Form 8-K, on
June 29, 2011, the Company entered into stock purchase agreements with several institutional investors pursuant to which the
investors agreed to purchase an aggregate of 55,000 shares of the Company's Mandatorily Convertible Non-Voting
Participating Preferred Stock, Series C for an aggregate purchase price of $55,000,000. The Series C preferred stock was
offered and sold pursuant to an exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On October 25, 2011, Carver's shareholders voted and approved a 1-for-15 reverse stock split. A separate vote of
stockholder approval was given to convert the Series C preferred stock into Series D preferred stock and common stock and
exchange the Treasury CDCI Series B preferred stock for common stock.
On October 28, 2011, the Treasury exchanged the CDCI Series B preferred stock for Carver common stock.
ITEM 6.
SELECTED FINANCIAL DATA.
The following selected consolidated financial and other data is as of and for the years ended March 31 and is derived in
part from, and should be read in conjunction with the Company's Consolidated Financial Statements and related notes:
34
$ in thousands
Selected Financial Condition Data:
Assets
Loans held-for-sale
Total loans receivable, net
Investment securities
Cash and cash equivalents
Deposits
Advances from the FHLB-NY and other borrowed money
Equity
Number of deposit accounts
Number of branches
Operating Data:
Interest income
Interest expense
Net interest income before provision for (recovery of) loan losses
(Recovery of) provision for loan losses
Net interest income after (recovery of) provision for loan losses
Non-interest income
Non-interest expense
(Loss) income before income tax (benefit) expense
Income tax expense (benefit)
Loss attributable to non-controlling interest
Net (loss) income attributable to Carver Bancorp, Inc.
Basic (loss) earnings per common share
Diluted (loss) earnings per common share
Selected Statistical Data:
Return on average assets (1)
Return on average stockholders' equity (2) (10)
Return on average stockholders' equity, excluding AOCI (2) (10)
Net interest margin (3)
Average interest rate spread (4)
Efficiency ratio (5) (10)
Operating expense to average assets (6)
Average stockholders' equity to average assets (7) (10)
Average stockholders' equity, excluding AOCI, to average assets (7) (10)
Dividend payout ratio (8)
2019
2018
2017
2016
2015
$ 563,713
$ 693,910
$687,861
$739,054
$ 674,632
—
—
944
2,436
424,182
472,627
540,492
583,396
91,436
31,228
480,196
21,403
47,136
31,447
8
23,230
6,141
17,089
(270)
17,359
4,858
28,020
(5,803)
133
—
(5,936)
(1.60)
(1.60)
72,784
134,558
586,883
38,403
51,971
31,972
9
24,359
5,280
19,079
135
18,944
14,359
27,982
5,321
(33)
—
5,354
0.58
0.58
72,446
58,686
71,491
63,188
579,176
606,741
49,403
47,398
34,582
9
26,126
4,918
21,208
29
21,179
4,618
28,531
68,403
51,880
47,565
9
26,564
4,605
21,959
1,495
20,464
6,014
28,117
2,665
479,334
112,126
50,824
527,761
83,403
52,908
45,780
10
22,450
3,988
18,462
(2,842)
21,304
5,304
27,875
(2,734)
(1,639)
(1,267)
119
—
128
—
(2,853)
(1,767)
(0.77)
(0.77)
(0.48)
(0.48)
166
(281)
(1,152)
(0.31)
(0.31)
(0.96)%
(12.93)%
(12.31)%
2.80 %
2.57 %
0.81%
10.15%
9.82%
2.94%
2.79%
(0.41)%
(5.88)%
(5.78)%
3.11 %
2.97 %
(0.25)%
(3.46)%
(3.39)%
3.17 %
3.07 %
(0.18)%
(2.21)%
(2.11)%
3.05 %
2.92 %
127.67 %
83.68%
110.47 %
100.51 %
117.29 %
4.52 %
7.41 %
7.79 %
—
4.23%
7.97%
8.23%
—
4.09 %
6.96 %
7.07 %
—
3.92 %
7.11 %
7.27 %
—
2.35 %
2.37 %
0.89 %
4.46 %
8.33 %
8.74 %
—
2.28 %
1.74 %
0.92 %
1.13%
1.90 %
Asset Quality Ratios:
Non-performing assets to total assets (9)
Non-performing loans to total loans receivable (9)
Allowance for loan losses to total loans receivable
(1) Net income (loss) divided by average total assets.
(2) Net income (loss) divided by average total stockholders' equity.
(3) Net interest income divided by average interest-earning assets.
(4) Combined weighted average interest rate earned less combined weighted average interest rate cost.
(5) Operating expense divided by sum of net interest income and non-interest income.
(6) Non-interest expense divided by average total assets.
(7) Average stockholders' equity divided by average assets for the period ended.
(8) Dividends paid to common stockholders as a percentage of net income available to common stockholders.
(9) Non-performing assets consist of nonaccrual loans, loans held-for-sale and real estate owned.
1.08 %
2.40 %
1.07%
1.39%
1.50 %
1.54 %
0.93 %
35
(10) See Non-GAAP Financial Measures disclosure below for comparable GAAP measures.
Non-GAAP Financial Measures
In addition to evaluating the Company's results of operations in accordance with U.S. generally accepted accounting
principles (“GAAP”), management routinely supplements their evaluation with an analysis of certain non-GAAP financial
measures, such as the return on average stockholders' equity excluding average accumulated other comprehensive income (loss)
("AOCI"), and average stockholders' equity excluding AOCI to average assets. Management believes these non-GAAP financial
measures provide information that is useful to investors in understanding the Company's underlying operating performance and
trends, and facilitates comparisons with the performance of other banks and thrifts. 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.
$ in thousands
Average Stockholders' Equity
Average Stockholders' Equity
Average AOCI
2019
2018
2017
2016
2015
$ 45,920
$
52,727
$ 48,533
$ 51,024
$ 52,073
(2,315)
(1,779)
(802)
(1,162)
(2,525)
Average Stockholders' Equity, excluding AOCI
$ 48,235
$
54,506
$ 49,335
$ 52,186
$ 54,598
Return on Average Stockholders' Equity
Return on Average Stockholders' Equity, excluding AOCI
(12.93)%
(12.31)%
10.15%
9.82%
(5.88)%
(5.78)%
(3.46)%
(3.39)%
(2.21)%
(2.11)%
Average Stockholders' Equity to Average Assets
Average Stockholders' Equity, excluding AOCI, to Average Assets
7.41 %
7.79 %
7.97%
8.23%
6.96 %
7.07 %
7.11 %
7.27 %
8.33 %
8.74 %
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial
Statements and Notes to Consolidated Financial Statements presented elsewhere in this report.
Executive Summary
Carver ended fiscal 2019 with a net loss of $5.9 million, compared to net income of $5.4 million for the prior year period.
The significant change in results of operations was primarily driven by lower non-interest income and net interest income in the
current year compared to the prior year. The prior year results included a $9.6 million gain recognized from the sale and leaseback
transaction on the Company's Harlem headquarters location. Net interest income was lower due to the decrease in the Bank's loan
portfolio as it reduced the concentration level of commercial real estate loans based on regulatory guidance. 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.
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, assessment of the recoverability of the deferred tax asset, and the fair value of
financial instruments 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
36
susceptible to significant changes in today's economic environment. Changes in these judgments, assumptions or estimates could
result in material differences in the Company's results of operations or financial condition.
Allowance for Loan and Lease Losses
The 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:
•
1-4 Family
• Multifamily
• Commercial Real Estate
• Construction
• 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 segments. In some segments, such as in its Commercial Real Estate, Multifamily
and Business segments, 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 may 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).
37
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.
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 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 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
38
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. During the fiscal year ended March 31, 2018, the Bank recognized an impairment
of less than $500 on a mortgage-backed security. The Bank does not have any other securities that are classified as having other-
than-temporary impairment in its investment portfolio at March 31, 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. On December 22, 2017, the
Tax Cuts and Jobs Act was signed into law, reducing the corporate income tax rate from a 35% maximum rate to 21% effective
January 1, 2018. Given that the Company has reserved all but $170 thousand of its deferred tax asset, there is minimal impact to
the financial statements.
On June 29, 2011, the Company raised $55 million of equity, 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 net deferred tax asset of $23.9 million
has been recorded. The valuation allowance was initially recorded during fiscal 2011, and has remained through March 31, 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, which at March 31, 2019, is the $170
thousand discussed above.
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.
Management monitors the Company's cumulative gap position, which is the difference between the sensitivity to rate
changes on the Company's interest-earning assets and interest-bearing liabilities. In addition, the Company uses various tools to
monitor and manage interest rate risk, such as a model that projects net interest income based on increasing or decreasing interest
rates.
Discussion of Market Risk-Interest Rate Sensitivity Analysis
As a financial institution, the Bank's primary component of market risk is interest rate volatility. Fluctuations in interest
rates will ultimately impact both the level of income and expense recorded on a large portion of the Bank's assets and liabilities,
and the market value of all interest-earning assets, other than those which are short-term in maturity. Since virtually all of the
Company's interest-bearing assets and liabilities are held by the Bank, most of the Company's interest rate risk exposure is retained
by the Bank. As a result, all significant interest rate risk management procedures are performed at the Bank. Based upon the
Bank's nature of operations, the Bank is not subject to foreign currency exchange or commodity price risk. The Bank does not
own any trading assets.
39
Carver Federal 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, Carver Federal 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, Carver Federal had a negative one-year gap
equal to 7.88% of total rate sensitive assets at March 31, 2019. As a result, Carver Federal's net interest income may be negatively
affected by rising interest rates and may be positively 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 Carver Federal as of March 31, 2019. 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 Bank'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:
<3 Mos.
3-12 Mos.
1-3 Yrs.
3-5 Yrs.
5-10 Yrs.
10+ Yrs.
Non-
Interest
Bearing
Total
$ in thousands
Rate Sensitive Assets:
Loans
Short-term investments
Long-term investments
Other assets
Total assets
$ 35,284
27,859
1,972
—
$ 65,115
Rate Sensitive Liabilities:
Interest-bearing non-maturity deposits $ 11,353
69,280
Term deposits
8,000
Borrowings
—
Other liabilities
Equity
—
$ 88,633
Total liabilities and equity
$ 61,433
—
10,274
—
$ 71,707
$ 24,829
65,721
—
—
—
$ 90,550
$137,639
—
27,563
—
$165,202
$ 81,499
—
20,391
—
$101,890
$ 60,545
—
20,977
—
$ 81,522
$ 44,997
—
7,477
—
$ 52,474
$
$
— $ 421,397
27,859
—
88,654
—
25,803
25,803
$ 563,713
25,803
$ 32,705
48,430
—
—
—
$ 81,135
$ 16,570
17,087
—
—
—
$ 33,657
$ 28,765
94
—
—
—
$ 28,859
$105,124
—
13,403
—
—
$118,527
$
60,201
—
—
15,015
47,136
$ 122,352
$ 279,547
200,612
21,403
15,015
47,136
$ 563,713
Interest sensitivity gap
$ (23,518)
$ (18,843)
$ 84,067
$ 68,233
$ 52,663
$ (66,053)
$ (96,549) $
Cumulative interest sensitivity gap
$ (23,518)
$ (42,361)
$ 41,706
$109,939
$162,602
$ 96,549
$
— $
Ratio of cumulative gap to total rate
sensitive assets
(4.37)%
(7.88)%
7.75%
20.44%
30.23%
17.95%
—
—
—
—
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
40
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 Carver Federal'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, 2019 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, 2019, is an analysis of the Bank'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 Bank's current capital position. The information set forth below relates
solely to the Bank. However, because virtually all of the Company's interest rate risk exposure lies at the Bank level, management
believes the table below also similarly reflects an analysis of the Company's interest rate risk.
$ in thousands
Economic Value of Equity
Change in Rate
$ Amount
$ Change
% Change
+400 bps
+300 bps
+200 bps
+100 bps
0 bps
-100 bps
-200 bps
97,300
96,300
94,400
90,300
82,400
68,700
46,700
14,900
13,900
12,000
7,900
(13,700)
(35,700)
18.1 %
16.9 %
14.6 %
9.6 %
(16.6)%
(43.3)%
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 Carver Federal'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 Carver Federal's net interest income and may differ from actual results.
Average Balance, Interest and Average Yields and Rates
The following table sets forth certain information relating to Carver Federal's average interest-earning assets and average
interest-bearing liabilities, and their related average yields and costs for the years ended March 31, 2019, 2018, and 2017. 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:
41
$ in thousands
Interest-Earning Assets:
Loans (1)
Mortgage-backed securities
Investment securities
Equity securities (2)
Other investments
Total interest-earning assets
Non-interest-earning assets
Total assets
Interest-Bearing Liabilities:
Deposits
Interest-bearing checking
Savings and clubs
Money market
Certificates of deposit
Mortgagors deposits
Total deposits
Borrowed money
Total interest-bearing
liabilities
Non-interest-bearing liabilities:
Demand deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities & equity
Net interest income
Average interest rate spread
Net interest margin
2019
2018
2017
Average
Balance
Interest
Average
Yield/
Cost
Average
Balance
Interest
Average
Yield/
Cost
Average
Balance
Interest
Average
Yield/
Cost
$19,470
1,265
1,078
42
1,375
23,230
$ 442,218
52,002
45,041
4,162
65,857
609,280
10,135
$ 619,415
4.40% $ 514,938
46,412
2.43%
14,592
2.39%
2,193
1.01%
70,885
2.09%
649,020
3.81%
12,916
$ 661,936
$21,917
970
344
109
1,019
24,359
4.26% $ 556,169
41,261
2.09%
17,333
2.36 %
2,564
4.97%
1.44%
65,448
682,775
3.76%
14,965
$ 697,740
$24,257
806
406
120
537
26,126
4.36%
1.95%
2.34 %
4.68 %
0.82%
3.82%
$ 25,159
100,838
98,061
250,260
2,142
476,460
17,521
$
30
265
466
4,427
44
5,232
909
0.12% $ 26,158
101,415
0.26%
111,674
0.48%
263,436
1.77%
2,323
2.05%
505,006
1.10%
39,973
5.19%
$
19
249
540
3,256
42
4,106
1,174
0.07% $ 34,287
0.25 %
97,555
146,984
0.48 %
245,792
1.24%
1.81%
2,253
526,871
0.81%
51,524
2.94%
$
48
261
875
2,437
40
3,661
1,257
0.14 %
0.27 %
0.60 %
0.99%
1.78 %
0.69%
2.44%
493,981
6,141
1.24%
544,979
5,280
0.97%
578,395
4,918
0.85%
59,525
19,989
573,495
45,920
$ 619,415
57,883
6,347
609,209
52,727
$ 661,936
56,407
14,405
649,207
48,533
$ 697,740
$17,089
$19,079
$21,208
2.57%
2.80%
2.79%
2.94%
2.97%
3.11%
Ratio of average interest-earning assets to
interest-bearing liabilities
123.34%
119.09%
118.05%
(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 Carver Federal's interest income and expense during the fiscal years ended
March 31, 2019, 2018, and 2017 (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.
42
$ in thousands
Interest-Earning Assets:
Loans
Mortgage-backed securities
Investment securities
Equity securities
Other investments
Total interest-earning assets
Interest-Bearing Liabilities:
Deposits
Interest-bearing checking
Savings and clubs
Money market savings
Certificates of deposit
Mortgagors deposits
Total deposits
Borrowed money
Total interest-bearing liabilities
2019 vs. 2018
Increase (Decrease) due to
Rate
Volume
Total
Volume
2018 vs. 2017
Increase (Decrease) due to
Rate
Total
$
(3,096) $
117
720
98
(71)
(2,232)
$
649
178
14
(165)
427
1,103
$
(2,447)
295
734
(67)
356
(1,129)
(1,796) $
101
(64)
(17)
46
(1,730)
(544) $
63
2
6
436
(37)
(2,340)
164
(62)
(11)
482
(1,767)
(1)
(1)
(66)
(163)
(3)
(234)
(659)
(893)
12
17
(8)
1,334
5
1,360
394
1,754
11
16
(74)
1,171
2
1,126
(265)
861
(11)
10
(210)
175
1
(35)
(282)
(317)
(18)
(22)
(125)
644
1
480
199
679
(29)
(12)
(335)
819
2
445
(83)
362
Net change in net interest income
$
(1,339) $
(651) $
(1,990)
$
(1,413) $
(716) $
(2,129)
Comparison of Financial Condition at March 31, 2019 and 2018
Assets
At March 31, 2019, total assets were $563.7 million, reflecting a decrease of $130.2 million, or 18.8%, from total assets
of $693.9 million at March 31, 2018. The reduction is primarily attributable to a decrease in cash and cash equivalents of $103.3
million and a $48.4 million decrease in the loan portfolio, net of the allowance for loan losses. This was partially offset by an
$18.7 million increase in the investment portfolio.
