CARVER BANCORP, INC. Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 which may be identified by the use of such words as "may," "believe," "expect," "anticipate," "should," "plan," "estimate," "predict," "continue," and "potential" or the negative of these terms or other comparable terminology. Examples of forward-looking statements include, but are not limited to, estimates with respect to the Company's financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates. These factors include but are not limited to the following: •the effects of COVID-19, which includes, but is not limited to, the length of time that the pandemic continues, the duration of restrictive orders and the imposition of restrictions on businesses and travel, the remedial actions and stimulus measures adopted by federal, state, and local governments, the health of our employees and the inability of employees to work due to illness, quarantine, or government mandates, the business continuity plans of our customers and our vendors, the increased likelihood of cybersecurity risk, data breaches, or fraud due to employees working from home, the ability of our borrowers to continue to repay their loan obligations, and the effect of the pandemic on the general economy and the business of our borrowers; •the ability of the Company to obtain approval from theFederal Reserve Bank of Philadelphia (the "Federal Reserve Bank ") to distribute interest payments owed to the holders of the Company's subordinated debt securities; •the limitations imposed on the Company which require, among other things, written approval of theFederal 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 market price and trading volume of our shares of common stock has been and may continue to be volatile, and purchasers of our securities could incur substantial losses;
•changes in the level of trends of delinquencies and write-offs and in our allowance and provision for loan losses;
•changes in interest rates, which may reduce net interest margin and net interest income;
•monetary and fiscal policies of the
•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; •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 values);
•changes in our existing loan portfolio composition (including reduction in
commercial real estate loan concentration) and credit quality or changes in loan
loss requirements;
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•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 secured by property located in our market area;
•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 theFinancial Accounting Standards Board could negatively impact the Company's financial results;
•litigation or regulatory actions, whether currently existing or commencing in the future, which may restrict our operations or strategic business plan;
•the ability to originate and purchase loans with attractive terms and acceptable credit quality; and
•the ability to attract and retain key members of management, and to address staffing needs in response to product demand or to implement business initiatives.
Because forward-looking statements are subject to numerous assumptions, risks and uncertainties, actual results or future events could differ possibly materially from those that the Company anticipated in its forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and the Company assumes no obligation to, and expressly disclaims any obligation to, update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements, except as legally required.
Overview
Carver Bancorp, Inc. is the holding company forCarver Federal Savings Bank , a federally chartered savings bank. The Company is headquartered inNew 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 serveAfrican-American communities whose residents, businesses and institutions had limited access to mainstream financial services. The Bank remains headquartered inHarlem , and predominantly all of its seven branches and five 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 largestAfrican-American operated banks inthe 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 sixth consecutive "Outstanding" rating, issued by the OCC following its most recent Community Reinvestment Act ("CRA") examination inMarch 2022 . The OCC found that 90% of Carver Federal's loans were made within our assessment area, and the Bank has demonstrated excellent responsiveness to its assessment area's 30 --------------------------------------------------------------------------------
needs through its community development lending, investing and service
activities. The Bank had approximately
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 withinNew 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 account opening and 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 inU.S. government agency securities and mortgage-backed securities. The Bank's primary market area for deposits consists of the areas served by its seven branches in theBrooklyn ,Manhattan andQueens boroughs ofNew 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 includesKings, New York ,Bronx andQueens Counties inNew York City , and lowerWestchester 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 theNew York market, add to the challenges the Bank faces in expanding its current market share and growing its near-term profitability. Carver Federal's 74-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'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
Involvement with SPE (000's) Funded Exposure Unfunded Exposure
Significant Maximum
Recognized Gain Total Rights unconsolidated VIE Total Involvement Equity exposure to
$ in thousands (Loss) (000's) transferred assets with SPE asset Debt Investments Investments Funding Commitments Total loss
Carver Statutory
Trust 1 (1) $ - $ - $ 13,403 $ 13,403 $ 13,038 $ 403 $ - $ - $ 13,441 (1) Carver Statutory Trust I debt investment includes deferred interest of
Critical Accounting Estimates Note 2 to the Company's audited Consolidated Financial Statements for the year endedMarch 31, 2022 included in its Form 10-K for the year endedMarch 31, 2022 , 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 is the most critical accounting policy. This policy involves a high degree of complexity, requiring 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 result in material differences in the Company's results of operations or financial condition. The following description of these policies should be read in conjunction with the corresponding section of the Company's Form 10-K for the year endedMarch 31, 2022 . 31 --------------------------------------------------------------------------------
