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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 which may be identified by the use of such words as “may,” “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate,” “predict,” “continue,” and “potential” or the negative of these terms or other comparable terminology. Examples of forward-looking statements include, but are not limited to, estimates with respect to the Company's financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates. These factors include but are not limited to the following:
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•
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the ability of the Bank to comply with the Formal 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;
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•
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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;
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•
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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;
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•
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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;
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•
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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;
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•
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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;
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•
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adverse changes in the financial industry and the securities, credit, national and local real estate markets (including real estate values);
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•
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changes in our existing loan portfolio composition (including reduction in commercial real estate loan concentration) and credit quality or changes in loan loss requirements;
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•
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changes in the level of trends of delinquencies and write-offs and in our allowance and provision for loan losses;
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•
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legislative or regulatory changes that may adversely affect the Company’s business, including but not limited to the impact of the Dodd-Frank Wall Street Reform, the JOBS Act, the Consumer Protection Act and 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;
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•
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changes in the level of government support of housing finance;
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•
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our ability to control costs and expenses;
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risks related to a high concentration of loans to borrowers secured by property located in our market area;
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•
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changes in interest rates, which may reduce net interest margin and net interest income;
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•
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increases in competitive pressure among financial institutions or non-financial institutions;
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•
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changes in consumer spending, borrowing and savings habits;
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•
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technological changes that may be more difficult to implement or more costly than anticipated;
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•
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changes in deposit flows, loan demand, real estate values, borrowing facilities, capital markets and investment opportunities, which may adversely affect our business;
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•
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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;
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•
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litigation or regulatory actions, whether currently existing or commencing in the future, which may restrict our operations or strategic business plan;
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•
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the ability to originate and purchase loans with attractive terms and acceptable credit quality; and
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•
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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.
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Because forward-looking statements are subject to numerous assumptions, risks and uncertainties, actual results or future events could differ possibly materially from those that the company anticipated in its forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and the Company assumes no obligation to, and expressly disclaims any obligation to, update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements, except as legally required.
Overview
Carver Bancorp, Inc. is the holding company for Carver Federal Savings Bank, a federally chartered savings bank. The Company is headquartered in New York, New York. The Company conducts business as a unitary savings and loan holding company, and the principal business of the Company consists of the operation of Carver Federal. Carver Federal was founded in
1948 to serve African-American communities whose residents, businesses and institutions had limited access to mainstream financial services. The Bank remains headquartered in Harlem, and predominantly all of its eight branches and three stand-alone 24/7 ATM centers are located in low- to moderate-income neighborhoods. Many of these historically underserved communities 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 fourth consecutive "Outstanding" rating, issued by the OCC following its most recent Community Reinvestment Act (“CRA”) examination in January 2016. The OCC found that approximately 75% of originated and purchased loans were within Carver's assessment area, and the Bank has demonstrated excellent responsiveness to its assessment area's needs through its community development lending, investing and service activities. The Bank had approximately
$615.0 million
in assets and 114 employees as of
September 30, 2018
.
Carver Federal engages in a wide range of consumer and commercial banking services. The Bank provides deposit products, including demand, savings and time deposits for consumers, businesses, and governmental and quasi-governmental agencies in its local market area within New York City. In addition to deposit products, Carver Federal offers a number of other consumer and commercial banking products and services, including debit cards, online banking, online bill pay and telephone banking. Carver Federal also offers a suite of products and services for unbanked and underbanked consumers, branded as Carver Community Cash. This includes check cashing, wire transfers, bill payment, reloadable prepaid cards and money orders.
Carver Federal offers loan products covering a variety of asset classes, including commercial and multifamily mortgages, and business loans. The Bank finances mortgage and loan products through deposits or borrowings. Funds not used to originate mortgages and loans are invested primarily in U.S. government agency securities and mortgage-backed securities.
The Bank's primary market area for deposits consists of the areas served by its eight branches in the Brooklyn, Manhattan and Queens boroughs of New York City. The neighborhoods in which the Bank's branches are located have historically been low- to moderate-income areas. The Bank's primary lending market includes Kings, New York, Bronx and Queens Counties in New York City, and lower Westchester County, New York. Although the Bank's branches are primarily located in areas that were historically underserved by other financial institutions, the Bank faces significant competition for deposits and mortgage lending in its market areas. Management believes that this competition has become more intense as a result of increased examination emphasis by federal banking regulators on financial institutions' fulfillment of their responsibilities under the CRA and more recently due to the decline in demand for loans. Carver Federal's market area has a high density of financial institutions, many of which have greater financial resources, name recognition and market presence, and all of which are competitors to varying degrees. The Bank's competition for loans comes principally from commercial banks, savings institutions and mortgage banking companies. The Bank's most direct competition for deposits comes from commercial banks, savings institutions and credit unions. Competition for deposits also comes from money market mutual funds, corporate and government securities funds, and financial intermediaries such as brokerage firms and insurance companies. Many of the Bank's competitors have substantially greater resources and offer a wider array of financial services and products. This, combined with competitors' larger presence in the New York market, add to the challenges the Bank faces in expanding its current market share and growing its near-term profitability.
Carver Federal's 70-year history in its market area, its community involvement and relationships, targeted products and services and personal service consistent with community banking, help the Bank compete with competitors in its market.
The Bank formalized its many community focused investments on August 18, 2005, by forming Carver Community Development Corporation (“CCDC”). CCDC oversees the Bank's participation in local economic development and other community-based initiatives, including financial literacy activities. CCDC coordinates the Bank's development of an innovative approach to reach the unbanked customer market in Carver Federal's communities. Importantly, CCDC spearheads the Bank's applications for grants and other resources to help fund these important community activities. In this connection, Carver Federal has successfully competed with large regional and global financial institutions in a number of competitions for government grants and other awards.
New Markets Tax Credit Award
The New Markets Tax Credit ("NMTC") award is used to stimulate economic development in low- to moderate-income communities. The NMTC award enables the Bank to invest with community and development partners in economic development projects with attractive terms including, in some cases, below market interest rates, which may have the effect of attracting capital to underserved communities and facilitating revitalization of the community, pursuant to the goals of the NMTC program. NMTC
awards provide a credit to Carver Federal against Federal income taxes when the Bank makes qualified investments. The credits are allocated over seven years from the time of the qualified investment. Alternatively, the Bank can utilize the award in projects where another investor entity provides funding and receives the tax benefits of the award in exchange for the Bank receiving fee income.