Total cash and cash equivalents decreased $103.3 million, or 76.8%, from $134.6 million at March 31, 2018 to $31.2
million at March 31, 2019, primarily due to the strategic management of intended deposit outflows during the period, as the decline
in loan demand no longer warranted the maintenance of certain higher cost time deposits. A $48.9 million decline in the loan
portfolio provided the additional funds required to repay a $25.0 million FHLB long-term borrowing and to produce a net increase
of $18.7 million in the investment portfolio.
Total investment securities increased $18.7 million, or 25.6%, to $91.4 million at March 31, 2019, compared to $72.8
million at March 31, 2018. The Bank invested $16.5 million into U.S. Treasury securities and $40.0 million into agency and
mortgage-backed securities in order to improve interest income and to diversify the Bank's available-for-sale investment portfolio.
In addition, the Bank redeemed its $9.2 million investment in a CRA mutual fund during the third quarter and generated $20
million in liquidity from the sale of two Treasuries and a mortgage-backed security during the fourth quarter.
Gross portfolio loans decreased $48.9 million, or 10.2%, to $428.8 million at March 31, 2019, compared to $477.8 million
at March 31, 2018, due primarily to attrition and payoffs of non-owner occupied commercial real estate mortgage loans. The Bank
has achieved its goal of reaching a concentration level of non-owner occupied commercial real estate mortgage loans commensurate
with its risk perspective.
Liabilities and Equity
Liabilities
Total liabilities decreased $125.4 million, or 19.5%, to $516.6 million at March 31, 2019, compared to $641.9 million at
March 31, 2018, as a result of the Bank's managed decline in deposits and the repayment of borrowed funds.
43
Deposits decreased $106.7 million, or 18.2%, to $480.2 million at March 31, 2019, compared to $586.9 million at
March 31, 2018, 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, balance
sheet management called for a lower level of deposits due to weaker loan demand.
Advances from the FHLB-NY and other borrowed money decreased $17.0 million, or 44.3%, to $21.4 million at March 31,
2019, compared to $38.4 million at March 31, 2018 as the Bank repaid a $25.0 million FHLB long-term borrowing that matured
on May 30, 2018. The Bank secured an $8.0 million FHLB overnight advance at March 31, 2019.
Equity
Total equity decreased $4.8 million, or 9.3%, to $47.1 million at March 31, 2019, compared to $52.0 million at March 31,
2018. The reduction was due to a net loss of $5.9 million for the fiscal year, partially offset by a decrease of $1.8 million in
unrealized losses on securities available-for-sale.
Comparison of Operating Results for the Years Ended March 31, 2019 and 2018
Net (Loss) Income
The Company reported a net loss of $5.9 million for fiscal year 2019, compared to net income of $5.4 million for the
prior year period. The change in our results was primarily driven by lower non-interest income and net interest income in the
current period compared to the prior year.
Net Interest Income
Net interest income decreased $2.0 million, or 10.4%, to $17.1 million for fiscal year 2019, compared to $19.1 million
for the prior year period. The decrease was due to a $1.1 million decrease in interest income and an $861 thousand increase in
interest expense for the period.
Interest income decreased $1.1 million, or 4.6%, to $23.2 million, compared to $24.4 million for the prior year period.
Interest income on loans decreased $2.4 million, comprised of a decrease of $3.1 million due to a decrease in average balances in
the current period of $72.7 million, which was partially offset by a current period increase of $649 thousand due to a 14 basis-
point improvement in the overall yield. The decrease in 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 year. The loss in loan interest income was
partially offset by increases in interest on securities due to new investment purchases, and interest on money market investments
attributed to interest earned on the Bank's interest-bearing accounts at the Federal Home Loan Bank and the Federal Reserve Bank.
Interest expense increased $861 thousand, or 16.3%, to $6.1 million compared to $5.3 million for the prior year period.
Interest expense on deposits increased $1.1 million, or 27.4%, primarily due to higher rates on certificates of deposits. Interest
expense on borrowings decreased from the prior fiscal year, due to a decrease in average borrowings during the current year-to-
date period.
Provision for Loan Losses
The Bank recorded a $270 thousand recovery of loan losses for fiscal year 2019, compared to a $135 thousand provision
for loan losses for the prior year period. For the year ended March 31, 2019, net charge-offs of $210 thousand were recognized,
compared to net charge-offs of $69 thousand in the prior year period. In fiscal year 2019, the Bank's recoveries on previously
charged off loans exceeded its chargeoffs to such an extent that additional provisions were not necessary. At March 31, 2019,
nonaccrual loans totaled $10.3 million, or 1.8% of total assets, compared to $6.7 million, or 1.0% of total assets at March 31,
2018. The ALLL was $4.6 million at March 31, 2019, which represents a ratio of the ALLL to nonaccrual loans of 45.1%, compared
to 76.9% at March 31, 2018. The ratio of the allowance for loan losses to total loans receivable was 1.08% at March 31, 2019,
compared to 1.07% at March 31, 2018.
Non-interest Income
Non-interest income for the twelve months ended March 31, 2019 decreased $9.5 million, or 66.2%, to $4.9 million
compared to $14.4 million in the prior year period. Non-interest income in the prior period included a $9.6 million gain recognized
on the sale and leaseback of the Bank's Harlem headquarters during fiscal year 2018. In addition, other non-interest income
decreased from the prior year due to the completion of NMTC projects.
44
Non-interest Expense
Non-interest expense remained relatively flat at $28.0 million, increasing $38 thousand, or 0.1%, compared to the prior
year period. Net occupancy expense increased $712 thousand as the Company began making lease payments on its Main Office
branch in conjunction with the sale/leaseback of its administrative headquarters in February 2018, in addition to one-time costs
associated with the move into its new administrative headquarters. Equipment and data processing costs increased $458 thousand
for the same reasons, as well as costs incurred for system upgrades and cybersecurity protection. The Company's employee
compensation and benefits expense decreased by $367 thousand in fiscal 2019 compared to the prior fiscal year.
Income Taxes
The Company did not have any federal income tax expense as of March 31, 2019. The Company utilized its federal
NOLs to offset its taxable income, but recorded a $174 thousand alternative minimum income tax expense for the fiscal year ended
March 31, 2018. A change in the tax legislation permitted the Company to record a deferred federal tax benefit related to its AMT
credit in the amount of $340 thousand at March 31, 2018. As of March 31, 2019, the valuation allowance was reduced by $170
thousand, the amount of the Company's AMT credits. State and local income tax expenses were $133 thousand for the fiscal years
ended March 31, 2019 and 2018.
Liquidity and Capital Resources
Liquidity is a measure of the Bank's ability to generate adequate cash to meet its financial obligations. The principal
cash requirements of a financial institution are to cover potential deposit outflows, fund increases in its loan and investment
portfolios and ongoing operating expenses. The Bank's primary sources of funds are deposits, borrowed funds and principal and
interest payments on loans, mortgage-backed securities and investment securities. While maturities and scheduled amortization
of loans, mortgage-backed securities and investment securities are predictable sources of funds, deposit flows and loan and
mortgage-backed securities prepayments are strongly influenced by changes in general interest rates, economic conditions and
competition. Carver Federal monitors its liquidity utilizing guidelines that are contained in a policy developed by its management
and approved by its Board of Directors. Carver Federal's several liquidity measurements are evaluated on a frequent basis. The
Bank was in compliance with this policy as of March 31, 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 decreased $17.0 million during fiscal year
2019 due to the repayment of a $25.0 million FHLB long-term borrowing that matured during the first quarter. At March 31,
2019, the Bank had $8.0 million in a FHLB-NY overnight borrowing with a weighted average rate of 2.66%. Due to the late filing
of Carver's 2016 Form 10-K, and the going concern language contained therein, the FHLB-NY notified Carver on July 1, 2016
that it would be restricting Carver's borrowings to 30-day terms. At March 31, 2019, based on available collateral held at the
FHLB-NY, Carver Federal had the ability to borrow from the FHLB-NY an additional $42.5 million on a secured basis, utilizing
mortgage-related loans and securities as collateral. The bank has the ability to pledge additional loans as collateral in order to
borrow up to 30% of its total assets.
The Bank's most liquid assets are cash and short-term investments. The level of these assets is dependent on the Bank's
operating, investing and financing activities during any given period. At March 31, 2019 and 2018, assets qualifying for short-
term liquidity, including cash and cash equivalents, totaled $31.2 million and $134.6 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 to
deposit outflows.
The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities.
During fiscal year 2019, total cash and cash equivalents decreased by $103.3 million to $31.2 million reflecting cash used in
financing activities of $123.7 million and cash used in operating activities of $8.8 million, offset by cash provided by investing
activities of $29.1 million.
45
Net cash used in financing activities of $123.7 million resulted from net decreases in deposits of $106.7 million and
repayment of the $25.0 million FHLB long-term borrowing that matured on May 30, 2018. 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 $29.1 million was primarily attributable to net loan principal repayments and proceeds received from securities sales
and redemption of the Bank's $9.2 million investment in a CRA mutual fund. This was partially offset by the purchase of investment
securities. Net cash used in operating activities totaled $8.8 million for the 2019 fiscal year.
Potential Mortgage Representation and Warranty Liabilities
During the period 2004 through 2009, the Bank originated 1-4 family residential mortgage loans and sold the loans to
the FNMA. The loans were sold to FNMA with the standard representations and warranties for loans sold to the GSE's. The Bank
may be required to repurchase these loans in the event of breaches of these representations and warranties. In the event of a
repurchase, the Bank is typically required to pay the unpaid principal balance as well as outstanding interest and fees. The Bank
then recovers the loan or, if the loan has been foreclosed, the underlying collateral. The Bank is exposed to any losses on repurchased
loans after giving effect to any recoveries on the collateral.
Through fiscal 2011, none of the loans sold to FNMA were repurchased by the Bank. During fiscal 2012, 2013, 2014
and 2015, three, ten, six and one loan, respectively, that had been sold to FNMA were repurchased by the Bank. At March 31,
2019 the Bank continues to service 119 loans with a principal balance of $18.8 million for FNMA that were sold with standard
representations and warranties.
Management has established a representation and warranty reserve for losses associated with the repurchase of mortgage
loans sold by the Bank to FNMA that we consider to be both probable and reasonably estimable. These reserves are reported in
the consolidated statement of financial condition as a component of other liabilities. The 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 $226 thousand as of March 31, 2019. The table below summarizes changes in our
representation and warranty reserves in fiscal 2019:
$ in thousands
Representation and warranty repurchase reserve, as of March 31, 2018 (1)
Net provision of repurchase losses (2)
Representation and warranty repurchase reserve, as of March 31, 2019 (1)
(1) Reported in consolidated statements of financial condition as a component of other liabilities.
(2) Component of other non-interest expense.
March 31, 2019
$
$
205
21
226
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 14 Commitments and Contingencies.”
Off-Balance Sheet Arrangements and Contractual Obligations
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers and in connection with its overall investment strategy. These instruments involve, to varying
degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are not recorded in the
consolidated financial statements. Such instruments primarily include lending obligations, including commitments to originate
mortgage and consumer loans and to fund unused lines of credit. The Bank also has contractual obligations related to operating
leases. See Note 14 of Notes to Consolidated Financial Statements for the Bank's outstanding lending commitments and contractual
obligations at March 31, 2019.
The Bank has contractual obligations at March 31, 2019 as follows:
46
$ in thousands
Payments due by period
Contractual Obligations
Debt obligations:
FHLB advances
Guaranteed preferred beneficial interest in junior
subordinated debentures
Total debt obligations
Operating lease obligations:
Lease obligations for rental properties
Total contractual obligations
Variable Interest Entities ("VIEs")
Total
Less than
1 year
1 - 3
years
3 - 5
years
More than
5 years
$
8,002
$
8,002
$
— $
— $
—
15,137
23,139
—
8,002
—
—
—
—
21,026
44,165
$
2,761
10,763
$
$
5,114
5,114
$
4,579
4,579
$
15,137
15,137
8,572
23,709
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 (formerly FIN
46(R)). Carver Statutory Trust I was formed in 2003 for the purpose of issuing $13 million aggregate liquidation amount of
floating rate Capital Securities due September 17, 2033 (“Capital Securities”) and $0.4 million of common securities (which are
the only voting securities of Carver Statutory Trust I), which are 100% owned by Carver Bancorp Inc., and using the proceeds to
acquire junior subordinated debentures issued by Carver Bancorp, Inc. Carver Bancorp, Inc. has fully and unconditionally
guaranteed the Capital Securities along with all obligations of Carver Statutory Trust I under the trust agreement relating to the
Capital Securities.
The 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 million in NMTC. CCDC won a second NMTC award of $65 million in May 2009, and a
third award of $25 million in 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 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 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. As of March 31, 2019, all three allocation awards have been fully utilized in qualifying
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
Recognized
Gain (Loss)
(000's)
Total
Rights
transferred
Significant
unconsolidated
VIE assets
Total
Involvement
with SPE
asset
Debt
Investments
Equity
Investments
Funding
Commitments
Maximum
exposure
to loss
Carver
Statutory
Trust I(1)
CDE 18*
CDE 19
CDE 20*
CDE 21
$
— $
— $
13,400 $
13,400 $
14,733 $
400 $
— $
— $15,133
600
500
625
625
13,254
10,746
12,500
12,500
—
—
11,054
11,054
—
—
12,014
12,014
—
—
—
—
—
1
—
1
—
—
—
—
5,169
4,191
4,875
4,875
5,169
4,192
4,875
4,876
Total
$
3,250 $
69,500 $
36,468 $
36,468 $
14,733 $
402 $
— $
27,105 $42,240
* Entities exited the NMTC projects during fiscal years 2018 and 2019 and remain on the above table pending final dissolution.
47
1 Carver Statutory Trust debt investment includes deferred interest of $1.7 million.
Regulatory Capital Position
The Bank must satisfy minimum capital standards established by the OCC. For a description of the OCC capital regulation,
see “Item 1-Regulation and Supervision-Federal Banking Regulation-Capital Requirements.” Regardless of Basel III's minimum
requirements, Carver, as a result of the Formal Agreement, was issued an Individual Minimum Capital Ratio 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, 2019, 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 15.39%, 10.77%, 15.39% and 16.58%, respectively. For additional information regarding Carver
Federal's Regulatory Capital and Ratios, refer to Note 11 of Notes to Consolidated Financial Statements, “Stockholders' Equity.”
Impact of Inflation and Changing Prices
The financial statements and accompanying notes appearing elsewhere herein have been prepared in accordance with
GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering
the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the
increased cost of Carver Federal's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank
are monetary in nature. As a result, interest rates have a greater impact on Carver Federal's performance than do the effects of the
general level of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods
and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See discussion of Market Risk-Interest Rate Sensitivity Analysis in Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
48
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Carver Bancorp, Inc.
New York, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial condition of Carver Bancorp, Inc. and Subsidiaries,
(collectively the “Company”) as of March 31, 2019 and 2018, the related consolidated statements of operations, comprehensive
income (loss), changes in equity, and cash flows for each of the two years in the period ended March 31, 2019, and the related
notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company at March 31, 2019 and 2018, and the results of its
operations and its cash flows for each of the two years in the period ended March 31, 2019, in conformity with accounting principles
generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2016.