Allowance for Loan and Lease Losses
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. In a continued effort to combat inflation, theFederal Reserve approved an eighth consecutive interest rate hike inFebruary 2023 , raising the overnight borrowing rate 25 basis points to a target range of 4.5% to 4.75%, the highest it has been in 15 years. While this quarter-point rate increase is the smallest adjustment sinceMarch 2022 and inflation seems to have eased, rates will likely continue to increase, although at potentially smaller increments. A rising rate environment can negatively impact the Company if the higher debt service costs on adjustable-rate loans lead to borrowers' inability to pay contractual obligations. Further, any change in the size of the loan portfolio or any of its components could necessitate an increase in the 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 evaluation of the risk to potential loss 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:
•One-to-four family
•Multifamily
•Commercial Real Estate
•Business Loans
•Consumer (including Overdraft Accounts)
The Bank next applies to each pool a risk factor that determines the level of
general reserves for that specific pool. The Bank estimates its historical
charge-offs via a lookback analysis. The actual historical loss experience by
major loan category is expressed as a percentage of the outstanding balance of
all loans within the category. As the loss experience for a particular loan
category increases or decreases, the level of reserves required for that
particular loan category also increases or decreases. The Bank's historical
charge-off rate reflects the period over which the charge-offs were confirmed
and recognized, not the period over which the earlier losses occurred. That is,
the charge-off rate measures the confirmation of losses over a period that
occurs after the earlier actual losses. During the period between the
loss-causing events and the eventual confirmations of losses, conditions may
have changed. There is always a time lag between the period over which average
charge-off rates are calculated and the date of the financial statements. During
that period, conditions may have changed. Another factor influencing the General
Reserve is the Bank's loss emergence period ("LEP") assumptions which represent
the Bank's estimate of the average amount of time from the point at which a loss
is incurred to the point at which the loss is confirmed, either through the
identification of the loss or a charge-off. Based upon adequate management
information systems and effective methodologies for estimating losses,
management has established a LEP floor of one year on all pools. In some pools,
such as Commercial Real Estate , Multifamily and Business pools, the Bank
demonstrates a LEP in excess of 12 months. The Bank also recognizes losses in
accordance with regulatory charge-off criteria.
Because actual loss experience may not adequately predict the level of losses
inherent in a portfolio, the Bank reviews nine qualitative factors to determine
if reserves should be adjusted based upon any of those factors. As the risk
ratings worsen, some of the qualitative factors tend to increase. The nine
qualitative factors the Bank considers and may utilize are:
1.Changes in lending policies and procedures, including changes in underwriting
standards and collection, charge-off, and recovery practices not considered
elsewhere in estimating credit losses (Policy & Procedures).
2.Changes in relevant economic and business conditions and developments that
affect the collectability of the portfolio, including the condition of various
market segments (Economy).
3.Changes in the nature or volume of the loan portfolio and in the terms of
loans (Nature & Volume).
4.Changes in the experience, ability, and depth of lending management and other
relevant staff (Management).
5.Changes in the volume and severity of past due loans, the volume of nonaccrual
loans, and the volume and severity of adversely classified loans (Problem
Assets).
6.Changes in the quality of the loan review system (Loan Review).
7.Changes in the value of underlying collateral for collateral dependent loans
(Collateral Values).
8.The existence and effect of any concentrations of credit and changes in the
level of such concentrations (Concentrations).
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--------------------------------------------------------------------------------9.The effect of other external forces such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio (External Forces).
Specific Reserve Allowance The Bank also maintains a specific reserve allowance for criticized and classified loans individually reviewed for impairment in accordance with ASC Subtopic 310-10 guidelines. The amount assigned to the specific reserve allowance is individually determined based upon the loan. The ASC Subtopic 310-10 guidelines require the use of one of three approved methods to estimate the amount to be reserved and/or charged off for such credits. The three methods are as follows: 1.The present value of expected future cash flows discounted at the loan's effective interest rate; 2.The loan's observable market price; or 3.The fair value of the collateral if the loan is collateral dependent. The Bank may choose the appropriate ASC Subtopic 310-10 measurement on a loan-by-loan basis for an individually impaired loan, except for an impaired collateral dependent loan. Guidance requires impairment of a collateral dependent loan to be measured using the fair value of collateral method. A loan is considered "collateral dependent" when the repayment of the debt will be provided solely by the underlying collateral, and there are no other available and reliable sources of repayment. All substandard and doubtful loans and any other loans that the Chief Credit Officer deems appropriate for review, are identified and reviewed for individual evaluation for impairment in accordance with ASC Subtopic 310-10. Loans rated Substandard have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are inadequately protected by the current sound worth, paying capacity of the obligor, or of the collateral pledged, if any. 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. 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 to the contractual terms of the loan agreement, the loan is categorized as impaired. Loans determined to be impaired are evaluated to determine the amount of impairment based on one of the three measurement methods noted above. In accordance with guidance, if there is no impairment amount, no reserve is established for the loan.