In June 2006, CCDC was selected by the U.S. Department of Treasury, in a highly competitive process, to receive an award of $59 million in NMTC. CCDC received a second NMTC award of $65 million in May 2009, and a third award of $25 million in August 2011. CCDC provides funding to underlying projects. While providing funding to investments in the NMTC eligible projects, CCDC has retained a 0.01% interest in other special purpose entities created to facilitate the investments, with the investors owning the remaining 99.99%. CCDC also provides certain administrative services to these entities and receives servicing fee income during the term of the qualifying projects. The Bank has determined that it and CCDC do not have the sole power to direct activities of these special purpose entities that significantly impact the entities' performance, and therefore are not the primary beneficiaries of these entities. The Bank has a contingent obligation to reimburse the investors for any loss or shortfall incurred as a result of the NMTC projects not being in compliance with certain regulations that would void the investors' ability to otherwise utilize tax credits stemming from the award. As of
September 30, 2018
, all three award allocations have been fully utilized in qualifying projects.
The Bank's unconsolidated variable interest entities ("VIEs"), in which the Company holds significant variable interests or has continuing involvement through servicing a majority of assets in a VIE at
September 30, 2018
, are presented below.
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Involvement with SPE (000's)
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Funded Exposure
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Unfunded Exposure
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Total
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$ in thousands
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Recognized Gain (Loss) (000's)
|
Total Rights transferred
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Significant unconsolidated VIE assets
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Total Involvement with SPE asset
|
Debt Investments
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Equity Investments
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Funding Commitments
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Maximum exposure to loss
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|
Carver Statutory Trust 1
|
$
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—
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$
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—
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$
|
13,400
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$
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13,400
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$
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13,000
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$
|
400
|
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$
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—
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$
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—
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$
|
13,400
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|
CDE 16, CDE 17
|
900
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20,500
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—
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—
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—
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—
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—
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7,995
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7,995
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CDE 18
|
600
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13,254
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—
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—
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—
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—
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—
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5,169
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5,169
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CDE 19
|
500
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10,746
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11,015
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11,015
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—
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1
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—
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4,191
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4,192
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CDE 20
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625
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12,500
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11,906
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11,906
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—
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1
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—
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|
4,875
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4,876
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CDE 21
|
625
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|
12,500
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11,958
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11,958
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—
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1
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—
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4,875
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4,876
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Total
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$
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3,250
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$
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69,500
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$
|
48,279
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$
|
48,279
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$
|
13,000
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$
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403
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$
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—
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$
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27,105
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$
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40,508
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Critical Accounting Policies
Note 2 to the Company’s audited Consolidated Financial Statements for the year ended
March 31, 2018
included in its
2018
Form 10-K, as supplemented by this report, contains a summary of significant accounting policies. The Company believes its policies, with respect to the methodologies used to determine the allowance for loan and lease losses, securities impairment, assessment of the recoverability of the deferred tax asset, and the fair value of financial instruments involve a high degree of complexity and require management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. The following description of these policies should be read in conjunction with the corresponding section of the Company’s fiscal
2018
Form 10-K.
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 pools of loans (“Loan Type”) are:
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•
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Consumer (including Overdraft Accounts)
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The pools are further segregated into the following risk rating classes:
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 tend to increase. The nine qualitative factors the Bank considers and may utilize are:
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1.
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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
).
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2.
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Changes in relevant economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments (
Economy
).
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3.
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Changes in the nature or volume of the loan portfolio and in the terms of loans (
Nature & Volume
).
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4.
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Changes in the experience, ability, and depth of lending management and other relevant staff (
Management
).
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5.
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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
).
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6.
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Changes in the quality of the loan review system (
Loan Review
).
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7.
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Changes in the value of underlying collateral for collateral dependent loans (
Collateral Values
).
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8.
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The existence and effect of any concentrations of credit and changes in the level of such concentrations (
Concentrations
).
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9.
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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
).
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Specific Reserve Allowance
The Bank also maintains a specific reserve allowance for criticized and classified loans individually reviewed for impairment in accordance with ASC Subtopic 310-10 guidelines. The amount assigned to the specific reserve allowance is individually determined based upon the loan. The ASC Subtopic 310-10 guidelines require the use of one of three approved methods to estimate the amount to be reserved and/or charged off for such credits. The three methods are as follows:
1.
The present value of expected future cash flows discounted at the loan's effective interest rate;
2.
The loan's observable market price; or
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. The Bank then determines whether the impairment amount is permanent, in which case the loan is written down by the amount of the impairment, or if it is other than permanent, in which case the Bank establishes a specific valuation reserve that is included in the total ALLL. 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 portfolio are based on published or securities dealers’ market values and are affected by changes in interest rates. On a quarterly basis, the Bank reviews and evaluates the securities portfolio to determine if the decline in the fair value of any security below its cost basis is other-than-temporary. The Bank generally views changes in fair value caused by changes in interest rates as temporary, which is consistent with its experience. The amount of an other-than-temporary impairment, when there are credit and non-credit losses on a debt security which management does not intend to sell, and for which it is more likely than not that the Bank will not be required to sell the security prior to the recovery of the non-credit impairment, the portion of the total impairment that is attributable to the credit loss would be recognized in earnings, and the remaining difference between the debt security’s amortized cost basis and its fair value would be included in other comprehensive (loss) income. This guidance also requires additional disclosures about investments in an unrealized loss position and the methodology and significant inputs used in determining the recognition of other-than-temporary impairment. 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
September 30, 2018
.
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 fully reserved all but $255 thousand of its deferred tax asset, there is minimal impact to the financial statements.
On June 29, 2011, the Company raised $55 million of capital, which resulted in a $51.4 million increase in equity after considering the effect of various expenses associated with the capital raise. The capital raise triggered a change in control under Section 382 of the Internal Revenue Code. Generally, Section 382 limits the utilization of an entity's net operating loss carryforwards, general business credits, and recognized built-in losses, upon a change in ownership. The Company is currently subject to an annual limitation of approximately $900 thousand. A valuation allowance for net deferred tax asset of $22.0 million has been recorded. The valuation allowance was initially recorded during fiscal year 2011, and has remained through March 31, 2017, 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 received 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 September 30, 2018 is the $255 thousand discussed above.
Stock Repurchase Program
On August 6, 2002, the Company announced a stock repurchase program to repurchase up to 15,442 shares of its outstanding common stock. As of
September 30, 2018
, 11,744 shares of its common stock have been repurchased in open market transactions at an average price of $235.80 per share (as adjusted for 1-for-15 reverse stock split that occurred on October 27, 2011). The Company reissued shares as restricted stock in accordance with their management recognition plan. No shares were repurchased during the three months ended
September 30, 2018
. As a result of the Company's participation in the TARP CDCI, the U.S. Treasury's prior approval is required to make further repurchases. On October 28, 2011, the U.S. Treasury converted its preferred stock into common stock, which the U.S. Treasury continues to hold. The Company continues to be bound by the TARP CDCI restrictions so long as the U.S. Treasury is a common stockholder.