New York, New York
June 28, 2019
49
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
$ in thousands except per share data
ASSETS
Cash and cash equivalents:
Cash and due from banks
Money market investments
Total cash and cash equivalents
Investment securities:
Available-for-sale, at fair value
Held-to-maturity, at amortized cost (fair value of $11,107 and $11,909 at March 31, 2019
and March 31, 2018, respectively)
Equity securities
Total investment securities
Loans receivable:
Real estate mortgage loans
Commercial business loans
Consumer loans
Loans, net of deferred fees and costs
Allowance for loan losses
Total loans receivable, net
Premises and equipment, net
Federal Home Loan Bank of New York (“FHLB-NY”) stock, at cost
Accrued interest receivable
Other assets
Total assets
LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Non-interest bearing checking
Interest-bearing deposits
Interest-bearing checking
Savings
Money market
Certificates of deposit
Escrow
Total interest-bearing deposits
Total deposits
Advances from the FHLB-NY and other borrowed money
Other liabilities
Total liabilities
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)
Common stock (par value $0.01 per share: 10,000,000 shares authorized; 3,700,728 and
3,698,031 issued; 3,698,784 and 3,697,914 shares outstanding at March 31, 2019 and 2018,
respectively)
Additional paid-in capital
Accumulated deficit
Treasury stock, at cost (1,944 shares)
Accumulated other comprehensive loss
Total equity
Total liabilities and equity
March 31, 2019
March 31, 2018
$
$
$
$
$
30,719
509
31,228
79,845
11,137
454
91,436
328,104
96,661
4,063
428,828
(4,646)
424,182
5,056
926
2,019
8,866
563,713
$
$
134,299
259
134,558
60,709
12,075
—
72,784
370,261
102,203
5,289
477,753
(5,126)
472,627
2,970
1,768
2,023
7,180
693,910
60,201
$
62,905
23,473
99,310
94,376
200,607
2,229
419,995
480,196
21,403
14,978
516,577
$
23,570
102,550
101,990
293,513
2,355
523,978
586,883
38,403
16,653
641,939
45,118
45,118
61
55,514
(52,201)
(417)
(939)
47,136
563,713
$
61
55,479
(45,544)
(417)
(2,726)
51,971
693,910
See accompanying notes to consolidated financial statements
50
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
$ in thousands except per share data
Interest income:
Loans
Mortgage-backed securities
Investment securities
Money market investments
Total interest income
Interest expense:
Deposits
Advances and other borrowed money
Total interest expense
Net interest income
(Recovery of) provision for loan losses
Net interest income after (recovery of) provision for loan losses
Non-interest income:
Depository fees and charges
Loan fees and service charges
Loss on sale of securities, net
Gain on sale of loans, net
Gain on sale of building
Other
Total non-interest income
Non-interest expense:
Employee compensation and benefits
Net occupancy expense
Equipment, net
Data processing
Consulting fees
Federal deposit insurance premiums
Other
Total non-interest expense
(Loss) income before income tax expense (benefit)
Income tax expense (benefit)
Net (loss) income
(Loss) earnings per common share:
Basic
Diluted
Years Ended March 31,
2019
2018
$
19,470
1,265
1,252
1,243
23,230
5,232
909
6,141
17,089
(270)
17,359
3,337
341
(16)
29
616
551
4,858
12,248
4,255
1,215
1,774
416
638
7,474
28,020
(5,803)
133
(5,936) $
(1.60) $
(1.60) $
21,917
970
680
792
24,359
4,106
1,174
5,280
19,079
135
18,944
3,372
554
—
—
9,615
818
14,359
12,615
3,543
862
1,669
801
832
7,660
27,982
5,321
(33)
5,354
0.58
0.58
$
$
$
$
See accompanying notes to consolidated financial statements
51
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
$ in thousands
Net (loss) income
Other comprehensive income (loss), net of tax:
Change in unrealized loss of securities available-for-sale, net of income tax expense of $0
Less: Reclassification adjustment for realized loss on sales of available-for-sale securities,
net of income tax expense of $0 (due to full valuation allowance)
Total other comprehensive income (loss), net of tax
Total comprehensive (loss) income, net of tax
Years Ended March 31,
2018
2019
$
(5,936) $
5,354
1,050
16
1,066
$
(4,870) $
(786)
—
(786)
4,568
See accompanying notes to consolidated financial statements
52
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
$ in thousands
Preferred
Stock
Common
Stock
Additional
Paid-In
Capital
Accumulated
Deficit
Treasury
Stock
Accumulated
Other
Comprehensive
Loss
Total
Equity
Balance—March 31, 2017
45,118
Net income
Other comprehensive loss, net of tax
Stock based compensation expense
—
—
—
Balance—March 31, 2018
45,118
Net loss
Other comprehensive income, net of tax
ASU reclassification (adoption of ASU
2016-01)
Stock based compensation expense
—
—
—
—
Balance—March 31, 2019
$
45,118
$
61
—
—
—
61
—
—
—
—
61
55,474
(50,898)
(417)
(1,940)
47,398
—
—
5
55,479
—
—
—
35
5,354
—
—
(45,544)
(5,936)
—
(721)
—
—
—
—
—
(786)
—
5,354
(786)
5
(417)
(2,726)
51,971
—
—
—
—
—
(5,936)
1,066
1,066
721
—
—
35
$
55,514
$
(52,201) $
(417) $
(939) $ 47,136
See accompanying notes to consolidated financial statements
53
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
$ in thousands
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income
Adjustments to reconcile net loss to net cash provided by operating activities:
(Recovery of) provision for loan losses
Stock based compensation expense
Depreciation and amortization expense
Gain on sale of real estate owned, net of market value adjustment
Loss on securities sales and redemption of equity investment, net
Gain on sale of loans, net
Gain on sale of building
Amortization and accretion of loan premiums and discounts and deferred charges
Amortization and accretion of premiums and discounts - securities
Decrease (increase) in accrued interest receivable
(Increase) decrease in other assets
Decrease in other liabilities
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments: Available-for-sale
Proceeds from sales of investments: Available-for-sale
Proceeds from principal payments, maturities and calls of investments: Available-for-sale
Proceeds from principal payments, maturities and calls of investments: Held-to-maturity
Repayments and maturities, net of originations of loans held-for-investment
Proceeds from redemption of equity investment
Proceeds on sale of loans
Decrease in restricted cash
Redemption of FHLB-NY stock
Purchase of premises and equipment
Net proceeds from sale of building
Proceeds from sale of real estate owned
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits
Net decrease in FHLB-NY advances and other borrowings
Net cash used in by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow information:
Noncash financing and investing activities
Transfer of loans held-for-sale to loans held-for-investment
Deferred gain on sale-leaseback of building
Transfer to real estate owned from loans held-for-investment
Cash paid for:
Interest
Income taxes
Years Ended March 31,
2019
2018
$
(5,936) $
5,354
(270)
35
793
(209)
43
(29)
(616)
532
558
4
(1,995)
(1,675)
(8,765)
(58,129)
20,487
9,308
898
46,079
9,179
1,766
—
842
(2,880)
—
1,572
29,122
135
5
897
(237)
—
—
(9,615)
616
343
(440)
(1,173)
(870)
(4,985)
(7,790)
—
5,049
1,304
65,062
—
2,436
283
403
(1,602)
18,133
871
84,149
(106,687)
(17,000)
(123,687)
(103,330)
134,558
31,228
$
7,708
(11,000)
(3,292)
75,872
58,686
134,558
— $
—
346
$
5,296
123
944
5,417
790
4,584
225
$
$
$
See accompanying notes to consolidated financial statements
54
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 subsidiaries are Carver Federal Savings Bank (the “Bank” or “Carver Federal”) and Alhambra Holding
Corp., an inactive Delaware corporation. 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, “Consolidation,” 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 5.66% and the total amount of deferred interest was $1.7 million at March 31, 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, 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 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
55
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.
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). 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. 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.
In addition, the OCC, Carver Federal's regulator, as an integral part of its examination process, periodically reviews
Carver Federal's allowance for loan losses and, if applicable, real estate owned valuations. The OCC may require Carver Federal
to recognize additions to the allowance for loan losses or additional writedowns of real estate owned based on their judgments
about information available to them at the time of their examination.
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.
Cash and cash equivalents
For the purpose of reporting cash flows, cash and cash equivalents include cash, amounts due from depository institutions
and other short-term instruments with an original maturity of three months or less. The amounts due from depository institutions
include an interest-bearing account held at the Federal Reserve Bank where any additional cash reserve required on demand
deposits would be maintained. Currently, this reserve requirement is zero since the Bank's vault cash satisfies cash reserve
requirements for deposits.
Investment Securities
When purchased, investment securities are designated as either investment securities held-to-maturity, available-for-
sale or trading.
Securities are classified as held-to-maturity and carried at amortized cost only if the Bank has a positive intent and
ability to hold such securities to maturity. Securities held-to-maturity are carried at cost, adjusted for the amortization of premiums
and the accretion of discounts using the level-yield method over the remaining period until maturity.
If not classified as held-to-maturity or trading, securities are classified as available-for-sale based upon management's
ability to sell in response to actual or anticipated changes in interest rates, resulting prepayment risk or any other factors. Available-
for-sale securities are reported at fair value. Estimated fair values of securities are based on either published or security dealers'
market value if available. If quoted or dealer prices are not available, fair value is estimated using quoted or dealer prices for
similar securities.
Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading
securities and are reported at fair value with unrealized gains and losses included in earnings.
56
The Company adopted ASU 2016-01 on April 1, 2018; this standard required that all equity securities are measured at
fair value with unrealized holding gains and losses reflected in net income. In the prior fiscal year, equity securities measured
at fair value reported any change in unrealized gains and losses through other comprehensive income.
The Company conducts periodic reviews to identify and evaluate each investment that has an unrealized holding loss.
Unrealized holding gains or losses for securities available-for-sale are excluded from earnings and reported net of deferred income
taxes in accumulated other comprehensive loss, a component of Stockholders' Equity. Following Financial Accounting Standards
Board ("FASB") guidance, 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. The remaining difference between the debt security's amortized cost basis and
its fair value would be included in other comprehensive income (loss). During the fiscal year ended March 31, 2018, the Bank
recognized an impairment of less than $500 on a mortgage-backed security. There were no other-than-temporary impairment
charges recorded during the fiscal year ended March 31, 2019. Gains or losses on sales of securities of all classifications are
recognized based on the specific identification method.
Loans Held-for-Sale
Loans are only moved to held-for-sale classification upon the determination by Carver to sell a loan. Held-for-sale loans
are carried at the lower of cost or market value. The initial charge-off, if any is required, will be taken upon the move to held-
for-sale and absorbed through Carver's loan loss reserve. The need for further charge-offs is periodically evaluated if the loan
remains classified as held-for-sale for an extended period of time using the valuation methodologies identified below. Any
subsequently required charge-off is processed as a mark-to-market adjustment. The valuation methodology for loans held-for-
sale varies based upon the circumstances. Held-for-sale values may be based upon accepted offer amounts, appraised value of
underlying mortgaged premises, prior loan loss experience of Carver in connection with recent loan sales for the loan type in
question, and/or other acceptable valuation methods.
Loans Receivable
Loans receivable are carried at unpaid principal balances plus unamortized premiums, certain deferred direct loan
origination costs and deferred loan origination fees and discounts, less the allowance for loan losses and charge-offs.
The Bank defers loan origination fees and certain direct loan origination costs and amortizes or accretes such amounts
as an adjustment of yield over the contractual lives of the related loans using methodologies which approximate the interest
method. Premiums and discounts on loans purchased are amortized or accreted as an adjustment of yield over the contractual
lives of the related loans, adjusted for prepayments when applicable, using methodologies which approximate the interest method.
Loans are placed on nonaccrual status when they are past due 90 days or more as to contractual obligations or when
other circumstances indicate that collection is not probable. When a loan is placed on nonaccrual status, any interest accrued
but not received is reversed against interest income. Payments received on a nonaccrual loan are either applied to protective
advances, the outstanding principal balance or recorded as interest income, depending on an assessment of the ability to collect
the loan. A nonaccrual loan may be restored to accrual status when principal and interest payments have been brought current
and the loan has performed in accordance with its contractual terms for a reasonable period (generally six months).
If the Bank determines that a loan is impaired, the Bank next determines the amount of the impairment. The amount
of impairment on collateral dependent loans is charged off within the given fiscal quarter. Generally the amount of the loan and
negative escrow in excess of the appraised value less estimated selling costs, for the fair value of collateral valuation method, is
charged off. For impairment amounts calculated utilizing the present value of expected future cash flows, such as TDRs, the
dollar amount of impairment is recorded as a specific valuation allowance.
Allowance for Loan and Lease Losses ("ALLL")
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
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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:
• One-to-four family
• Multifamily
• Commercial Real Estate
• Construction
• 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).
The following discussion describes the general risks associated with the Bank’s lending activities:
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• One-to-four family - Carver Federal purchases first mortgage loans secured by one-to-four family properties that serve
as the primary residence of the owner. The loans are underwritten in accordance with applicable secondary market
underwriting guidelines and requirements for sale. These loans present a moderate level of risk due primarily to general
economic conditions.
• Multifamily - Carver Federal originates and purchases multifamily loans. These loans can be affected by economic
conditions and the value of the underlying properties. The Bank primarily considers the property's ability to generate
net operating income sufficient to support the debt service, the financial resources, income level and managerial expertise
of the borrower, the marketability of the property and the Bank's lending experience with the borrower.
• Commercial - Commercial real estate ("CRE") lending consists predominantly of originating loans for the purpose of
purchasing or refinancing office, mixed-use (properties used for both commercial and residential purposes but
predominantly commercial), retail and church buildings in the Bank's market area. Mixed-use loans are secured by
properties that are intended for both residential and business use and are classified as CRE. In originating CRE loans,
the Bank primarily considers the ability of the net operating income generated by the real estate to support the debt
service, the financial resources, income level and managerial expertise of the borrower, the marketability of the property
and the Bank's lending experience with the borrower. The Bank also requires the assignment of rents of all tenants'
leases in the mortgaged property and personal guarantees may be obtained for additional security from these borrowers.
CRE loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic
conditions and the complexities involved in valuing the underlying collateral.
• Construction - The Bank has historically originated or participated in construction loans for new construction and
renovation of multifamily buildings, residential developments, community service facilities, churches, and affordable
housing programs. The loans provide for disbursement in stages as construction is completed. Borrowers must satisfy
all credit requirements that apply to the Bank's permanent mortgage loan financing for the mortgaged property. Carver
Federal has additional criteria for construction loans, including an engineer's plan and periodic cost reviews on all
construction budgets for loans. Construction loans present an increased level of risk from the effect of general economic
conditions and uncertainties surrounding total construction costs. The Bank is not actively engaged in the origination
of construction loans and does not pursue the purchase of them.
• Business - The Bank originates and purchases business and SBA loans primarily to businesses located in its primary
market area and surrounding areas. Business loans are typically personally guaranteed by the owners and may also be
secured by additional collateral, including real estate, equipment and inventory. Business loans are also subject to
increased risk from the effect of general economic conditions.
• Consumer - The majority of the Consumer portfolio are student loans to medical students enrolled in several Caribbean
schools.
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.
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 troubled debt restructurings (“TDRs”). All TDRs are
classified as impaired. For non-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.
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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 (less estimated costs of disposal) 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.
Representation and Warranty Reserve
During the period 2004 through 2009, the Bank originated one-to-four 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. At March 31, 2019 the Bank serviced $19.4 million of loans for others.
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 calculation of the reserve is based on
estimates, which are uncertain, and require the application of judgment. In establishing the reserves, we consider a variety of
factors, including those loans that are under review by FNMA that have not yet received a repurchase request. The Bank tracks
the FNMA claims monthly and evaluates the reserve on a quarterly basis.
Segment Reporting
The Company has determined that all of its activities constitute one reportable operating segment.
Concentration of Risk
The Bank's principal lending activities are concentrated in loans secured by real estate, a substantial portion of which
is located in New York City. Accordingly, the ultimate collectability of a substantial portion of the Company's loan portfolio is
susceptible to changes in New York's real estate market conditions. Qualitative factors in the ALLL calculation considers the
Bank's concentration risk.
Premises and Equipment
Premises and equipment are comprised of land, at cost, and buildings, building improvements, furnishings and equipment
and leasehold improvements, at cost less accumulated depreciation and amortization. Depreciation and amortization charges are
computed using the straight-line method over the following estimated useful lives:
Buildings and improvements
Furnishings and equipment
Leasehold improvements
10 to 25 years
3 to 5 years
Lesser of useful life or remaining term of lease
Maintenance, repairs and minor improvements are charged to non-interest expense in the period incurred.
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Federal Home Loan Bank Stock
The FHLB-NY has assigned to the Bank a mandated membership stock purchase, based on the Bank's asset size. In
addition, for all borrowing activity, the Bank is required to purchase shares of FHLB-NY non-marketable capital stock at par.
Such shares are redeemed by FHLB-NY at par with reductions in the Bank's borrowing levels. We do not consider these shares
to be other-than-temporarily impaired at March 31, 2019. The Bank carries this investment at historical cost.
Mortgage Servicing Rights
All separately recognized servicing assets totaled $180 thousand and $181 thousand, respectively, at March 31, 2019
and 2018, and are included in Other Assets in the consolidated statements of financial condition and measured at fair value.
Servicing fee income of $51 thousand and $63 thousand, respectively, was recognized during the years ended March 31, 2019
and 2018, and is included in Non-Interest Income in the consolidated statements of operations.
Other Real Estate Owned
Real estate acquired by foreclosure or deed-in-lieu of foreclosure is recorded at fair value at the date of acquisition less
estimated selling costs. Any subsequent adjustments will be to the lower of cost or market. The fair value of such assets is
determined based primarily upon independent appraisals and other relevant factors. The amounts ultimately recoverable from
real estate owned could differ from the net carrying value of these properties because of economic conditions. Costs incurred
to improve properties or prepare them for sale are capitalized. Revenues and expenses related to the holding and operating of
properties are recognized in operations as earned or incurred. Gains or losses on sale of properties are recognized as incurred.
As of March 31, 2019, the Bank held $404 thousand in foreclosed residential real estate properties as a result of obtaining physical
possession. In addition, as of March 31, 2019 and 2018, we had residential loans with a carrying value of $4.2 million and $3.3
million, respectively, collateralized by residential real estate property for which formal foreclosure proceedings were in process.
Income Taxes
The Company records income taxes in accordance with ASC 740 “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. This valuation allowance would subsequently be adjusted
by a charge or credit to income tax expense as changes in facts and circumstances warrant. A tax position is recognized as a
benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being
realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Any interest
expense or penalties would be recorded as interest expense.
Earnings (Loss) per Common Share
The Company has preferred stock series D shares which if exercised could convert to common stock and are therefore
considered to be participating securities. Basic earnings (loss) per share (“EPS”) is computed using the two class method. This
calculation divides net income (loss) available to common stockholders after the allocation of undistributed earnings to the
participating securities by the weighted average number of shares of common stock outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock
were exercised and converted into common stock. These potentially dilutive shares are then included in the weighted average
number of shares outstanding for the period. Dilution calculations are not applicable to net loss periods.
Preferred and Common Dividends
The Company is prohibited from paying any dividends without prior regulatory approval pursuant to the terms of the
Formal Agreement and Resolution to which it is subject, and is generally subject to regulations governing the payment of dividends.
See Item 1 - Business - Regulation and Supervision - Enforcement Actions. There are no assurances that the payments of common
stock dividends will resume.
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Treasury Stock
Treasury stock is recorded at cost and is presented as a reduction of stockholders' equity.
Stock Compensation Plans
The Company currently has multiple stock plans in place for employees and directors of the Company. U.S. GAAP
requires that the compensation cost related to share-based payment transactions be recognized in financial statements. The share-
based compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over
a defined vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the
requisite vesting period for the entire award. A Black-Scholes model is used to estimate the fair value of stock options, while
the market price of the Company's common stock at the date of grant is used for restricted stock awards.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of
commitments to extend credit and letters of credit. Such financial instruments are recorded in the consolidated statements of
condition when they are funded.
NMTC fee income
The fee income the Company receives related to the transfers of its New Market Tax Credits ("NMTC") varies with
each transaction, but all are similar in nature. There are two basic types of fees associated with these transactions. The first is
a “sub-allocation fee” that is paid to CCDC when the tax credits are allocated to a subsidiary entity at the time a qualified equity
investment is made. This fee is recognized by the Company at the time of allocation. The second type of fee is paid to cover
the administrative and servicing costs associated with CCDC's compliance with NMTC reporting requirements. This fee is
recognized as the services are rendered.
Advertising Costs
The Company follows the policy of charging the costs of advertising to expense as incurred.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains
the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets,
and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them
before their maturity.
Recent Accounting Standards
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
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
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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 years beginning after June 15, 2018. The Company completed its evaluation of the provisions of ASU
2016-01 and identified the equity investments that fall 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 3 "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 does not 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 will adopt ASU No. 2016-02 effective April 1,
2019 and will elect to apply the guidance as of the beginning of the period of adoption (April 1, 2019) and not restate comparative
periods. The Company will also elect 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. The Company is also evaluating of the impact, if any, the standard will have
on its sale and leaseback transaction. The adoption of ASU 2016-02 will result in increases to both the Company's assets and
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liabilities on the consolidated balance sheet. Based on the analysis performed, management estimates recognizing ROU assets
and a corresponding lease liabilities of approximately $20.1 million.
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. 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 impact that it will have on the 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 is
not expected to 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 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. Early adoption is permitted in any interim period for reporting periods
for which financial statements have not yet been issued.
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
64
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.
NOTE 3.
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 March 31, 2019, securities with fair value of $79.8 million, or 87.3%, of the Bank’s total
securities were classified as available-for-sale, and the remaining securities with amortized cost of $11.1 million, or 12.2%, were
classified as held-to-maturity. The Bank had no securities classified as trading at March 31, 2019 and March 31, 2018.
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 future changes
in fair value will be 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.
65
The following tables set forth the amortized cost and fair value of securities available-for-sale and held-to-maturity at
March 31, 2019 and March 31, 2018:
$ in thousands
Available-for-Sale:
Mortgage-backed securities:
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Total mortgage-backed securities
U.S. Government Agency Securities
Corporate Bonds
Total available-for-sale
Held-to-Maturity*:
Mortgage-backed securities:
Government National Mortgage Association
Federal National Mortgage Association
Total held-to-maturity mortgage-backed securities
Corporate Bonds
Total held-to-maturity
$ in thousands
Available-for-Sale:
Mortgage-backed securities:
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Total mortgage-backed securities
U.S. Government Agency Securities
Corporate Bonds
Other investments (1)
Total available-for-sale
Held-to-Maturity*:
Mortgage-backed securities:
Government National Mortgage Association
Federal National Mortgage Association and Other
Total held-to-maturity mortgage-backed securities
Corporate Bonds
Total held-to-maturity
Amortized
Cost
At March 31, 2019
Gross Unrealized
Gains
Losses
Fair Value
$
$
$
$
$
$
$
4,443
11,104
27,094
42,641
33,089
5,054
80,784
1,214
8,923
10,137
1,000
11,137
Amortized
Cost
2,163
6,633
24,638
33,434
14,490
5,078
10,433
63,435
1,434
9,641
11,075
1,000
12,075
$
$
$
$
$
$
$
25
69
131
225
—
—
225
40
—
40
17
57
$
$
$
86
148
617
851
236
77
1,164
—
87
87
—
87
$
$
$
4,382
11,025
26,608
42,015
32,853
4,977
79,845
1,254
8,836
10,090
1,017
11,107
At March 31, 2018
Gross Unrealized
Gains
Losses
Fair Value
— $
—
—
—
—
—
—
— $
51
—
51
30
81
$
$
97
283
1,227
1,607
258
212
649
2,726
$
$
— $
247
247
—
247
$
2,066
6,350
23,411
31,827
14,232
4,866
9,784
60,709
1,485
9,394
10,879
1,030
11,909
* The carrying amount and amortized cost are the same for all held-to-maturity securities, as no OTTI has been recorded.
(1) Primarily comprised of an investment in a CRA fund with 95% of its underlying investments consisting of government and agency backed
securities.
There were no sales of available-for-sale securities for the year ended March 31, 2018. The following is a summary
regarding proceeds, gross gains and gross losses realized from the sale of securities from the available-for-sale portfolio for the
year ended March 31, 2019.
66
$ in thousands
Proceeds
Gross gains
Gross losses
$
2019
20,487
12
28
There were no sales of held-to-maturity securities in fiscal years 2019 or 2018.
The Bank's investment portfolio is comprised primarily of fixed-rate mortgage-backed securities guaranteed by a
Government Sponsored Enterprise (“GSE”) as issuer and Agency securities. Carver maintains a portfolio of mortgage-backed
securities in the form of Government National Mortgage Association (“GNMA”) pass-through certificates, Federal National
Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) participation certificates. GNMA
pass-through certificates are guaranteed as to the payment of principal and interest by the full faith and credit of the United States
Government, while FNMA and FHLMC certificates are each guaranteed by their respective agencies as to principal and interest.
Based on the high quality of the Bank's investment portfolio, current market conditions have not significantly impacted the pricing
of the portfolio or the Bank's ability to obtain reliable prices.
At March 31, 2019, the Bank pledged securities of $24.6 million as collateral for advances from the FHLB-NY.
The following tables set forth the unrealized losses and fair value of securities in an unrealized loss position at
March 31, 2019 and March 31, 2018 for less than 12 months and 12 months or longer:
Less than 12 months
Fair
Value
Unrealized
Losses
At March 31, 2019
12 months or longer
Fair
Value
Unrealized
Losses
Total
Unrealized
Losses
Fair
Value
$
$
$
$
— $
23
—
23
$
— $
— $
— $
20,851
—
20,851
$
— $
— $
851
213
77
1,141
87
87
$
$
$
$
26,787
12,002
4,977
43,766
8,752
8,752
$
$
$
$
851
236
77
1,164
87
87
$
$
$
$
26,787
32,853
4,977
64,617
8,752
8,752
Less than 12 months
Fair
Value
Unrealized
Losses
At March 31, 2018
12 months or longer
Fair
Value
Unrealized
Losses
Total
Unrealized
Losses
Fair
Value
$
$
101
80
—
—
181
$
$
3,702
7,666
—
—
11,368
$
$
1,506
178
212
649
2,545
$
$
28,124
6,566
4,866
9,351
48,907
$
$
1,607
258
212
649
2,726
$
$
31,826
14,232
4,866
9,351
60,275
$ in thousands
Available-for-Sale:
Mortgage-backed securities
U.S. Government Agency Securities
Corporate bonds
Total available-for-sale securities
Held-to-Maturity:
Mortgage-backed securities
Total held-to-maturity securities
$ in thousands
Available-for-Sale:
Mortgage-backed securities
U.S. Government Agency Securities
Corporate bonds
Other investments (1)
Total available-for-sale securities
Held-to-Maturity:
Mortgage-backed securities
9,293
9,293
(1) Primarily comprised of an investment in a CRA fund with 95% of its underlying investments consisting of government and agency backed
Total held-to-maturity securities
7,681
7,681
1,612
1,612
188
188
247
247
59
59
$
$
$
$
$
$
$
$
$
$
$
$
securities.
A total of 35 securities had an unrealized loss at March 31, 2019 and March 31, 2018. U.S. government agency securities
and mortgage-backed securities represented 50.8% and 41.5%,respectively, of total available-for-sale securities in an unrealized
loss position at March 31, 2019. There were 18 mortgage-backed securities, three U.S. government agency securities, and five
corporate bonds that had an unrealized loss position for more than 12 months at March 31, 2019. The cause of the temporary
impairment is directly related to changes in interest rates. In general, as interest rates decline, the fair value of securities will rise,
and conversely as interest rates rise, the fair value of securities will decline. Management considers fluctuations in fair value as
67
a result of interest rate changes to be temporary, which is consistent with the Bank's experience. The impairments are deemed
temporary based on the direct relationship of the change in fair value to movements in interest rates, the life of the investments
and their high credit quality. 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 has the ability and intent
to hold the securities until maturity or the valuation recovers.
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). During the fiscal year ended
March 31, 2018, the Bank recognized an impairment of less than $500 on a mortgage-backed security. The Bank did not have
any other securities that were classified as having other-than-temporary impairment in its investment portfolio at March 31, 2019.
The following is a summary of the amortized cost and fair value of debt securities at March 31, 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
Available-for-Sale:
Less than one year
One through five years
Five through ten years
After ten years
Held-to-maturity:
One through five years
Five through ten years
After ten years
Amortized Cost
Fair Value
Weighted
Average Yield
$
$
$
1,005
8,279
17,775
53,725
80,784
4,555
4,381
2,201
11,137
$
$
$
998
8,116
17,590
53,141
79,845
4,530
4,377
2,200
11,107
1.65%
1.72%
2.84%
2.76%
2.65%
2.40%
3.31%
2.87%
2.85%
NOTE 4. LOANS RECEIVABLE, NET
The following is a summary of loans receivable, net of allowance for loan losses at March 31:
$ in thousands
Gross loans receivable:
One-to-four family
Multifamily
Commercial real estate
Construction
Business (1)
Consumer (2)
Total loans receivable
Unamortized premiums, deferred costs and fees, net
Allowance for loan losses
March 31, 2019
March 31, 2018
Amount
%
Amount
%
$
108,363
86,177
130,812
—
96,430
4,023
425,805
3,023
25.5% $
20.2%
30.7%
—%
22.7%
0.9%
100.0%
(4,646)
424,182
25.6%
21.9%
29.9%
—%
21.5%
1.1%
100.0%
121,233
103,887
141,835
—
102,004
5,238
474,197
3,556
(5,126)
472,627
Total loans receivable, net
$
(1) Includes business overdrafts of $79 thousand and $35 thousand as of March 31, 2019 and 2018, respectively
(2) Includes consumer overdrafts of $15 thousand and $18 thousand as of March 31, 2019 and 2018, respectively
$
68
Substantially all of the Bank's real estate loans receivable are principally secured by properties located in New York City.
Accordingly, as with most financial institutions in the market area, the ultimate collectability of a substantial portion of the
Company's loan portfolio is susceptible to changes in market conditions in this area.
Real estate mortgage loan portfolios (one-to-four family) serviced for Federal National Mortgage Association (“FNMA”)
and other third parties are not included in the accompanying consolidated financial statements. The unpaid principal balances of
these loans aggregated $19.4 million and $23.1 million at March 31, 2019 and 2018, respectively.
At March 31, 2019 the Bank pledged $38.8 million in total real estate mortgage loans as collateral for advances from the
FHLB-NY.
The following is an analysis of the allowance for loan losses based upon the method of evaluating loan impairment for
the fiscal year ended March 31, 2019:
$ in thousands
Allowance for loan losses:
Beginning Balance
Charge-offs
Recoveries
Provision for (Recovery of) Loan Losses
Ending Balance
Allowance for Loan Losses Ending
Balance: collectively evaluated for
impairment
Allowance for Loan Losses Ending
Balance: individually evaluated for
impairment
One-to-four
family
Multifamily
Commercial
Real Estate
Business Consumer Unallocated
Total
$
$
$
1,210
$
1,819
$
1,052
$
1,003
$
18
$
(151)
190
25
(164)
158
(928)
—
—
(286)
(964)
705
586
1,274
$
885
$
766
$
1,330
$
(19)
35
120
154
$
24
—
—
213
237
$ 5,126
(1,298)
1,088
(270)
$ 4,646
1,103
$
885
$
766
$
1,312
$
154
$
237
$ 4,457
171
—
—
18
—
—
189
Loan Receivables Ending Balance
$
109,925
$
86,886
$
131,292
$ 96,662
$
4,063
$
— $428,828
Ending Balance: collectively evaluated for
impairment
Ending Balance: individually evaluated
for impairment
104,508
83,672
130,816
93,400
4,063
— 416,459
5,417
3,214
476
3,262
—
—
12,369
The following is an analysis of the allowance for loan losses based upon the method of evaluating loan impairment for
the fiscal year ended March 31, 2018:
69
$ in thousands
Allowance for loan losses:
One-to-four
family
Multifamily
Commercial
Real Estate Construction Business Consumer Unallocated
Total
Beginning Balance
$
1,663
$
1,213
$
1,496
$
106
$
573
$
9
$
— $
5,060
Charge-offs
Recoveries
Provision for (Recovery
of) Loan Losses
Ending Balance
Allowance for Loan
Losses Ending Balance:
collectively evaluated for
impairment
Allowance for Loan
Losses Ending Balance:
individually evaluated for
impairment
Loan Receivables Ending
Balance
Ending Balance:
collectively evaluated for
impairment
Ending Balance:
individually evaluated for
impairment
(96)
—
(357)
(104)
131
579
—
20
—
—
(81)
87
(464)
(106)
424
1,210
$
1,819
$
1,052
$
— $
1,003
$
(33)
7
35
18
$
—
—
24
24
(314)
245
135
$
5,126
1,065
$
1,744
$
1,052
$
— $
908
$
18
$
24
$
4,811
$
$
145
75
—
—
95
—
—
315
$
123,092
$
104,865
$
142,304
$
— $102,203
$
5,289
$
— $477,753
116,588
103,160
140,765
—
98,914
5,289
— 464,716
6,504
1,705
1,539
—
3,289
—
—
13,037
At March 31, 2019 and 2018, the recorded investment in impaired loans was $12.4 million and $13.0 million, respectively.