Liquidity and Capital Resources
Liquidity is a measure of the Bank's ability to generate adequate cash to meet its financial obligations. The principal cash requirements of a financial institution are to cover potential deposit outflows, fund increases in its loan and investment portfolios and ongoing operating expenses. The Bank's primary sources of funds are deposits, borrowed funds and principal and interest payments on loans, mortgage-backed securities and investment securities. While maturities and scheduled amortization of loans, mortgage-backed securities and investment securities are predictable sources of funds, deposit flows and loan and mortgage-backed securities prepayments are strongly influenced by changes in general interest rates, economic conditions and competition. Carver Federal monitors its liquidity utilizing guidelines that are contained in a policy developed by its management and approved by its Board of Directors. Carver Federal's several liquidity measurements are evaluated on a frequent basis. The Bank was in compliance with this policy as of
September 30, 2018
.
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
$25.0 million
, or
65.1%
, to
$13.4
million
at
September 30, 2018
, compared to
$38.4 million
at
March 31, 2018
due to the repayment of a
$25.0 million
FHLB long-term borrowing that matured during the first quarter. Due to the late filing of Carver's 2016 Form 10-K (as filed with the Securities and Exchange Commission on August 12, 2016), 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
September 30, 2018
, based on available collateral held at the FHLB-NY, Carver Federal had the ability to borrow from the FHLB-NY an additional $35.6 million on a secured basis, utilizing mortgage-related loans and securities as collateral.
The Bank's most liquid assets are cash and short-term investments. The level of these assets is dependent on the Bank's operating, investing and financing activities during any given period. At
September 30, 2018
and
March 31, 2018
, assets qualifying for short-term liquidity, including cash and cash equivalents, totaled
$60.5 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 of deposit outflows due to a competitive interest rate environment.
The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During the six months ended
September 30, 2018
, total cash and cash equivalents decreased
$74.0 million
to
$60.5 million
at
September 30, 2018
, compared to
$134.6 million
at
March 31, 2018
, reflecting cash used in financing activities of
$75.5 million
and cash used in operating activities of
$2.6 million
, offset by cash provided by investing activities of
$4.1 million
. Net cash used in financing activities of
$75.5 million
resulted from net decreases in deposits of
$50.5 million
and repayment of a
$25.0 million
FHLB long-term borrowing that matured on May 30, 2018. Net cash provided by investing activities of
$4.1 million
was primarily attributable to net loan principal repayments, partially offset by the purchase of investment securities. Net cash used in operating activities totaled
$2.6 million
.
Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. In common with all U.S. banks, Carver’s capital adequacy is measured in accordance with the Basel III regulatory framework governing capital adequacy, stress testing, and market liquidity risk. The final rule, which became effective for the Bank on January 1, 2015, established a minimum Common Equity Tier 1 (CET1) ratio, a minimum leverage ratio and increases in the Tier 1 and Total risk-based capital ratios. The rule also limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer" consisting of 2.5% of CET1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was phased in beginning January 1, 2016 and ends on January 1, 2019, when the full capital conservation buffer requirement will be effective. As of
September 30, 2018
, the Bank's capital conservation buffer ("buffer") was 1.875%, making its minimum CET1 plus buffer 6.375%, its minimum Tier 1 capital plus buffer 7.875% and its minimum total capital plus buffer 9.875%. Regardless of Basel III’s minimum requirements, Carver, as a result of the Formal Agreement, was issued an Individual Minimum Capital Ratio (“IMCR”) letter by the OCC, which requires the Bank to maintain minimum regulatory capital levels of 9% for its Tier1 leverage ratio and 12% for its total risk-based capital ratio.
The table below presents the capital position of the Bank at
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
($ in thousands)
|
|
Amount
|
|
Ratio
|
Tier 1 leverage capital
|
|
|
|
|
Regulatory capital
|
|
$
|
65,251
|
|
|
10.31
|
%
|
Individual minimum capital requirement
|
|
56,962
|
|
|
9.00
|
%
|
Minimum capital requirement
|
|
25,317
|
|
|
4.00
|
%
|
Excess over individual minimum capital requirement
|
|
8,289
|
|
|
1.31
|
%
|
|
|
|
|
|
Common equity Tier 1
|
|
|
|
|
Regulatory capital
|
|
$
|
65,251
|
|
|
15.74
|
%
|
Minimum capital requirement
|
|
18,657
|
|
|
4.50
|
%
|
Excess
|
|
46,594
|
|
|
11.24
|
%
|
|
|
|
|
|
Tier 1 risk-based capital
|
|
|
|
|
Regulatory capital
|
|
$
|
65,251
|
|
|
15.74
|
%
|
Minimum capital requirement
|
|
24,876
|
|
|
6.00
|
%
|
Excess
|
|
40,375
|
|
|
9.74
|
%
|
|
|
|
|
|
Total risk-based capital
|
|
|
|
|
Regulatory capital
|
|
$
|
70,273
|
|
|
16.95
|
%
|
Individual minimum capital requirement
|
|
49,751
|
|
|
12.00
|
%
|
Minimum capital requirement
|
|
33,167
|
|
|
8.00
|
%
|
Excess over individual minimum capital requirement
|
|
20,522
|
|
|
4.95
|
%
|
Bank Regulatory Matters
On October 23, 2015, the Board of Directors of Carver Bancorp, Inc., in response to the FRB’s Bank Holding Company Report of Inspection issued on April 14, 2015, adopted a Board Resolution (“the Resolution”) as a commitment by the Company’s Board to address certain supervisory concerns noted in the Reserve Bank‘s Report. The supervisory concerns are related to the Company’s leverage, cash flow and accumulated deferred interest. As a result of those concerns, the Company is prohibited from paying any dividends without the prior written approval of the Reserve Bank.
On May 24, 2016, the Bank entered into a Formal Agreement with the OCC to undertake certain compliance-related and other actions as further described in the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission (“SEC”) on May 27, 2016. As a result of the Formal Agreement, the Bank must obtain the approval of the OCC prior to effecting any change in its directors or senior executive officers. The Bank may not declare or pay dividends or make any other capital distributions, including to the Company, without first filing an application with the OCC and receiving the prior approval of the OCC. Furthermore, the Bank must seek the OCC's written approval and the FDIC's written concurrence before entering into any "golden parachute payments" as that term is defined under 12 U.S.C. § 1828(k) and 12 C.F.R. Part 359.