The related allowance for loan losses for these impaired loans was approximately $189 thousand and $315 thousand at March 31,
2019 and 2018, respectively. Interest income of $122 thousand and $324 thousand for fiscal years 2019 and 2018 respectively,
would have been recorded on impaired loans had they performed in accordance with their original terms.
The following is a summary of nonaccrual loans at March 31, 2019 and 2018.
$ in thousands
Loans accounted for on a nonaccrual basis:
Gross loans receivable:
One-to-four family
Multifamily
Commercial real estate
Business
Consumer
Total nonaccrual loans
March 31, 2019 March 31, 2018
$
$
4,488
$
4,561
3,214
476
2,051
65
964
502
635
—
10,294
$
6,662
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. 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 March 31, 2019 were $5.4 million, $3.2 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, 2018, total TDR loans were $5.7 million,
of which $1.9 million were non-performing.
At March 31, 2019, other non-performing assets totaled $404 thousand which consisted of other real estate owned
("OREO") properties. At March 31, 2019, other real estate owned valued at $404 thousand comprised of four foreclosed properties,
compared to $1.1 million comprised of eight properties at March 31, 2018. Other real estate loans is included in other assets in
the consolidated statements of financial condition. There were no held-for-sale loans at March 31, 2019 or March 31, 2018.
70
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
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.
As of March 31, 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
Credit Risk Profile by Internally Assigned Grade:
Pass
Special Mention
Substandard
Doubtful
Loss
Total
Credit Risk Profile Based on Payment Activity:
Performing
Non-Performing
Total
Multifamily
Commercial
Real Estate
Business
$
$
83,672
—
3,214
—
—
86,886
One-to-four family
$
$
106,530
3,395
109,925
$
$
$
$
128,319
2,497
476
—
—
131,292
$
$
90,337
2,425
3,900
—
—
96,662
Consumer
4,063
—
4,063
As of March 31, 2018, the risk category by class of loans was as follows:
$ in thousands
Credit Risk Profile by Internally Assigned Grade:
Pass
Special Mention
Substandard
Doubtful
Loss
Total
Credit Risk Profile Based on Payment Activity:
Performing
Non-Performing
Total
Multifamily
Commercial
Real Estate
Business
$
$
103,160
—
1,705
—
—
104,865
$
$
140,765
—
1,539
—
—
142,304
$
$
93,886
5,028
3,289
—
—
102,203
One-to-four family
Consumer
$
$
116,588
6,504
123,092
$
$
5,289
—
5,289
71
The following table presents an aging analysis of the recorded investment of past due financing receivable as of March 31,
2019.
$ in thousands
One-to-four family
Multifamily
Commercial real estate
Business
Consumer
Total
30-59 Days
Past Due
60-89 Days
Past Due
90 or More
Days Past Due
Total Past
Due
Current
Total Financing
Receivables
$
1,827
$
— $
3,395
$
5,222
$
104,703
$
2,580
121
780
87
$
5,395
$
—
—
—
53
53
2,118
—
599
65
4,698
121
1,379
205
82,188
131,171
95,283
3,858
$
6,177
$
11,625
$
417,203
$
109,925
86,886
131,292
96,662
4,063
428,828
The following table presents an aging analysis of the recorded investment of past due financing receivable as of March 31,
2018.
$ in thousands
One-to-four family
Multifamily
Commercial real estate
Business
Consumer
Total
30-59 Days
Past Due
60-89 Days
Past Due
$
$
1,819
—
1,395
973
7
4,194
$
$
90 or More
Days Past Due
4,056
219
—
322
—
4,597
— $
—
—
312
5
317
$
Total Past
Due
Current
Total Financing
Receivables
$
$
5,875
219
1,395
1,607
12
9,108
$
$
117,217
104,646
140,909
100,596
5,277
468,645
$
$
123,092
104,865
142,304
102,203
5,289
477,753
At March 31, 2019 and 2018, there were no loans 90 or more days past due and accruing interest.
The following tables present information on impaired loans with the associated allowance amount, if applicable, at
March 31, 2019 and 2018. Management determined the specific allowance based on the present value of expected future cash
flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation
or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling costs was used to determine the
specific allowance recorded. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan
is on nonaccrual status, all payments are applied to principal under the cost recovery method. When the ultimate collectability of
the total principal of an impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest
income when received under the cash basis method.
$ in thousands
With no specific allowance recorded:
One-to-four family
Multifamily
Commercial real estate
Business
With an allowance recorded:
One-to-four family
Multifamily
Commercial real estate
Business
Consumer
Total
Impaired Loans by Class
At March 31,
2019
Unpaid
Principal
Balance
Recorded
Investment
Associated
Allowance
Recorded
Investment
2018
Unpaid
Principal
Balance
Associated
Allowance
$
$
5,643
3,214
476
2,017
929
—
—
1,288
—
13,567
$
$
$
4,488
3,214
476
1,974
929
—
—
1,288
—
12,369
$
72
— $
—
—
—
171
—
—
18
—
189
$
5,439
964
1,539
611
1,065
741
—
2,678
—
13,037
$
$
6,862
1,122
1,539
611
1,065
741
—
2,681
—
14,621
$
$
—
—
—
—
145
75
—
95
—
315
The following table presents information on average balances on impaired loans and the interest income recognized for
the years ended March 31, 2019 and 2018.
$ in thousands
With no specific allowance recorded:
One-to-four family
Multifamily
Commercial real estate
Business
With an allowance recorded:
One-to-four family
Multifamily
Commercial real estate
Business
Consumer
Total
For the years ended March 31,
2019
2018
Average
Balance
Interest
Income
recognized
Average
Balance
Interest
Income
recognized
$
$
4,964
2,089
1,007
1,293
997
371
—
1,983
—
12,704
$
$
96
42
16
18
—
—
—
10
—
182
$
$
5,375
1,340
2,075
827
1,078
248
541
2,358
—
13,842
$
$
36
34
28
—
—
—
—
2
—
100
In certain circumstances, loan modifications involve a troubled borrower to whom the Bank may grant a modification.
In cases where the Bank grants any significant concessions to a troubled borrower, the Bank accounts for the modification as a
TDR under ASC Subtopic 310-40 and the related allowance under ASC Section 310-10-35. 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 three loan modification
made during the twelve month period ended March 31, 2019. There was one loan modification during the twelve month period
ended March 31, 2018. The following table presents an analysis of those loan modifications that were classified as TDRs during
the twelve month periods ended March 31, 2019 and 2018,
Modifications to loans during the years ended March 31,
2019
Pre-
modification
outstanding
recorded
investment
Post-
Modification
Recorded
investment
Number
of loans
Pre-
Modification
rate
Post-
Modification
rate
Number
of loans
2018
Pre-
modification
outstanding
recorded
investment
Post-
Modification
Recorded
investment
Pre-
Modification
rate
Post-
Modification
rate
3
$
2,776
$
2,776
6.51%
6.04%
1
$
285
$
285
7.25%
7.00%
$ in
thousands
Business
In an effort to proactively resolve delinquent loans, Carver has selectively extended to certain borrowers concessions
such as extensions, rate reductions or forbearance agreements. For the fiscal years ended March 31, 2019 and 2018, there were
no modified loans that defaulted with the last 12 months of modification.
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 $80 thousand at March 31, 2019 and $120 thousand
at March 31, 2018. During fiscal year 2019, there were no advances and principal repayments totaled $40 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.
73
NOTE 5. OFFICE PROPERTIES AND EQUIPMENT, NET
The details of office properties and equipment as of March 31 are as follows:
$ in thousands
Leasehold improvements
Furniture, equipment, and other
Less accumulated depreciation and amortization
Office properties and equipment, net
2019
2018
$
$
7,394
$
13,169
20,563
(15,507)
5,056
$
5,946
13,177
19,123
(16,153)
2,970
Depreciation and amortization charged to operations for fiscal years 2019 and 2018 amounted to $793 thousand and
$897 thousand, respectively.
During fiscal year 2016, Carver conducted a sale and leaseback transaction on its Crown Heights branch location with
an unaffiliated third party as part of the Bank's ongoing facilities rationalization efforts. Carver did not finance the purchase and
the gain was calculated utilizing the profit on sale in excess of the present value of the minimum lease payments in accordance
with ASC 840. The remaining amount of profit on the sale of the property was deferred from gain recognition and will be amortized
into income over the term of the lease. The deferred gain on the sale of the property is included in Other Liabilities on the
Consolidated Statements of Financial Condition and totaled $468 thousand and $537 thousand as of March 31, 2019 and 2018,
respectively.
During fiscal year 2018, Carver conducted a sale and leaseback transaction on its Harlem headquarters location with an
unaffiliated third party. The Bank leased a portion of the property to continue to maintain its Main Office branch at the same
location, and the administrative offices were relocated to a nearby facility. The Company recognized a $9.6 million gain on the
sale and leaseback in the fourth quarter of fiscal year 2018. Carver did not finance the purchase and the gain was calculated
utilizing the profit on sale in excess of the present value of the minimum lease payments in accordance with ASC 840. The
remaining amount of profit on the sale of the property was deferred from gain recognition and will be amortized into income over
the term of the lease. The deferred gain on the sale of the property is included in Other Liabilities on the Consolidated Statements
of Financial Condition and totaled $4.9 million and $5.4 million as of March 31, 2019 and 2018, respectively.
NOTE 6. ACCRUED INTEREST RECEIVABLE
The details of accrued interest receivable as of March 31 are as follows:
$ in thousands
Loans receivable
Mortgage-backed securities
Investments and other interest-bearing assets
Total accrued interest receivable
NOTE 7.
DEPOSITS
2019
2018
$
$
1,529
$
135
355
2,019
$
1,716
101
206
2,023
Deposit balances and weighted average interest rates as of March 31 are as follows:
74
$ in thousands
Amount
Non-interest-bearing demand
$
Interest-bearing checking
Savings
Money market savings account
Certificates of deposit
Loan escrow deposits
60,201
23,473
99,310
94,376
200,607
2,229
2019
Percent of
Total
Deposits
Weighted
Average
Rate
12.54%
—% $
4.89
20.68
19.65
41.78
0.46
0.12
0.26
0.48
1.78
2.09
2018
Percent of
Total
Deposits
Weighted
Average
Rate
10.72%
—%
4.02
17.47
17.38
50.01
0.40
0.07
0.25
0.48
1.25
1.76
Amount
62,905
23,570
102,550
101,990
293,513
2,355
Total
$
480,196
100.00%
0.91% $
586,883
100.00%
0.61%
Scheduled maturities of certificates of deposit for the year ended March 31, 2019 are as follows:
$ in thousands
Maturing years ending March 31:
2020
2021
2022
2023
2024
2025 and beyond
Total
Amount
$
160,350
13,428
8,403
12,729
5,587
110
$
200,607
The following table represents the amount of certificates of deposit of $100,000 or more at March 31, 2019 maturing
during the periods indicated:
$ in thousands
Maturing:
April 1, 2019 to June 30, 2019
July 1, 2019 to September 30, 2019
October 1, 2019 to March 31, 2020
April 1, 2020 and beyond
Total
Interest expense on deposits is as follows for the years ended March 31:
$ in thousands
Interest-bearing checking
Savings and clubs
Money market savings
Certificates of deposit
Loan escrow deposits
Total interest expense
The following table presents additional information about our year-end deposits:
$ in thousands
2019
2018
Deposits from the Certificate of Deposit Account Registry Service (CDARS)
$
48,274
$
Deposits from brokers
Certificates of deposit individually greater than $250,000
Deposits from certain directors, executive officers and their affiliates
36,744
25,076
5,029
75
$
$
25,464
17,615
25,965
26,250
95,294
2019
2018
$
30
$
265
466
4,427
44
$
5,232
$
19
249
540
3,256
42
4,106
48,206
78,215
59,164
7,356
NOTE 8. BORROWED MONEY
Federal Home Loan Bank Advances. FHLB-NY advances weighted average interest rates by remaining period to
maturity at March 31 are as follows:
$ in thousands
Maturing Year Ended March 31,
2019 (1)
2020
2019
$
Weighted
Average Rate
—%
2.66%
2.66%
2018
$
Amount
—
8,000
8,000
Weighted
Average Rate
1.50%
—%
1.50%
Amount
25,000
—
25,000
$
(1) Effective rate is 2.13% which includes the net impact of the amortization of the termination fee on restructured borrowing.
$
As a member of the FHLB-NY, the Bank may have outstanding FHLB-NY borrowings in a combination of term advances
and overnight funds of up to 30% of its total assets, or approximately $169.1 million at March 31, 2019. Borrowings are secured
by the Bank's investment in FHLB-NY stock and by a blanket security agreement. This agreement requires the Bank to maintain
as collateral certain qualifying assets (principally mortgage loans and securities) not otherwise pledged. At March 31, 2019,
advances were all fixed-rate and secured by pledges of the Bank's investment in the capital stock of the FHLB-NY totaling $926
thousand and a blanket assignment of the Bank's pledged qualifying mortgage loans of $38.8 million and mortgage-backed and
investment securities with a market value of $24.6 million. The Bank has sufficient collateral at the FHLB-NY to be able to borrow
an additional $42.5 million from the FHLB-NY at March 31, 2019. The accrued interest payable on FHLB advances was $2
thousand and interest expense was $89 thousand for the year ended March 31, 2019. At March 31, 2018, the accrued interest
payable on FHLB advances was $32 thousand and the interest expense was $542 thousand. The Bank completed a debt restructuring
during the first quarter of fiscal year 2014 that allowed it to prepay a $25 million long-term borrowing and secure a new borrowing
at a significantly lower rate. The termination fees and penalties associated with the borrowing were prepaid to the FHLB and
amortized over five years. The Bank repaid the $25 million upon maturity during the first quarter of fiscal year 2019.
Repurchase agreements. Repurchase agreements ("REPO") are short-term contracts for the sale of securities owned or
borrowed by the Bank with an agreement to repurchase those securities at an agreed-upon price and date. Securities sold under
agreements to repurchase are stated at the amount of cash received in connection with the transaction. The Bank monitors collateral
levels on a continuous basis and may be required to provide additional collateral based on the fair value of the underlying securities.
Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. The Bank repaid a
REPO borrowing with an outstanding balance of $1.0 million during fiscal year 2018. The Bank had no outstanding REPO
borrowings at March 31, 2019 or 2018.
Subordinated Debt Securities. 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 totaling $2.5 million 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.
On September 30, 2009, the Bank raised $5.0 million in a private placement of subordinated debt maturing December
30, 2018. The interest rate was set at 7% per annum for the first seven years as long as there is no default event, including Carver
maintaining its certification as a Community Development Entity (“CDE”) and remaining in compliance with NMTC requirements,
and 12% per annum after. During the second quarter of fiscal year 2012, the interest rate was reduced to 2%. This subordinated
debt has been approved by the regulators to qualify as Tier II capital for the Bank's regulatory capital calculations. Qualifying
term subordinated debt must have an original weighted average maturity of at least five years. Once the term to maturity is less
than five years, the amount qualified as Tier II capital declines 20% per year. The ability to include any portion of the private
placement subordinated debt in Tier II capital expired on January 1, 2017. The $5.0 million subordinated debt was paid in full
during fiscal year 2018.
76
The accrued interest payable on subordinated debt securities was $1.7 million and the interest expense was $819 thousand
for the year ended March 31, 2019. The accrued interest payable on subordinated debt securities was $914 thousand and the
interest expense was $625 thousand for the year ended March 31, 2018.
The following table sets forth certain information regarding Carver Federal's borrowings as of and for the years ended
March 31:
$ in thousands
Amounts outstanding at the end of year:
FHLB advances
Subordinated debt securities
Rate paid at year end:
FHLB advances
Subordinated debt securities
Maximum amount of borrowing outstanding at any month end:
FHLB advances
Subordinated debt securities
Repo
Approximate average amounts outstanding for year:
FHLB advances
Subordinated debt securities
Repo
Approximate weighted average rate paid during year:
FHLB advances
Subordinated debt securities
Repo
$
$
$
$
$
$
$
2019
2018
8,000
13,403
$
25,000
13,403
2.66%
5.66%
1.50%
5.23%
25,000
13,403
$
$
— $
4,118
13,403
$
$
— $
30,000
13,403
1,000
25,616
13,773
584
2.16%
6.11%
—%
2.11%
4.54%
1.17%
77
NOTE 9.
INCOME TAXES
The components of income tax (benefit) expense for the years ended March 31 are as follows:
$ in thousands
Income tax expense
Federal:
Current expense
Deferred benefit
Total
State: Current expense
Total income tax expense (benefit)
2019
2018
$
$
— $
—
—
133
133
$
174
(340)
(166)
133
(33)
The following is a reconciliation of the expected Federal income tax rate to the consolidated effective tax rate for the
years ended March 31:
$ in thousands
2019
2018
Amount
Percent
Amount
Percent
Statutory Federal income tax expense (benefit)
$
(1,218)
(21.0)% $
State and local income tax, net of Federal tax benefit
Impact of income tax rate changes
Credit and NOL adjustments
Change in valuation allowance
Other
Total income tax expense (benefit)
$
105
—
—
1,332
(86)
133
1.8
—
—
23.0
(1.6)
2.2 % $
1,638
92
3,283
(2,148)
(3,061)
163
(33)
30.8 %
1.7
61.7
(40.4)
(57.5)
3.1
(0.6)%
Tax effects of existing temporary differences that give rise to significant portions of deferred tax assets and deferred tax
liabilities are included in other assets at March 31 as follows:
$ in thousands
Deferred Tax Assets:
Allowance for loan losses
Nonaccrual loan interest
Deferred gain - sale leaseback transactions
Net operating loss carryforward
New markets tax credit
AMT credits
Depreciation
Unrealized loss on available-for-sale securities
Total Deferred Tax Assets
Deferred Tax Liabilities:
Other
Total Deferred Tax Liabilities
Deferred Tax Assets, net
Valuation Allowance
2019
2018
$
1,561
$
41
1,803
16,248
3,452
170
821
1,092
25,188
1,073
1,073
24,115
(23,945)
1,727
109
2,006
12,419
3,452
340
1,864
1,105
23,022
676
676
22,346
(21,952)
394
Deferred Tax Assets, net of valuation allowance
$
170
$
On June 29, 2011, the Company raised $55.0 million of equity. 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, but has accumulated availability of $6.7 million as of March 31,
2019. The total cumulative availability over the carryover period (20 years) is $18.1 million. The Company has a net deferred
78
tax asset (“DTA”) of approximately $24.1 million. Based on management's calculations, the Section 382 limitation has resulted
in previous reductions of the deferred tax asset of $5.8 million. A valuation allowance for net deferred tax asset of $23.9 million
has been recorded. The valuation allowance was initially recorded during fiscal year 2011, and has largely remained through
March 31, 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. The Tax Cuts and Jobs Act, that was 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. The Company
made a reasonable estimate and recorded a remeasurement of the Company’s net deferred income tax assets and liabilities based
on the new reduced U.S. corporate income tax rate as of March 31, 2018. The impact on the net deferred tax asset before valuation
allowances was a reduction of $3.1 million, which was offset by a corresponding decrease in the valuation allowance of the same
amount. The Company recorded a benefit of $340 thousand for alternative minimum tax credits which, under the new tax law,
are refundable. As of March 31, 2019, the valuation allowance was reduced by $170 thousand, the amount of the Company's
AMT credits.
At March 31, 2019, the Company had net operating carryforwards for federal purposes of approximately $32.3 million,
for state purposes of approximately $61.0 million and for city purposes of approximately $54.0 million which are available to
offset future federal, state and city income and which expire over varying periods from March 2029 through March 2039. Federal
net operating carryforwards of $8.6 million do not expire.
The Company has no uncertain tax positions. The Company and its subsidiaries are subject to federal, New York State
and New York City income taxation. The Company is no longer subject to examination by taxing authorities for years before
March 31, 2016. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained
in a tax examination; with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit
that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no
tax benefit is recorded.
NOTE 10. EARNINGS (LOSS) PER COMMON SHARE
The following table reconciles the earnings (loss) available to common shareholders (numerator) and the weighted average
common stock outstanding (denominator) for both basic and diluted earnings (loss) per share for the years ended March 31:
$ in thousands except per share data
Net (loss) income attributable to Carver Bancorp, Inc.
Less: Participated securities share of undistributed earnings
Net (loss) income available to common shareholders of Carver Bancorp, Inc.
Weighted average common shares outstanding – basic
Effect of dilutive Equity Incentive Plan (Restricted Stock) shares
Weighted average common shares outstanding – diluted
Basic (loss) earnings per common share
Diluted (loss) earnings per common share
2019
2018
$
(5,936) $
—
(5,936)
5,354
(3,206)
2,148
3,698,534
3,698,058
—
3,400
3,698,534
3,701,458
$
$
(1.60) $
(1.60) $
0.58
0.58
For the year ended March 31, 2019, all restricted shares and outstanding stock options were anti-dilutive. For details
of restricted shares and stock options, please refer to Note 13. Employee Benefit and Stock Compensation Plans.
NOTE 11. STOCKHOLDERS' EQUITY
Conversion and Stock Offering. On October 24, 1994, the Bank issued in an initial public offering 2,314,375 shares of
common stock, par value $0.01 (the “Common Stock”), at a price of $10 per share resulting in net proceeds of $21.5 million. As
part of the initial public offering, the Bank established a liquidation account at the time of conversion, in an amount equal to the
surplus and reserves of the Bank at September 30, 1994. In the unlikely event of a complete liquidation of the Bank (and only in
such event), eligible depositors who continue to maintain accounts shall be entitled to receive a distribution from the liquidation
account. The total amount of the liquidation account may be decreased if the balances of eligible deposits decreased as measured
on the annual determination dates. The Bank is not permitted to pay dividends to the Company on its capital stock if the effect
thereof would cause its net worth to be reduced below either: (i) the amount required for the liquidation account, or (ii) the amount
required for the Bank to comply with applicable minimum regulatory capital requirements. In 2011 the stockholders approved a
1-for-15 reverse stock split pursuant to which each 15 shares of the Company’s Common Stock would be converted into one share
79
of Common Stock. The 1-for-15 reverse stock split was effective as of October 27, 2011, resulting in a reduction in the number
of outstanding shares of the Company’s Common Stock from 2,492,415 to 166,161, an increase of the conversion price of the
Series C Preferred Stock and the Series D Preferred Stock and the exchange ratio of the Series B Preferred Stock from $0.5451
to $8.1765, and a corresponding decrease in the number of shares of Common Stock issued to the Investors and Treasury. During
the year ended March 31, 2012, all outstanding shares of Series B Preferred Stock were converted to Common Stock and all
outstanding shares of Series C preferred Stock were converted to Series D Preferred Stock. As of March 31, 2019, there were
3,698,784 shares of Company common stock outstanding.
Series D Preferred Stock ranks senior to the Common Stock. The holders of Series D Preferred Stock are entitled to
receive dividends, on an as-converted basis, simultaneously to the payment of any dividends on the Company's common stock.
Dividends on the Series D Preferred Stock are not cumulative. If the Company's board of directors does not declare a dividend
with respect to any dividend period, the holders of the Series D Preferred Stock will have no right to receive any dividend for that
period. The Company may not declare, pay or set apart for payment any dividend or make any distribution on common stock,
unless at the time of such dividend or distribution the Company simultaneously pays a non-cumulative dividend or makes a
distribution on each outstanding share of Series D Preferred Stock on an as-converted basis. The holders of Series D preferred
Stock are generally not entitled to vote, except with respect to amendments to the Company's certificate of incorporation that
would change the rights and preferences of the Series D Preferred Stock, the creation or increase of any class of securities senior
to the Series D Preferred Stock, the consummation of certain mergers, consolidations or other transactions where the holders of
the Series D Preferred Stock are not converted into or exchanged for preference securities of the surviving entity, and as otherwise
required by applicable law.
.
The Series D Preferred Stock shall automatically convert into shares of Common Stock only upon the following transfers
to third parties (“Eligible Transfers”):
• a transfer in a widespread public distribution;
• a transfer in which no transferee (together with its affiliates and other transferees acting in concert with it) acquires
more than 2% of the Company’s common stock or any other class or series of the Company’s voting stock; or
• a transfer to a transferee that (together with its affiliates and other transferees acting in concert with it) owns or controls
more than 50% of the Company’s common stock, without regard to the transfer.
The conversion price of the Series D Preferred Stock is $8.1765, and is subject to adjustment in the event of stock splits,
subdivisions or combinations, dividends and distributions, issuance of certain rights, spin-offs, self-tenders and exchange offers
as set forth under the agreement. The Series D Preferred Stock is not convertible at the option of the holders. As of March 31,
2019, there were 45,118 shares of Series D Preferred Stock outstanding.
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 March 31, 2019, 11,744 shares of its common stock have been repurchased in open market
transactions. No shares were repurchased during fiscal 2019. The U.S. Treasury's prior approval is required to make further
repurchases.
Regulatory Capital. The operations and profitability of the Bank are significantly affected by legislation and the policies
of the various regulatory agencies. In July 2013, the FDIC and the other federal bank regulatory agencies issued a final rule that
revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them
consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-
Frank Act. 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%.
Carver Federal, as a matter of prudent management, targets as its goal the maintenance of capital ratios which exceed these
minimum requirements and that are consistent with Carver Federal's risk profile. In assessing an institution's capital adequacy,
the OCC takes into consideration not only these numeric factors but also qualitative factors, and has the authority to establish
higher capital requirements for individual institutions where necessary. Regardless of Basel III's minimum requirements, Carver,
as a result of the previously described Formal Agreement, was issued an Individual Minimum Capital Ratio ("IMCR") letter by
the OCC, which requires the Bank to maintain minimum regulatory capital levels of 9% for its Tier 1 leverage ratio and 12% for
its total risk-based capital ratio. At March 31, 2019, the Bank's capital level exceeded the regulatory requirements and its IMCR
80
requirements with a Tier 1 leverage ratio of 10.77%, Common Equity Tier 1 capital ratio of 15.39%, Tier 1 risk-based capital ratio
of 15.39%, and a total risk-based capital ratio of 16.58%.
The table below presents the Bank's regulatory capital ratios at March 31, 2019 and 2018.
($ in thousands)
Tier 1 leverage capital
Regulatory capital
Individual minimum capital requirement
Minimum capital requirement
Excess
Common equity Tier 1
Regulatory capital
Minimum capital requirement
Excess
Tier 1 risk-based capital
Regulatory capital
Minimum capital requirement
Excess
Total risk-based capital
Regulatory capital
Individual minimum capital requirement
Minimum capital requirement
Excess
$
$
$
$
March 31, 2019
March 31, 2018
Amount
Ratio
Amount
Ratio
62,875
52,525
23,344
39,531
62,875
18,388
44,487
62,875
24,518
38,357
67,766
49,036
32,691
35,075
10.77% $
9.00%
4.00%
6.77%
15.39% $
4.50%
10.89%
15.39% $
6.00%
9.39%
16.58% $
12.00%
8.00%
8.58%
67,742
60,022
26,676
41,066
67,742
20,050
47,692
67,742
26,733
41,009
73,082
53,465
35,644
37,438
10.16%
9.00%
4.00%
6.16%
15.20%
4.50%
10.70%
15.20%
6.00%
9.20%
16.40%
12.00%
8.00%
8.40%
NOTE 12. OTHER COMPREHENSIVE INCOME (LOSS)
The following tables set forth changes in each component of accumulated other comprehensive loss, net of tax for the
years ended March 31, 2019 and 2018:
$ in thousands
Net unrealized loss on securities
available-for-sale
At
March 31, 2018
ASU 2016-01
reclassification
Other
Comprehensive
Loss
At
March 31, 2019
$
(2,726)
721
$
1,066
$
(939)
$ in thousands
At
March 31, 2017
Other
Comprehensive
Income
At
March 31, 2018
Net unrealized loss on securities available-for-sale
$
(1,940) $
(786) $
(2,726)
The following table sets forth information about amounts reclassified from accumulated other comprehensive loss to
the consolidated statement of operations and the affected line item in the statement where net income is presented.
$ in thousands
For the Twelve Months
Ended March 31,
2019
2018
Affected Line Item in the Consolidated
Statement of Operations
Reclassification adjustment for sales of available for-sale
securities, net of tax
$
16
$
— Loss on sale of securities, net
Comprehensive (Loss) Income. Comprehensive (loss) income represents net (loss) income and certain amounts reported directly
in stockholders' equity, such as net unrealized gain or loss on securities available-for-sale. The balance at March 31, 2019 included
$1.1 million of unrealized losses for the year ended March 31, 2019. The balance at March 31, 2018 included $786 thousand of
unrealized losses for the year ended March 31, 2018.
81
NOTE 13. EMPLOYEE BENEFIT AND STOCK COMPENSATION PLANS
Savings Incentive Plan. Carver has a savings incentive plan, pursuant to Section 401(k) of the Code, for all eligible
employees of the Bank. The Bank matches contributions to the 401(k) Plan equal to 100% of pre-tax contributions made by each
employee up to a maximum of 3% of their pay, subject to IRS limitations. All such matching contributions are fully vested and
non-forfeitable at all times regardless of the years of service with the Bank.
Under the profit-sharing feature, if the Bank achieves a minimum of 70% of its net income goal as mentioned previously,
the Compensation Committee may authorize an annual non-elective contribution to the 401(k) Plan on behalf of each eligible
employee up to 2% of the employee's annual pay, subject to IRS limitations. This non-elective contribution may be made regardless
of whether the employee makes a contribution to the 401(k) Plan. Non-elective Bank contributions, if awarded, vest 20% each
year for the first five years of employment and are fully vested thereafter.
To be eligible for the matching contribution, the employee must be 21 years of age and have completed at least three
months of service. To be eligible for the non-elective Carver contribution, the employee must also be employed as of the last day
of the plan year.
Compensation expense recognized for the savings incentive plan was $257 thousand and $261 thousand, respectively,
for fiscal 2019 and 2018.
Stock Option Plans. In September 2006, Carver stockholders approved the 2006 Stock Incentive Plan (the "2006 Incentive
Plan") which provides for the grant of stock options, stock appreciation rights and restricted stock to employees and directors who
are selected to receive awards by the Committee. The 2006 Incentive Plan authorizes Carver to grant awards with respect to
20,000 shares, but no more than 10,000 shares of restricted stock may be granted. Options are granted at a price not less than
fair market value of Carver common stock at the time of the grant for a period not to exceed 10 years. Shares generally vest in
20% increments over 5 years, however, the Committee may specify a different vesting schedule. At March 31, 2019, there were
3,733 options outstanding under the 2006 Incentive Plan and 3,133 were exercisable. All options are exercisable immediately
upon a participant's disability, death or a change in control, as defined in the 2006 Incentive Plan, if the person is employed on
that date. If the person is terminated (voluntary or involuntarily) from the Bank, all unvested shares are forfeited. Pursuant to the
plan, the Bank recognized $4 thousand and $5 thousand as expense for fiscal years 2019 and 2018, respectively.