At
September 30, 2018
, the Bank's capital level exceeded the regulatory requirements and its IMCR requirements with a Tier 1 leverage capital ratio of
10.31%
, Common Equity Tier 1 capital ratio of
15.74%
, Tier 1 risk-based capital ratio of
15.74%
, and a total risk-based capital ratio of
16.95%
.
Mortgage Representation and Warranty Liabilities
During the period 2004 through 2009, the Bank originated 1-4 family residential mortgage loans and sold the loans to the Federal National Mortgage Association (“FNMA”). The loans were sold to FNMA with the standard representations and warranties for loans sold to the Government Sponsored Entities ("GSEs"). The Bank may be required to repurchase these loans in the event of breaches of these representations and warranties. In the event of a repurchase, the Bank is typically required to pay the unpaid principal balance as well as outstanding interest and fees. The Bank then recovers the loan or, if the loan has been foreclosed, the underlying collateral. The Bank is exposed to any losses on repurchased loans after giving effect to any recoveries on the collateral.
Through fiscal 2011 none of the loans sold to FNMA were repurchased by the Bank. During fiscal 2012, 2013, 2014 and 2015 three, ten, six and one loan, respectively, that had been sold to FNMA were repurchased by the Bank. No loans have
been repurchased by the Bank subsequent to fiscal 2015. At
September 30, 2018
, the Bank continues to service
114
loans with a principal balance of
$20.1 million
for FNMA that had been sold with standard representations and warranties.
The following table presents information on open requests from FNMA. The amounts presented are based on outstanding loan principal balances.
|
|
|
|
|
|
$ in thousands
|
|
Loans sold to FNMA
|
Open claims as of March 31, 2018
(1)
|
|
$
|
2,013
|
|
Gross new demands received
|
|
—
|
|
Loans repurchased/made whole
|
|
—
|
|
Demands rescinded
|
|
—
|
|
Advances on open claims
|
|
—
|
|
Principal payments received on open claims
|
|
(15
|
)
|
Open claims as of September 30, 2018
(1)
|
|
$
|
1,998
|
|
(1)
The open claims include all open requests received by the Bank where either FNMA has requested loan files for review, where FNMA has not formally rescinded the repurchase request or where the Bank has not agreed to repurchase the loan. The amounts reflected in this table are the unpaid principal balance and do not incorporate any losses the Bank would incur upon the repurchase of these loans.
Management has established a representation and warranty reserve for losses associated with the repurchase of mortgage loans sold by the Bank to FNMA that we consider to be both probable and reasonably estimable. These reserves are reported in the consolidated statement of financial condition as a component of other liabilities. The Bank has not received a request to repurchase any of these loans since the second quarter of fiscal 2015, and there have not been any additional requests from FNMA for loans to be reviewed. The reserves totaled
$223 thousand
as of
September 30, 2018
. The table below summarizes changes in our representation and warranty reserves during the six months ended
September 30, 2018
:
|
|
|
|
|
|
$ in thousands
|
|
September 30, 2018
|
Representation and warranty repurchase reserve, March 31, 2018
(1)
|
|
$
|
205
|
|
Net provision for repurchase losses
(2)
|
|
18
|
|
Representation and warranty repurchase reserve, September 30, 2018
(1)
|
|
$
|
223
|
|
(1)
Reported in our consolidated statements of financial condition as a component of other liabilities.
(2)
Component of other non-interest expense.
Comparison of Financial Condition at
September 30, 2018
and
March 31, 2018
Assets
At
September 30, 2018
, total assets were
$615.0 million
, reflecting a decrease of
$78.9 million
, or
11.4%
, 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
$74.0 million
and a
$46.1 million
decrease in the loan portfolio, net of the allowance for loan losses. This was partially offset by a
$40.6 million
increase in the Bank's investment portfolio.
Total cash and cash equivalents decreased
$74.0 million
, or
55.0%
, to
$60.5 million
at
September 30, 2018
, compared to
$134.6 million
at
March 31, 2018
as the Bank purchased
$47.6 million
of investment securities and repaid a
$25.0 million
FHLB long-term borrowing during the six month period. The typical increase in cash from scheduled loan paydowns and payoffs was partially offset by 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.
Total investment securities increased
$40.6 million
, or
55.8%
, to
$113.4 million
at
September 30, 2018
, compared to
$72.8 million
at
March 31, 2018
. The Bank invested $16.5 million into U.S. Treasury securities and $30 million into agency and mortgage-backed securities in order to improve interest income and to diversify the Bank's available-for-sale investment portfolio.
Gross portfolio loans decreased
$46.4 million
, or
9.7%
, to
$431.4 million
at
September 30, 2018
, 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 strategy at maintaining a concentration level of commercial real estate loans commensurate with its risk perspective.
Liabilities and Equity
Total liabilities decreased
$75.2 million
, or
11.7%
, to
$566.8 million
at
September 30, 2018
, compared to
$641.9 million
at
March 31, 2018
, as a result of the managed decline in the Bank's deposits and the repayment of borrowed funds.
Deposits decreased
$50.5 million
, or
8.6%
, to
$536.4 million
at
September 30, 2018
, 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 Federal Home Loan Bank of New York and other borrowed money decreased
$25.0 million
, or
65.1%
, to
$13.4 million
at
September 30, 2018
, compared to
$38.4 million
at
March 31, 2018
as the Bank repaid a FHLB long-term borrowing that matured on May 30, 2018.
Total equity decreased
$3.7 million
, or
7.1%
, to
$48.3 million
at
September 30, 2018
, compared to
$52.0 million
at
March 31, 2018
. The decrease was due to a net loss of
$3.0 million
for the six month period and
$686 thousand
in unrealized losses on securities available-for-sale.
Asset/Liability Management
The Company's primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between the rates on interest-earning assets and interest-bearing liabilities, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and assets, and the credit quality of earning assets. Management's asset/liability objectives are to maintain a strong, stable net interest margin, to utilize the Company's capital effectively without taking undue risks, to maintain adequate liquidity and to manage its exposure to changes in interest rates.
The economic environment is uncertain regarding future interest rate trends. Management monitors the Company's cumulative gap position, which is the difference between the sensitivity to rate changes of the Company's interest-earning assets and interest-bearing liabilities. In addition, the Company uses various tools to monitor and manage interest rate risk, such as a model that projects net interest income based on increasing or decreasing interest rates.
Off-Balance Sheet Arrangements and Contractual Obligations
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and in connection with its overall investment strategy. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are not recorded in the consolidated financial statements. Such instruments primarily include lending obligations, including commitments to originate mortgage and consumer loans and to fund unused lines of credit. The Bank also has contractual obligations related to operating leases as discussed in our Form 10-K for the year ended
March 31, 2018
.
The following table reflects the Bank's outstanding lending commitments and contractual obligations as of
September 30, 2018
:
|
|
|
|
|
$ in thousands
|
|
Commitments to fund mortgage loans
|
$
|
903
|
|
Commitments to fund commercial and consumer loans
|
160
|
|
Lines of credit
|
5,008
|
|
Commitment to fund private equity investment
|
640
|
|
Total
|
$
|
6,711
|
|
Comparison of Operating Results for the Three and Six Months Ended
September 30, 2018
and
2017
Overview
The Company reported a net loss of
$2.0 million
for the three months ended
September 30, 2018
, compared to a net loss of
$594 thousand
for the comparable prior year quarter. For the six months ended
September 30, 2018
, the Company reported a net loss of
$3.0 million
, compared to to a net loss of
$1.2 million
for the prior year period. The change in our results was primarily driven by lower net interest income and higher net occupancy and equipment expense in the current period compared to the prior year period.
The following table reflects selected operating ratios for the three and six months ended
September 30, 2018
and
2017
(unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Six Months Ended
September 30,
|
|
Selected Financial Data:
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Return on average assets
(1)
|
|
(1.28
|
)%
|
|
(0.36
|
)%
|
|
(0.94
|
)%
|
|
(0.37
|
)%
|
|
Return on average stockholders' equity
(2) (8)
|
|
(16.29
|
)%
|
|
(5.01
|
)%
|
|
(12.55
|
)%
|
|
(5.28
|
)%
|
|
Return on average stockholders' equity, excluding AOCI
(2) (8)
|
|
(15.52
|
)%
|
|
(4.87
|
)%
|
|
(11.88
|
)%
|
|
(5.13
|
)%
|
|
Net interest margin
(3)
|
|
2.78
|
%
|
|
3.15
|
%
|
|
2.75
|
%
|
|
3.08
|
%
|
|
Interest rate spread
(4)
|
|
2.55
|
%
|
|
3.01
|
%
|
|
2.52
|
%
|
|
2.94
|
%
|
|
Efficiency ratio
(5)
|
|
135.25
|
%
|
|
108.99
|
%
|
|
126.14
|
%
|
|
108.48
|
%
|
|
Operating expenses to average assets
(6)
|
|
4.62
|
%
|
|
4.13
|
%
|
|
4.34
|
%
|
|
4.04
|
%
|
|
Average stockholders' equity to average assets
(7) (8)
|
|
7.84
|
%
|
|
7.22
|
%
|
|
7.46
|
%
|
|
7.03
|
%
|
|
Average stockholders' equity, excluding AOCI, to average assets
(7) (8)
|
|
8.23
|
%
|
|
7.42
|
%
|
|
7.88
|
%
|
|
7.24
|
%
|
|
Average interest-earning assets to average interest-bearing liabilities
|
|
1.23
|
x
|
1.19
|
x
|
1.22
|
x
|
1.19
|
x
|
|
|
|
|
|
|
|
|
|
|
(1)
Net income (loss), annualized, divided by average total assets.
|
|
|
|
|
|
(2)
Net income (loss), annualized, divided by average total stockholders' equity.
|
|
|
|
|
|
(3)
Net interest income, annualized, divided by average interest-earning assets.
|
|
|
|
|
|
(4)
Combined weighted average interest rate earned less combined weighted average interest rate cost.
|
|
|
|
|
|
(5)
Operating expense divided by sum of net interest income and non-interest income.
|
|
|
|
|
|
(6)
Non-interest expense, annualized, divided by average total assets.
|
|
|
|
|
|
(7)
Total average stockholders' equity divided by total average assets for the period.
|
|
|
|
|
|
(8)
See Non-GAAP Financial Measures disclosure for comparable GAAP measures.
|
|
|
|
|
|
Non-GAAP Financial Measures
In addition to evaluating the Company's results of operations in accordance with U.S. generally accepted accounting principles (“GAAP”), management routinely supplements their evaluation with an analysis of certain non-GAAP financial measures, such as the return on average stockholders' equity excluding average accumulated other comprehensive income (loss) ("AOCI"), and average stockholders' equity excluding AOCI to average assets. Management believes these non-GAAP financial measures provide information that is useful to investors in understanding the Company's underlying operating performance and trends, and facilitates comparisons with the performance of other banks and thrifts. Further, the efficiency ratio is used by management in its assessment of financial performance, including non-interest expense control.
Return on equity measures how efficiently we generate profits from the resources provided by our net assets. Return on average stockholders' equity is calculated by dividing annualized net income (loss) attributable to Carver by average stockholders' equity, excluding AOCI. Management believes that this performance measure explains the results of the Company's ongoing businesses in a manner that allows for a better understanding of the underlying trends in the Company's current businesses. For purposes of the Company's presentation, AOCI includes the changes in the market or fair value of its investment portfolio. These fluctuations have been excluded due to the unpredictable nature of this item and is not necessarily indicative of current operating or future performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Six Months Ended
September 30,
|
$ in thousands
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Average Stockholders' Equity
|
|
|
|
|
|
|
|
|
Average Stockholders' Equity
|
|
$
|
49,522
|
|
|
$
|
47,468
|
|
|
$
|
48,546
|
|
|
$
|
46,737
|
|
Average AOCI
|
|
(2,446
|
)
|
|
(1,277
|
)
|
|
(2,738
|
)
|
|
(1,367
|
)
|
Average Stockholders' Equity, excluding AOCI
|
|
$
|
51,968
|
|
|
$
|
48,745
|
|
|
$
|
51,284
|
|
|
$
|
48,104
|
|
|
|
|
|
|
|
|
|
|
Return on Average Stockholders' Equity
|
|
(16.29
|
)%
|
|
(5.01
|
)%
|
|
(12.55
|
)%
|
|
(5.28
|
)%
|
Return on Average Stockholders' Equity, excluding AOCI
|
|
(15.52
|
)%
|
|
(4.87
|
)%
|
|
(11.88
|
)%
|
|
(5.13
|
)%
|
|
|
|
|
|
|
|
|
|
Average Stockholders' Equity to Average Assets
|
|
7.84
|
%
|
|
7.22
|
%
|
|
7.46
|
%
|
|
7.03
|
%
|
Average Stockholders' Equity, excluding AOCI, to Average Assets
|
|
8.23
|
%
|
|
7.42
|
%
|
|
7.88
|
%
|
|
7.24
|
%
|
Analysis of Net Interest Income
The Company’s profitability is primarily dependent upon net interest income and is also affected by the provision for loan losses, non-interest income, non-interest expense and income taxes. Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned and paid. The Company’s net interest income is significantly impacted by changes in interest rate and market yield curves. Net interest income decreased
$771 thousand
, or
15.2%
, to
$4.3 million
for the three months ended
September 30, 2018
, compared to
$5.1 million
for the same quarter last year. Net interest income decreased
$1.2 million
, or
12.2%
, to
$8.8 million
for the six months ended
September 30, 2018
, compared to
$10.0 million
for the prior year period.