In September 2014, Carver stockholders approved the Carver Bancorp, Inc. 2014 Equity Incentive Plan (the "2014
Incentive Plan") which provides for the grant of stock options, stock appreciation rights and restricted stock to executive officers
and directors who are selected to receive awards by the Committee. The 2014 Incentive Plan authorizes Carver to grant awards
with respect to 250,000 shares. All of the shares may be issued pursuant to stock options (all of which may be incentive stock
options) or all of which may be issued pursuant to restricted stock awards or restricted stock units. Unless the Committee determines
otherwise, the award agreements will specify that no award will vest more rapidly than 25% per year over a four-year period, with
the first installment vesting one year after the date of grant, subject to acceleration upon the occurrence of specific events. During
fiscal 2018, there were 1,000 options and 1,000 restricted stock awards issued. At March 31, 2019, there were 1,000 options
outstanding under the 2014 Incentive Plan and 250 were exercisable. All options are exercisable immediately upon a participant's
disability, death or change in control, as defined in the 2014 Incentive Plan, if the person is employed on that date. If the person
is terminated (voluntary or involuntarily) from the Bank, all unvested shares are forfeited. Pursuant to the plan, the Bank recognized
less than $1 thousand as expense for fiscal year 2019.
Information regarding nonvested shares of restricted stock awards outstanding for the years ended March 31 is as follows:
Outstanding, beginning of year
Granted
Vested
Forfeited
Outstanding, end of year
2019
2018
Shares
Weighted
Average
Grant Price
Shares
Weighted
Average
Grant Price
4.52
—
5.06
5.56
4.76
3,200
$
1,000
(800)
—
3,400
$
5.56
3.48
5.56
—
4.52
3,400
$
—
(1,050)
400
1,950
$
82
Unrecognized compensation expense on unvested restricted shares as of March 31, 2019 totaled $7 thousand. This amount will
be recognized over the remaining vesting period of 1.80 years (weighted average).
Information regarding stock options as of and for the years ended March 31 is as follows:
Outstanding, beginning of year
Granted
Exercised
Expired/Forfeited
Outstanding, end of year
Exercisable, at year end
2019
2018
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Options
8.53
—
—
5.56
7.71
4,133
$
1,000
—
—
5,133
$
1,733
8.53
3.48
—
—
8.53
Options
5,133
$
—
—
400
4,733
$
3,383
Information regarding stock options as of March 31, 2019 is as follows :
Range of
Exercise Prices
3.00 $
5.00 $
90.00 $
5.00
5.99
104.85
$
$
Total
Shares
1,000
3,600
133
4,733
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Life
Weighted
Average
Exercise
Price
$
$
8.71
6.23
1.36
3.48
5.56
97.50
Weighted
Average
Exercise
Price
3.48
5.56
97.50
Shares
$
$
250
3,000
133
3,383
As of March 31, 2019, unrecognized compensation expense on unvested stock options totaled $7 thousand. This amount will be
recognized over the remaining vesting period of 1.80 years (weighted average).
There were no stock options awarded to employees or directors during the year ended March 31, 2019.
At March 31, 2019, all outstanding options had no intrinsic value.
The fair value of the option grants was estimated on the date of the grant using the Black-Scholes option pricing model
applying the following weighted average assumptions for the years ended March 31:
Risk-free interest rate
Volatility
Expected life of option grants (years)
2019
2018
N/A
N/A
N/A
2.74%
10%
7.5
The Company recorded compensation expense of $4 thousand in fiscal 2019 and $5 thousand in fiscal 2018.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Credit Related Commitments. 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's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit
policies in making commitments as it does for on-balance-sheet instruments.
83
The following table reflects the Bank's outstanding lending commitments and contractual obligations as of March 31:
$ in thousands
Commitments to fund commercial and consumer loans
Lines of credit
Letters of credit
Commitment to fund private equity investment
2019
2018
$
$
1,775
$
2,571
—
640
4,986
$
2,457
3,939
69
640
7,105
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require
payment of a fee. Since some of these commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-
by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty.
Mortgage Representation & 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 (GSE's). The Bank may be required to repurchase these loans in
the event of breaches of these representations and warranties. In the event of a repurchase, the Bank is typically required to pay
the unpaid principal balance as well as outstanding interest and fees. The Bank then recovers the loan or, if the loan has been
foreclosed, the underlying collateral. The Bank is exposed to any losses on repurchased loans after giving effect to any recoveries
on the collateral. The Bank has not received a request to repurchase any of these loans since the second quarter of fiscal 2015,
and there have not been any additional requests from FNMA for loans to be reviewed. The reserves totaled $226 thousand as of
March 31, 2019.
The following table presents information on open requests from FNMA. The amounts presented are based on outstanding
loan principal balances.
$ in thousands
Open claims as of March 31, 2018 (1)
Gross new demands received
Loans repurchased/made whole
Demands rescinded
Advances on open claims
Loans sold to FNMA
$
2,013
—
—
—
—
Principal payments received on open claims
Open claims as of March 31, 2019 (1)
(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.
1,982
(31)
$
The table below summarizes changes in our representation and warranty reserves during fiscal 2019.
$ in thousands
Representation and warranty repurchase reserve, March 31, 2018 (1)
Net provision of repurchase losses (2)
Representation and warranty repurchase reserve, March 31, 2019 (1)
(1) Reported in consolidated statements of financial condition as a component of other liabilities.
(2) Component of other non-interest expense.
$
$
March 31, 2019
205
21
226
84
Lease Commitments. Rentals under long-term operating leases for certain branches aggregated approximately $2.4
million and $1.4 million for fiscal years 2019 and 2018, respectively. As of March 31, 2019, minimum rental commitments under
all non-cancelable leases with initial or remaining terms of more than one year and expiring through 2029 follow:
$ in thousands
Year Ending March 31,
2020
2021
2022
2023
2024
Thereafter
$
$
2,761
2,686
2,428
2,290
2,289
8,572
21,026
The Bank also has, in the normal course of business, commitments for services and supplies.
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 March 31, 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.
NOTE 15. FAIR VALUE MEASUREMENTS
On April 1, 2008, the Company adopted ASC Topic 820 which, among other things, defines fair value, establishes a
consistent framework for measuring fair value, and expands disclosure for each major asset and liability category measured at fair
value on either a recurring or nonrecurring basis. ASC 820 clarifies that 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, ASC 820 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
March 31, 2019 and 2018, and that are included in the Company's Consolidated Statements of Financial Condition at these
dates:
85
$ in thousands
Mortgage servicing rights
Investment securities
Available-for-sale:
Mortgage-backed securities:
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
U.S. Government Agency securities
Corporate bonds
Total available-for-sale securities
Equity securities
Total assets
$ in thousands
Mortgage servicing rights
Investment securities
Available-for-sale:
Mortgage-backed securities:
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
U.S. Government Agency securities
Corporate bonds
Other investments
Total available-for-sale securities
Fair Value Measurements at March 31, 2019, Using
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level
3)
Total Fair
Value
$
— $
— $
180
$
180
—
—
—
—
—
—
—
— $
4,382
11,025
26,608
32,853
4,977
79,845
—
79,845
$
—
—
—
—
—
—
454
634
$
4,382
11,025
26,608
32,853
4,977
79,845
454
80,479
$
Fair Value Measurements at March 31, 2018, Using
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level
3)
Total Fair
Value
$
— $
— $
181
$
181
—
—
—
—
—
—
—
— $
2,066
6,350
23,411
14,232
4,866
9,351
60,276
60,276
$
—
—
—
—
—
433
433
614
$
2,066
6,350
23,411
14,232
4,866
9,784
60,709
60,890
Total assets
$
Instruments for which unobservable inputs are significant to their fair value measurement (i.e., Level 3) include mortgage
servicing rights ("MSR") and other available-for-sale securities. Level 3 assets accounted for 0.11% and 0.09% of the Company's
total assets at March 31, 2019 and 2018, respectively.
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.
86
During the fiscal year ended March 31, 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.
The following table includes a rollforward of assets classified by the Company within Level 3 of the valuation hierarchy
for the years ended March 31, 2019 and 2018:
$ in thousands
Equity Securities
Beginning
balance,
April 1, 2018
433
$
Mortgage Servicing Rights
181
$ in thousands
Available-for-Sale: Other investments $
Beginning
balance,
April 1, 2017
403
Mortgage Servicing Rights
(1) Includes net servicing cash flows and the passage of time.
192
Total Realized/
Unrealized
Gains/(Losses)
Recorded in
Income (1)
$
21
(1)
Total Realized/
Unrealized
Gains/(Losses)
Recorded in
Income (1)
$
30
(11)
Issuances /
(Settlements)
$
Transfers
to/(from)
Level 3
Ending
balance,
March 31, 2019
454
— $
— $
—
—
180
Issuances /
(Settlements)
$
Transfers
to/(from)
Level 3
Ending
balance,
March 31, 2018
433
— $
— $
—
—
181
Change in
Unrealized Gains/
(Losses) Related to
Instruments Held at
March 31, 2019
$
—
(1)
Change in
Unrealized Gains/
(Losses) Related to
Instruments Held at
March 31, 2018
$
—
(10)
For Level 3 assets measured at fair value on a recurring basis as of March 31, 2019 and 2018, the significant unobservable
inputs used in the fair value measurements were as follows:
$ in thousands
Equity Securities
Fair Value at
March 31, 2019 Valuation Technique
Significant Unobservable Inputs
454 Cost
n/a
Significant
Unobservable
Input Value
Mortgage Servicing Rights
Discounted Cash
Flow
180
Weighted Average Constant Prepayment
Rate (1)
11.19%
Option Adjusted Spread ("OAS") applied to
Treasury curve
1000 basis
points
87
$ in thousands
Available-for-Sale:
Other investments
Mortgage Servicing Rights
Fair Value at
March 31, 2018
Valuation Technique
Significant Unobservable Inputs
Significant
Unobservable
Input Value
433 Cost
n/a
181 Discounted Cash Flow Weighted Average Constant Prepayment Rate (1)
Discount Rate
20.03%
12.00%
(1) Represents annualized loan repayment rate assumptions
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 March 31, 2019 and 2018, and that are included in the Company's
Consolidated Statements of Financial Condition at these dates:
$ in thousands
Impaired loans
Other real estate owned
$ in thousands
Impaired loans
Other real estate owned
Fair Value Measurements at March 31, 2019, Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Total Fair
Value
— $
— $
— $
— $
2,027
404
$
$
2,027
404
Fair Value Measurements at March 31, 2018, Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Total Fair
Value
— $
— $
— $
— $
4,476
1,145
$
$
4,476
1,145
$
$
$
$
For Level 3 assets measured at fair value on a non-recurring basis as of March 31, 2019 and 2018, the significant
unobservable inputs used in the fair value measurements were as follows:
$ in thousands
Impaired loans
Fair Value at
March 31, 2019
$
Valuation Technique
2,027 Appraisal of collateral
Significant
Unobservable Inputs
Appraisal adjustments
Significant
Unobservable
Input Value
7.5% cost to sell
Other real estate owned
404 Appraisal of collateral
Appraisal adjustments
7.5% cost to sell
$ in thousands
Impaired loans
Fair Value at
March 31, 2018
$
Valuation Technique
4,476 Appraisal of collateral
Significant
Unobservable Inputs
Appraisal adjustments
Significant
Unobservable
Input Value
7.5% cost to sell
Other real estate owned
1,145 Appraisal of collateral
Appraisal adjustments
7.5% cost to sell
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.
88
NOTE 16. 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.
The carrying amounts and estimated fair values of the Bank's financial instruments and estimation methodologies at
March 31 are as follows:
$ in thousands
Financial Assets:
Cash and cash equivalents
Securities available-for-sale
Equity securities
FHLB Stock
Securities held-to-maturity
Loans receivable
Accrued interest receivable
Mortgage servicing rights
Other assets - Interest-bearing deposits
Financial Liabilities:
Deposits
Advances from FHLB of New York
Other borrowed money
Accrued interest payable
March 31, 2019
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Amount
Estimated
Fair Value
$
$
$
$
31,228
79,845
454
926
11,137
424,182
2,019
180
976
480,196
8,000
13,403
1,931
$
$
31,228
79,845
454
926
11,107
424,013
2,019
180
976
477,503
8,001
12,393
1,931
31,228
—
—
—
—
—
—
—
—
$
— $
79,845
—
926
11,107
—
2,019
—
976
$
277,360
—
—
—
$
200,143
8,001
12,393
1,931
—
—
454
—
—
424,013
—
180
—
—
—
—
—
89
March 31, 2018
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Amount
Estimated
Fair Value
$
$
$
$
134,558
60,709
1,768
12,075
472,627
2,023
181
971
586,883
25,000
13,403
1,086
$
$
134,558
60,709
1,768
11,909
469,382
2,023
181
971
535,808
24,970
14,565
1,086
134,558
—
—
—
—
—
—
—
245,634
—
—
—
$
— $
60,276
1,768
11,909
—
2,023
—
971
$
$
290,174
24,970
14,565
1,086
—
433
—
—
469,382
—
181
—
—
—
—
—
$ in thousands
Financial Assets:
Cash and cash equivalents
Securities available-for-sale
FHLB Stock
Securities held-to-maturity
Loans receivable
Accrued interest receivable
Mortgage servicing rights
Other assets - Interest-bearing deposits
Financial Liabilities:
Deposits
Advances from FHLB of New York
Other borrowed money
Accrued interest payable
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 2 and 3. Held-
to-maturity securities are classified as Level 2.
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 17. VARIABLE INTEREST ENTITIES
The Company's subsidiary, Carver Statutory Trust I, is not consolidated with Carver Bancorp, Inc. for financial reporting
purposes. Carver Statutory Trust I was formed in 2003 for the purpose of issuing $13 million aggregate liquidation amount of
floating rate Capital Securities due September 17, 2033 (“Capital Securities”) and $0.4 million of common securities (which are
the only voting securities of Carver Statutory Trust I), which are 100% owned by Carver Bancorp, Inc., and using the proceeds
to acquire Junior Subordinated Debentures issued by Carver Bancorp, Inc. Carver Bancorp, Inc. has fully and unconditionally
guaranteed the Capital Securities along with all obligations of Carver Statutory Trust I under the trust agreement relating to the
Capital Securities.
The Bank's subsidiary, Carver Community Development Corporation (“CCDC”), was formed to facilitate its participation
in local economic development and other community-based initiatives. Per the NMTC Award's Allocation Agreement between
the CDFI Fund and CCDC, CCDC is permitted to form and sub-allocate credits to subsidiary Community Development Entities
(“CDEs”) to facilitate investments in separate development projects.
The variable interest entities (“VIEs”) are consolidated, as required, where Carver has controlling financial interest in
these entities and is deemed to be the primary beneficiary. Carver is normally deemed to have a controlling financial interest and
be the primary beneficiary if it has both of the following characteristics:
(a) the power to direct activities of a VIE that most significantly impact the entities economic performance; and
(b) the obligation to absorb losses of the entity that could benefit from the activities that could potentially be significant
to the VIE.
90
As none of the Bank's VIEs meet the above criteria, there are no consolidated VIEs at March 31, 2019.
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 at March 31, 2019 are presented below:
Involvement with SPE (000's)
Funded Exposure
Unfunded Exposure
Total
Recognized
Gain (Loss)
(000's)
Total
Rights
transferred
Significant
unconsolidated
VIE assets
Total
Involvement
with SPE
asset
Debt
Investments
Equity
Investments
Funding
Commitments
Maximum
exposure
to loss
Carver
Statutory
Trust 1(1)
CDE 18*
CDE 19
CDE 20*
CDE 21
$
— $
— $
13,400 $
13,400 $
14,733 $
400 $
— $
— $15,133
600
500
625
625
13,254
10,746
12,500
12,500
—
—
11,054
11,054
—
—
12,014
12,014
—
—
—
—
—
1
—
1
—
—
—
—
5,169
5,169
4,191
4,192
4,875
4,875
4,875
4,876
Total
$
3,250 $
69,500 $
36,468 $
36,468 $
14,733 $
402 $
— $
27,105 $42,240
* Entities exited the NMTC projects during fiscal years 2018 and 2019 and remain on the above table pending final dissolution.
1 Carver Statutory Trust debt investment includes deferred interest of $1.7 million.
In June 2006, CCDC received a NMTC award of $59 million. CCDC has a contingent obligation to reimburse the investor
for any loss or shortfall incurred as a result of the NMTC projects 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
and CDEs 2-12 have been dissolved.