The following table sets forth certain information relating to the Company’s average interest-earning assets and average interest-bearing liabilities, and their related average yields and costs for the three and six months ended
September 30, 2018
and
2017
. Average yields are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods shown. Average balances are derived from daily or month-end balances as available and applicable. Management does not believe that the use of average monthly balances instead of average daily balances represents a material difference in information presented. The average balance of loans includes loans on which the Company has discontinued accruing interest. The yield includes fees, which are considered adjustments to yield.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
$ in thousands
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Cost
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Cost
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(1)
|
|
$
|
443,726
|
|
|
$
|
4,931
|
|
|
4.45
|
%
|
|
$
|
529,093
|
|
|
$
|
5,797
|
|
|
4.38
|
%
|
Mortgage-backed securities
|
|
52,721
|
|
|
281
|
|
|
2.13
|
%
|
|
47,413
|
|
|
245
|
|
|
2.07
|
%
|
Investment securities
|
|
43,279
|
|
|
243
|
|
|
2.25
|
%
|
|
13,391
|
|
|
71
|
|
|
2.12
|
%
|
Restricted cash deposit
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
|
|
0.03
|
%
|
Equity securities
(2)
|
|
10,262
|
|
|
22
|
|
|
0.85
|
%
|
|
2,251
|
|
|
27
|
|
|
4.76
|
%
|
Other investments and federal funds sold
|
|
71,980
|
|
|
440
|
|
|
2.43
|
%
|
|
54,168
|
|
|
199
|
|
|
1.46
|
%
|
Total interest-earning assets
|
|
621,968
|
|
|
5,917
|
|
|
3.81
|
%
|
|
646,316
|
|
|
6,339
|
|
|
3.92
|
%
|
Non-interest-earning assets
|
|
9,456
|
|
|
|
|
|
|
10,859
|
|
|
|
|
|
Total assets
|
|
$
|
631,424
|
|
|
|
|
|
|
$
|
657,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking
|
|
$
|
25,150
|
|
|
$
|
7
|
|
|
0.11
|
%
|
|
$
|
23,830
|
|
|
$
|
3
|
|
|
0.05
|
%
|
Savings and clubs
|
|
101,281
|
|
|
67
|
|
|
0.26
|
%
|
|
101,837
|
|
|
62
|
|
|
0.24
|
%
|
Money market
|
|
99,435
|
|
|
117
|
|
|
0.47
|
%
|
|
107,271
|
|
|
123
|
|
|
0.45
|
%
|
Certificates of deposit
|
|
264,194
|
|
|
1,200
|
|
|
1.80
|
%
|
|
266,652
|
|
|
758
|
|
|
1.13
|
%
|
Mortgagors deposits
|
|
1,943
|
|
|
11
|
|
|
2.25
|
%
|
|
2,213
|
|
|
10
|
|
|
1.79
|
%
|
Total deposits
|
|
492,003
|
|
|
1,402
|
|
|
1.13
|
%
|
|
501,803
|
|
|
956
|
|
|
0.76
|
%
|
Borrowed money
|
|
13,403
|
|
|
199
|
|
|
5.89
|
%
|
|
41,196
|
|
|
296
|
|
|
2.85
|
%
|
Total interest-bearing liabilities
|
|
505,406
|
|
|
1,601
|
|
|
1.26
|
%
|
|
542,999
|
|
|
1,252
|
|
|
0.91
|
%
|
Non-interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
58,868
|
|
|
|
|
|
|
55,896
|
|
|
|
|
|
Other liabilities
|
|
17,628
|
|
|
|
|
|
|
10,812
|
|
|
|
|
|
Total liabilities
|
|
581,902
|
|
|
|
|
|
|
609,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
49,522
|
|
|
|
|
|
|
47,468
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
631,424
|
|
|
|
|
|
|
$
|
657,175
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
4,316
|
|
|
|
|
|
|
$
|
5,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate spread
|
|
|
|
|
|
2.55
|
%
|
|
|
|
|
|
3.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
2.78
|
%
|
|
|
|
|
|
3.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes nonaccrual loans
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Includes FHLB-NY stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended September 30,
|
|
|
2018
|
|
2017
|
$ in thousands
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Cost
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Cost
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(1)
|
|
$
|
455,832
|
|
|
$
|
10,117
|
|
|
4.44
|
%
|
|
$
|
531,752
|
|
|
$
|
11,449
|
|
|
4.31
|
%
|
Mortgage-backed securities
|
|
47,524
|
|
|
511
|
|
|
2.15
|
%
|
|
48,119
|
|
|
495
|
|
|
2.06
|
%
|
Investment securities
|
|
38,995
|
|
|
448
|
|
|
2.30
|
%
|
|
13,442
|
|
|
151
|
|
|
2.25
|
%
|
Restricted cash deposit
|
|
—
|
|
|
—
|
|
|
0.03
|
%
|
|
139
|
|
|
—
|
|
|
0.03
|
%
|
Equity securities
(2)
|
|
6,051
|
|
|
23
|
|
|
0.76
|
%
|
|
2,272
|
|
|
50
|
|
|
4.39
|
%
|
Other investments and federal funds sold
|
|
93,686
|
|
|
941
|
|
|
2.00
|
%
|
|
55,557
|
|
|
365
|
|
|
1.31
|
%
|
Total interest-earning assets
|
|
642,088
|
|
|
12,040
|
|
|
3.75
|
%
|
|
651,281
|
|
|
12,510
|
|
|
3.84
|
%
|
Non-interest-earning assets
|
|
9,081
|
|
|
|
|
|
|
13,450
|
|
|
|
|
|
Total assets
|
|
$
|
651,169
|
|
|
|
|
|
|
$
|
664,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking
|
|
$
|
24,642
|
|
|
$
|
15
|
|
|
0.12
|
%
|
|
$
|
27,370
|
|
|
$
|
8
|
|
|
0.06
|
%
|
Savings and clubs
|
|
102,238
|
|
|
134
|
|
|
0.26
|
%
|
|
102,109
|
|
|
123
|
|
|
0.24
|
%
|
Money market
|
|
100,619
|
|
|
234
|
|
|
0.46
|
%
|
|
117,768
|
|
|
299
|
|
|
0.51
|
%
|
Certificates of deposit
|
|
272,972
|
|
|
2,347
|
|
|
1.71
|
%
|
|
258,236
|
|
|
1,427
|
|
|
1.10
|
%
|
Mortgagors deposits
|
|
2,293
|
|
|
20
|
|
|
1.74
|
%
|
|
2,440
|
|
|
31
|
|
|
2.53
|
%
|
Total deposits
|
|
502,764
|
|
|
2,750
|
|
|
1.09
|
%
|
|
507,923
|
|
|
1,888
|
|
|
0.74
|
%
|
Borrowed money
|
|
21,463
|
|
|
476
|
|
|
4.42
|
%
|
|
41,370
|
|
|
582
|
|
|
2.81
|
%
|
Total interest-bearing liabilities
|
|
524,227
|
|
|
3,226
|
|
|
1.23
|
%
|
|
549,293
|
|
|
2,470
|
|
|
0.90
|
%
|
Non-interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
59,552
|
|
|
|
|
|
|
57,083
|
|
|
|
|
|
Other liabilities
|
|
18,844
|
|
|
|
|
|
|
11,618
|
|
|
|
|
|
Total liabilities
|
|
602,623
|
|
|
|
|
|
|
617,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
48,546
|
|
|
|
|
|
|
46,737
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
651,169
|
|
|
|
|
|
|
$
|
664,731
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
8,814
|
|
|
|
|
|
|
$
|
10,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate spread
|
|
|
|
|
|
2.52
|
%
|
|
|
|
|
|
2.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
2.75
|
%
|
|
|
|
|
|
3.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes nonaccrual loans
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Includes FHLB-NY stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
Interest income decreased
$422 thousand
, or
6.7%
, to
$5.9 million
for the three months ended
September 30, 2018
, compared to
$6.3 million
for the prior year quarter. For the six months ended
September 30, 2018
, interest income decreased
$470 thousand
, or
3.8%
, to
$12.0 million
compared to
$12.5 million
for the prior year period. Interest income on loans decreased
$866 thousand
, or
14.9%
, for the three months ended
September 30, 2018
due to a decrease in average balances in the current period of
$85.4 million
. For the six months ended
September 30, 2018
, interest income on loans decreased
$1.3 million
, or
11.6%
, due to a decrease in average balances in the current period of
$75.9 million
. The decrease in the average loans outstanding is a result of the Bank's focused efforts to reduce the concentration level of commercial real estate loans during the prior fiscal 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
Interest expense increased
$349 thousand
, or
27.9%
, to
$1.6 million
for the three months ended
September 30, 2018
, compared to
$1.3 million
for the prior year quarter. For the six months ended
September 30, 2018
, interest expense increased
$756 thousand
, or
30.6%
, to
$3.2 million
compared to the prior year period. Interest expense on deposits increased
$446 thousand
, or
46.7%
, and
$862 thousand
, or
45.7%
, for the three and six months ended
September 30, 2018
, respectively, primarily due to higher rates on certificates of deposit. Interest expense on borrowings decreased from the prior periods despite an increase in the cost to borrow, due to a decrease in average borrowings during the current year-to-date periods.
Provision for Loan Losses and Asset Quality
The Bank maintains an ALLL that management believes is adequate to absorb inherent and probable losses in its loan portfolio. The adequacy of the ALLL is determined by management’s continuous review of the Bank’s loan portfolio, including the identification and review of individual problem situations that may affect a borrower’s ability to repay. Management reviews the overall portfolio quality through an analysis of delinquency and non-performing loan data, estimates of the value of underlying collateral, current charge-offs and other factors that may affect the portfolio, including a review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and composition of the loan portfolio. The ALLL reflects management’s evaluation of the loans presenting identified loss potential, as well as the risk inherent in various components of the portfolio. Any change in the size of the loan portfolio or any of its components could necessitate an increase in the ALLL even though there may not be a decline in credit quality or an increase in potential problem loans.
The Bank’s provision for loan loss methodology is consistent with the Interagency Policy Statement on the Allowance for Loan and Lease Losses (the “Interagency Policy Statement”) released by the OCC on December 13, 2006. For additional information regarding the Bank’s ALLL policy, refer to Note 2 of the Notes to Consolidated Financial Statements, “Summary of Significant Accounting Policies” included in the Company’s Annual Report on Form 10-K for the fiscal year ended
March 31, 2018
.
The following table summarizes the activity in the ALLL for the six month periods ended
September 30, 2018
and
2017
and the fiscal year ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in thousands
|
|
Six Months Ended September 30, 2018
|
|
Fiscal Year Ended March 31, 2018
|
|
Six Months Ended September 30, 2017
|
Beginning Balance
|
|
5,126
|
|
|
$
|
5,060
|
|
|
$
|
5,060
|
|
Less: Charge-offs
|
|
(590
|
)
|
|
(314
|
)
|
|
(141
|
)
|
Add: Recoveries
|
|
202
|
|
|
245
|
|
|
83
|
|
Provision for Loan Losses
|
|
54
|
|
|
135
|
|
|
124
|
|
Ending Balance
|
|
$
|
4,792
|
|
|
$
|
5,126
|
|
|
$
|
5,126
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
Net (charge-offs) recoveries to average loans outstanding (annualized)
|
|
(0.17
|
)%
|
|
(0.01
|
)%
|
|
(0.02
|
)%
|
Allowance to total loans
|
|
1.11
|
%
|
|
1.07
|
%
|
|
0.99
|
%
|
Allowance to non-performing loans
|
|
51.28
|
%
|
|
76.94
|
%
|
|
57.92
|
%
|
The Company recorded a
$49 thousand
provision for loan loss for the three months ended
September 30, 2018
, compared to a
$4 thousand
provision for loan loss for the prior year quarter. Net chargeoffs of
$444 thousand
were recognized during the second quarter, compared to net chargeoffs of
$11 thousand
for the prior year quarter. For the six months ended
September 30, 2018
, the Company recorded a
$54 thousand
provision for loan loss, compared to a
$124 thousand
provision for loan loss for the prior year period. Net chargeoffs of
$388 thousand
were recognized for the six months ended
September 30, 2018
, compared to net chargeoffs of
$58 thousand
in the prior year period.