CCDC received a second NMTC award of $65 million in May 2009, and a third award of $25 million in August 2011.
During the period from December 2009 to September 2012, CCDC transferred rights to investors in NMTC projects (entities
CDEs 13-21). The NMTC compliance period was completed for CDEs 13-17, and these entities have been dissolved. The NMTC
compliance period was completed for CDEs 18 and 20, and these entities will be dissolved. CCDC has a contingent obligation
to reimburse the investors for any losses or shortfalls 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.
CCDC established various special purpose entities (CDEs 22-25) through which its investments in NMTC eligible
activities will be conducted. As of March 31, 2019, there have been no activities in these entities.
NOTE 18. 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 2. Summary of Significant Accounting Policies - 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
91
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.
Interchange income
The Company earns interchange fees from debit card holder transactions conducted through various payment networks.
Interchangee fees from cardholder transactions are recognized daily, concurrently with the transaction procesing services provided
by an outsource technology solution and are presented on a net basis.
The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606,
for the years ended March 31, 2019 and March 31, 2018:
$ in thousands
Non-interest income
In-scope of Topic 606
Depository fees and charges
Loan fees and service charges
Other non-interest income
Non-interest income (in-scope of Topic 606)
Non-interest income (out-of-scope of Topic 606)
Total non-interest income
Years Ended March 31,
2019
2018
$
$
3,337
$
303
61
3,701
1,157
4,858
$
3,372
530
91
3,993
10,366
14,359
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 years presented:
$ in thousands
Other non-interest expense:
Advertising
Legal expense
Insurance and surety
Audit expense
Outsourced service
Data lines / internet
Retail expenses
Operating chargeoffs and other losses
Regulatory assessment
Director's fees
Other
Total non-interest expense
Years Ended March 31,
2019
2018
316
413
660
672
558
441
781
714
314
313
$
2,292
7,474
$
92
311
475
605
1,230
530
291
829
48
290
346
2,705
7,660
NOTE 19.
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth certain unaudited financial data for our quarterly operations in fiscal 2019 and 2018. The
following information has been prepared on the same basis as the annual information presented elsewhere in this report and, in
the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the quarterly periods presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
$ in thousands, except per share data
June 30, 2018
September 30, 2018
December 31, 2018 March 31, 2019
Fiscal 2019
Interest income
Interest expense
Net interest income
Provision for (recovery of) loan losses
Non-interest income
Non-interest expense
Income tax expense
Net loss
Loss per common share
Basic
Diluted
$
6,123
$
5,917
$
5,566
$
1,625
4,498
5
1,304
6,827
—
1,601
4,316
49
1,079
7,297
66
1,470
4,096
(332)
1,327
7,070
34
5,624
1,445
4,179
8
1,148
6,826
33
$
$
$
(1,030) $
(2,017) $
(1,349) $
(1,540)
(0.28) $
(0.28) $
(0.55) $
(0.55) $
(0.36) $
(0.36) $
(0.42)
(0.42)
$ in thousands, except per share data
June 30, 2017
September 30, 2017
December 31, 2017 March 31, 2018
Fiscal 2018
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income tax expense
Net (loss) income
(Loss) earnings per common share
Basic
Diluted
$
6,171
$
6,339
$
6,053
$
1,218
4,953
120
1,209
6,653
30
1,252
5,087
4
1,139
6,786
30
1,364
4,689
6
1,346
6,942
31
$
$
$
(641) $
(594) $
(944) $
(0.17) $
(0.17) $
(0.16) $
(0.16) $
(0.26) $
(0.26) $
5,796
1,446
4,350
5
10,665
7,601
(124)
7,533
0.82
0.82
NOTE 20. CARVER BANCORP, INC. - PARENT COMPANY ONLY
CONDENSED STATEMENTS OF FINANCIAL CONDITION
93
$ in thousands
Assets
Cash on deposit with subsidiaries
Investment in subsidiaries
Other assets
Total assets
Liabilities and Stockholders' Equity
Borrowings
Accounts payable to subsidiaries
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
CONDENSED STATEMENTS OF OPERATIONS
$ in thousands
Income
Equity in net (loss) income from subsidiaries
Other income
Total (loss) income
Expenses
Interest expense on borrowings
Shareholder expense
Other
Total expense
Net (loss) income
Comprehensive (loss) income
CONDENSED STATEMENTS OF CASH FLOW
$ in thousands
Cash Flows From Operating Activities
Net (loss) income
Adjustments to reconcile net loss to net cash from operating activities:
Equity in net loss (income) of subsidiaries
Increase in account receivable from subsidiaries
Increase in other assets
Increase in accounts payable to subsidiaries
Increase in other liabilities
Net cash (used in) provided by operating activities
Cash Flows From Financing Activities
Restricted stock vesting
Net cash provided by financing activities
Net increase in cash
Cash and cash equivalents – beginning
Cash and cash equivalents – ending
94
As of March 31,
2019
2018
$
495
$
62,340
121
494
66,235
66
$
62,956
$
66,795
$
13,403
$
13,403
563
1,854
15,820
47,136
62,956
$
$
$
393
1,028
14,824
51,971
66,795
$
$
$
Years Ended March 31,
2019
2018
$
$
$
(4,968) $
26
(4,942)
819
73
102
994
(5,936) $
(4,870) $
6,097
20
6,117
624
49
90
763
5,354
4,568
Years Ended March 31,
2019
2018
$
(5,936) $
5,354
4,968
(30)
(25)
170
824
(29)
30
30
1
494
495
$
$
(6,097)
—
(51)
166
630
2
—
—
2
492
494
95
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Controls and Procedures
Disclosure controls and procedures are the controls and other procedures that are 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 SEC’s rules and forms. Disclosure controls and procedures include, without
limitation, 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 accumulated and communicated to management, including the Chief Executive Officer
and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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 March 31, 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 and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 March 31, 2019.
(b) Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting. The Company's system of internal control is designed under the supervision of management, including the Company's
Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the Company's financial statements for external reporting purposes in accordance with U.S. GAAP. The
Company's internal control over financial reporting includes policies and procedures that pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that
transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts
and expenditures are made only in accordance with the authorization of management and the Boards of Directors of the Company
and the Bank; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the Company's assets that could have a material effect on the Company's financial statements. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions
or that the degree of compliance with policies and procedures may deteriorate.
The management of Carver Bancorp, Inc., with participation of the Chief Executive Officer and the Chief Financial
Officer, assessed the effectiveness of the Company's internal control over financial reporting as of March 31, 2019. In making
this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in the Internal Control -- Integrated Framework (2013). Based on the assessment under COSO, management determined that our
internal control over financial reporting was effective as of March 31, 2019.
This annual report does not include an attestation report of the Company's independent registered public accounting
firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in
this annual report.
(c) Changes in Internal Control Over Financial Reporting
96
There have not been any changes in the Company’s internal control over financial reporting during the fiscal year ended
March 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
97
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE.
PART III
Information concerning Executive Officers of the Company which responds to this Item is incorporated by reference
from the section entitled "Executive Officers and Key Managers of Carver and Carver Federal" in the Company's definitive proxy
statement to be filed in connection with the 2019 Annual Meeting of Stockholders (the "Proxy Statement"). The information that
responds to this Item with respect to Directors is incorporated by reference from the section entitled "Election of Directors" in
the Proxy Statement. Information with respect to compliance by the Company's Directors and Executive Officers with Section
16(a) of the Exchange Act is incorporated by reference from the subsection entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
Information regarding the audit committee of the Company's Board of Directors, including information regarding audit
committee financial experts serving on the audit committee, is presented under the heading "Corporate Governance" in the
Company's Proxy Statement and is incorporated herein by reference. Information regarding the process for shareholder nomination
of directors is incorporated by reference from the Proxy Statement and presented under the heading "Corporate Governance."
ITEM 11. EXECUTIVE COMPENSATION.
The information required in response to this Item is incorporated by reference from the section entitled "Compensation
of Directors and Executive Officers" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The information required in response to this Item is incorporated by reference from the section entitled "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The information required in response to this Item is incorporated by reference from the section entitled "Transactions
with Certain Related Persons" in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required in response to this Item is incorporated by reference from the section entitled "Auditor Fee
Information" in the Proxy Statement.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
I. List of Documents Filed as Part of this Annual Report on Form 10-K
PART IV
A. The following consolidated financial statements are included in Item 8 of this Annual Report:
1. Report of Independent Registered Public Accounting Firm
2. Consolidated Statements of Financial Condition as of March 31, 2019 and 2018
3. Consolidated Statements of Operations for the years ended March 31, 2019 and 2018
4. Consolidated Statements of Comprehensive Loss for the years ended March 31, 2019 and 2018
5. Consolidated Statements of Changes in Equity for the years ended March 31, 2019 and 2018
6. Consolidated Statements of Cash Flows for the years ended March 31, 2019 and 2018
98
7. Notes to Consolidated Financial Statements.
B. Financial Statement Schedules. Financial statement schedules are included in Item 8 of this Annual Report.
II. Exhibits required by Item 601 of Regulation S-K:
A. See Exhibit Index
III. Exhibits required by Rule 405 of Regulation S-T
A. See Exhibit Index
ITEM 16. FORM 10-K SUMMARY.
None.
99
EXHIBIT INDEX
Exhibit
Number
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
11
21.1
23.1
31.1
31.2
32.1
32.2
Exhibits 101
Description
Certificate of Incorporation of Carver Bancorp, Inc. (1)
Second Amended and Restated Bylaws of Carver Bancorp, Inc. (2)
Stock Certificate of Carver Bancorp, Inc. (1)
Carver Federal Savings Bank 401(k) Savings Plan in RSI Retirement Trust, as amended and restated effective as of January 1,
1997 and including provisions effective through January 1, 2002 (3)
First Amendment to the Restatement of the Carver Federal Savings Bank 401(k) Savings Plan (3)
Second Amendment to the Restatement of the Carver Federal Savings Bank 401(k) Savings Plan for EGTRRA (3)
Carver Bancorp, Inc. 2006 Stock Incentive Plan, effective as of September 12, 2006 (4)
Amendment to the Carver Bancorp, Inc. Stock Incentive Plan (5)
Carver Bancorp, Inc. 2014 Equity Incentive Plan (6)
Formal Agreement by and between Carver Federal Savings Bank and the Office of the Comptroller of the Currency (7)
Code of Ethics (8)
Subsidiaries of the Registrant
Consent of Current Independent Registered Public Accounting Firm - BDO USA, LLP
Certifications of Chief Executive Officer
Certifications of Chief Financial Officer
Written Statement of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350
Written Statement of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition, (ii) the
Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated
Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows, (vi) the Notes to the Consolidated Financial
Statements tagged as blocks of texts and in detail
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Incorporated herein by reference to Registration Statement No. 333-5559 on Form S-4 of the Registrant filed with the
Securities and Exchange Commission on June 7, 1996.
Incorporated herein by reference to the Exhibits to the Registrant's Report on Form 8-K filed with the Securities and
Exchange Commission on December 19, 2007.
Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 2003.
Incorporated herein by reference to the Exhibits to the Registrant's Definitive Proxy Statement on Form 14A filed with
the Securities and Exchange Commission on July 31, 2006.
Incorporated herein by reference to the Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2009, filed with the Securities and Exchange Commission on February 17, 2009.
Incorporated herein by reference to the Registrant's Definitive Proxy Statement on Form 14A for the 2014 Annual
Meeting of Stockholders filed with the Securities and Exchange Commission on July 29, 2014.
Incorporated herein by reference to the Registrant's Report on Form 8-K filed with the Securities and Exchange
Commission on May 27, 2016.
Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 2006.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
100
June 28, 2019
CARVER BANCORP, INC.
By /s/ Michael T. Pugh
Michael T. Pugh
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below on
June 28, 2019 by the following persons on behalf of the Registrant and in the capacities indicated.
/s/ Michael T. Pugh
Michael T. Pugh
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Christina L. Maier
Christina L. Maier
First Senior Vice President and Chief Financial Officer
(Principal Accounting Officer and Principal Financial Officer)
/s/ Robert R. Tarter
Robert R. Tarter
/s/ Colvin W. Grannum
Colvin W. Grannum
/s/ Pazel G. Jackson, Jr.
Pazel G. Jackson, Jr.
/s/ Lewis P. Jones III
Lewis P. Jones III
/s/ Kenneth J. Knuckles
Kenneth J. Knuckles
/s/ Craig C. MacKay
Craig C. MacKay
/s/ Michael T. Pugh
Michael T. Pugh
/s/ Janet L. Rollé
Janet L. Rollé
/s/ Susan M. Tohbe
Susan M. Tohbe
Chairman
Director
Director
Director
Director
Director
Director
Director
Director
101
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CARVER BANCORP, INC.
Subsidiaries of Registrant
Exhibit 21.1
Carver Bancorp, Inc.
Delaware
Holding Company
Ownership Percentage
State of Incorporation
Description
Carver Federal Savings Bank
CSFB Credit Corp.
CSFB Realty Corp.
Carver Asset Corp.
Carver Community Development Corporation
Sub CDE 1, LLC
Sub CDE 19, LLC
Sub CDE 21, LLC
Sub CDE 22, LLC
Sub CDE 23, LLC
Sub CDE 24, LLC
Sub CDE 25, LLC
100%
100%
100%
100%
100%
100%
00.00% 1, 2
00.00% 1, 2
99.00% 3
99.00% 3
99.00% 3
99.00% 3
New York
New York
New York
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Federal Savings Bank
Inactive
Real Estate Holding Company
Real Estate Investment Trust
Community Development
Lending Vehicle for NMTC
Lending Vehicle for NMTC
Lending Vehicle for NMTC
Inactive
Inactive
Inactive
Inactive
Alhambra Holdings Corp.
100%
Delaware
Inactive
(1) Also owned 0.01% by Carver Community Development Corporation
(2) 99.99% owned by an investment vehicle controlled by an investor unaffiliated with Carver. Carver may provide services for the
investment vehicle
(3) Also owned 1.00% by Carver Community Development Corporation
In addition, Carver Bancorp, Inc. has created Carver Statutory Trust I to raise capital for its operations.
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
Carver Bancorp, Inc.
New York, New York
We hereby consent to the incorporation by reference in Registration Statement on Form S 1 (No. 333-177054) of Carver Bancorp,
Inc., as amended, of our report dated June 28, 2019, relating to the consolidated financial statements, which appears in the Annual
Report to Shareholders, which is incorporated by reference in this Annual Report on Form 10-K.
/s/ BDO USA, LLP
New York, New York
June 28, 2019
Exhibit 31.1
CERTIFICATIONS
I, Michael T. Pugh, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Carver Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 28, 2019
/s/ Michael T. Pugh
Michael T. Pugh
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, Christina L. Maier, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Carver Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 28, 2019
/s/ Christina L. Maier
Christina L. Maier
First Senior Vice President and Chief Financial Officer
CERTIFICATION FURNISHED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 18 U.S.C SECTION 1350
Exhibit 32.1
The undersigned, Michael T. Pugh, is the President and Chief Executive Officer of Carver Bancorp, Inc. (the “Company”).
This certification is being furnished in connection with the filing by the Company of the Company's Annual Report on
Form 10 K for the year ended March 31, 2019 (the “Report”).
I certify that:
a)
b)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78m(a) or 78o(d)); and
the information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company as of the dates and for the periods covered by the Report.
Date: June 28, 2019
/s/ Michael T. Pugh
Michael T. Pugh
President and Chief Executive Officer
CERTIFICATION FURNISHED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 18 U.S.C SECTION 1350
Exhibit 32.2
The undersigned, Christina L. Maier, is the First Senior Vice President and Chief Financial Officer of Carver Bancorp,
Inc. (the “Company”).
This certification is being furnished in connection with the filing by the Company of the Company's Annual Report on
Form 10 K for the year ended March 31, 2019 (the “Report”).
By execution of this statement, I certify that:
a)
b)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78m(a) or 78o(d)); and
the information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company as of the dates and for the periods covered by the Report.
Date: June 28, 2019
/s/ Christina L. Maier
Christina L. Maier
First Senior Vice President and Chief Financial Officer
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Corporate Headquarters:
75 West 125th Street
New York, NY 10027
Please visit our website at: www.carverbank.com