At
September 30, 2018
, nonaccrual loans totaled
$9.3 million
, or
1.52%
of total assets, compared to
$6.7 million
, or
0.96%
of total assets at
March 31, 2018
. The ALLL was
$4.8 million
at
September 30, 2018
, which represents a ratio of the ALLL to nonaccrual loans of
51.3%
compared to a ratio of
76.9%
at
March 31, 2018
. The ratio of the allowance for loan losses to total loans was
1.11%
at
September 30, 2018
, compared to
1.07%
at
March 31, 2018
.
Non-performing Assets
Non-performing assets consist of nonaccrual loans, loans held-for-sale and property acquired in settlement of loans, including foreclosure. When a borrower fails to make a payment on a loan, the Bank and/or its loan servicers take prompt steps to have the delinquency cured and the loan restored to current status. This includes a series of actions such as phone calls, letters, customer visits and, if necessary, legal action. In the event the loan has a guarantee, the Bank may seek to recover on the guarantee, including, where applicable, from the SBA. Loans that remain delinquent are reviewed for reserve provisions and charge-off. The Bank’s collection efforts continue after the loan is charged off, except when a determination is made that collection efforts have been exhausted or are not productive.
The Bank may from time to time agree to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). Loans modified in a TDR are placed on nonaccrual status until the Bank determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for a minimum of six months. At
September 30, 2018
, loans classified as TDR totaled
$5.8 million
, of which
$3.1 million
were classified as performing. At
March 31, 2018
, loans classified as TDR totaled
$5.7 million
, of which
$3.8 million
were classified as performing.
At
September 30, 2018
, non-performing assets totaled
$9.6 million
, or
1.6%
of total assets compared to
$7.8 million
, or
1.1%
of total assets at
March 31, 2018
. The following table sets forth information with respect to the Bank’s non-performing assets at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non Performing Assets
|
|
|
|
|
|
|
|
|
|
|
|
$ in thousands
|
|
September 30, 2018
|
|
June 30, 2018
|
|
March 31, 2018
|
|
December 30, 2017
|
|
September 30, 2017
|
Loans accounted for on a nonaccrual basis
(1)
:
|
|
|
|
|
|
|
|
|
Gross loans receivable:
|
|
|
|
|
|
|
|
|
|
|
One-to-four family
|
|
$
|
4,709
|
|
|
$
|
4,809
|
|
|
$
|
4,561
|
|
|
$
|
4,598
|
|
|
$
|
5,583
|
|
Multifamily
|
|
2,328
|
|
|
2,436
|
|
|
964
|
|
|
897
|
|
|
1,582
|
|
Commercial real estate
|
|
489
|
|
|
495
|
|
|
502
|
|
|
508
|
|
|
1,382
|
|
Business
|
|
1,819
|
|
|
2,132
|
|
|
635
|
|
|
302
|
|
|
303
|
|
Total nonaccrual loans
|
|
9,345
|
|
|
9,872
|
|
|
6,662
|
|
|
6,305
|
|
|
8,850
|
|
Other non-performing assets
(2)
:
|
|
|
|
|
|
|
|
|
|
|
Real estate owned
|
|
262
|
|
|
552
|
|
|
1,145
|
|
|
1,200
|
|
|
604
|
|
Loans held-for-sale
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total other non-performing assets
|
|
262
|
|
|
552
|
|
|
1,145
|
|
|
1,200
|
|
|
604
|
|
Total non-performing assets
(3)
|
|
$
|
9,607
|
|
|
$
|
10,424
|
|
|
$
|
7,807
|
|
|
$
|
7,505
|
|
|
$
|
9,454
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
2.17
|
%
|
|
2.18
|
%
|
|
1.39
|
%
|
|
1.27
|
%
|
|
1.71
|
%
|
Non-performing assets to total assets
|
|
1.56
|
%
|
|
1.63
|
%
|
|
1.13
|
%
|
|
1.14
|
%
|
|
1.42
|
%
|
Allowance to total loans
|
|
1.11
|
%
|
|
1.15
|
%
|
|
1.07
|
%
|
|
1.02
|
%
|
|
0.99
|
%
|
Allowance to non-performing loans
|
|
51.28
|
%
|
|
52.54
|
%
|
|
76.94
|
%
|
|
80.41
|
%
|
|
57.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Nonaccrual status denotes any loan where the delinquency exceeds 90 days past due, or in the opinion of management, the collection of contractual interest and/or principal is doubtful. Payments received on a nonaccrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on assessment of the ability to collect on the loan.
|
(2)
Other non-performing assets generally represent loans that the Bank is in the process of selling and has designated held-for-sale or property acquired by the Bank in settlement of loans less costs to sell (i.e., through foreclosure, repossession or as an in-substance foreclosure). These assets are recorded at the lower of their cost or fair value.
|
(3)
Troubled debt restructured loans performing in accordance with their modified terms for less than six months and those not performing in accordance with their modified terms are considered nonaccrual and are included in the nonaccrual category in the table above. At September 30, 2018, there were $3.1 million TDR loans that have performed in accordance with their modified terms for a period of at least six months. These loans are generally considered performing loans and are not presented in the table above.
|
Subprime Loans
In the past, the Bank originated or purchased a limited amount of subprime loans (which are defined by the Bank as those loans where the borrowers have FICO scores of 660 or less at origination). At
September 30, 2018
, the Bank had $5.5 million in subprime loans, or 1.3% of its total loan portfolio, of which $1.6 million are non-performing loans.
Non-Interest Income
Non-interest income decreased
$60 thousand
, or
5.3%
, to
$1.1 million
for the three months ended
September 30, 2018
, compared to
$1.1 million
for the prior year quarter. For the six months ended
September 30, 2018
, non-interest income increased
$35 thousand
, or
1.5%
, to
$2.4 million
, compared to
$2.3 million
for the prior year period. Non-interest income for the current period included a higher deferred gain recognized on building sale compared to the prior periods due to the sale of the Bank's Harlem headquarters during fiscal year 2018. This was offset by lower depository fees earned in the current period.
Non-Interest Expense
Non-interest expense increased
$511 thousand
, or
7.5%
, to
$7.3 million
for the three months ended
September 30, 2018
, compared to
$6.8 million
for the prior year quarter. For the six months ended
September 30, 2018
, non-interest expense increased
$685 thousand
, or
5.1%
, to
$14.1 million
, compared to
$13.4 million
for the prior year period. Net occupancy expense increased 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.
Income Tax Expense
For the three months ended
September 30, 2018
, income tax expense was
$66 thousand
, compared to
$30 thousand
for the prior year quarter. For the six months ended
September 30, 2018
, income tax expense was
$66 thousand
, compared to
$60 thousand
for the prior year period.