An unallocated loan loss allowance is appropriate when it reflects an estimate of probable loss, determined in accordance with GAAP and is properly supported.
Financial institutions were not required to comply with ASU No. 2016-13, "Financial Instruments - Credit Loss," which updates the guidance on recognition and measurement of credit losses for financial assets, from the enactment date of the CARES Act until the earlier of the end of the President's declaration of a National Emergency orDecember 31, 2020 . The new methodology requirements, know as the current expected credit loss model ("CECL"), will require entities to adopt an impairment model based on expected losses, rather than incurred losses. The Consolidated Appropriations Act, 2021, that was enacted inDecember 2020 , provided for a further extension of the required CECL adoption date toJanuary 1, 2022 . For smaller reporting companies, as defined by theSEC , the FASB further extended the CECL implementation date. The new effective date is for fiscal years beginning afterDecember 15, 2022 (for the Company, the fiscal year endingMarch 31, 2024 ), including interim periods within those fiscal years.
Stock Repurchase Program
OnAugust 6, 2002 , the Company announced a stock repurchase program to repurchase up to 15,442 shares of its outstanding common stock. As ofDecember 31, 2022 , 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 onOctober 27, 2011 ).
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
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--------------------------------------------------------------------------------conditions and competition. Carver Federal monitors its liquidity utilizing guidelines that are contained in a policy developed by its management and approved by its Board of Directors. Carver Federal's several liquidity measurements are evaluated on a frequent basis.
Management believes Carver Federal's short-term assets have sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash requirements, including interest payments on our subordinated debt securities. Additionally, Carver Federal has other sources of liquidity including the ability to borrow from theFederal Home Loan Bank of New York ("FHLB-NY") utilizing unpledged mortgage-backed securities and certain mortgage loans, the sale of available-for-sale securities and the sale of certain mortgage loans. Net borrowings increased$15.1 million , or 95.0%, to$31.0 million atDecember 31, 2022 , compared to$15.9 million atMarch 31, 2022 . The Bank had a$15 million overnight advance outstanding from the FHLB-NY atDecember 31, 2022 . AtDecember 31, 2022 , based on available collateral held at the FHLB-NY, Carver Federal had the ability to borrow from the FHLB-NY an additional$25.4 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. During the nine months endedDecember 31, 2022 , the Bank repaid its remaining$3 thousand outstanding advance under its PPP liquidity facility ("PPPLF") at theFederal Reserve . The Company also had$13.4 million in subordinated debt securities and$2.5 million in low interest loans outstanding as ofDecember 31, 2022 . 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. AtDecember 31, 2022 andMarch 31, 2022 , assets qualifying for short-term liquidity, including cash and cash equivalents, totaled$43.9 million and$61.0 million , respectively. During fiscal year 2022, the Company entered into a sales agreement with an agent to sell, from time to time, our common stock having an aggregate offering price of up to$20.0 million , in an "at the market offering." As ofMarch 31, 2022 , we have sold an aggregate of 397,367 shares of our common stock pursuant to the terms of such sales agreement, for aggregate gross proceeds of approximately$3.1 million . Aggregate net proceeds received were approximately$3.0 million , after deducting expenses and commissions paid to the agent. There were no additional offerings during the nine months endedDecember 31, 2022 . 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 nine months endedDecember 31, 2022 , total cash and cash equivalents decreased$17.1 million to$43.9 million atDecember 31, 2022 , compared to$61.0 million atMarch 31, 2022 , reflecting$8.8 million ,$4.4 million and$3.9 million cash used in operating, investing and financing activities, respectively. Net cash used in operating activities totaled$8.8 million , which was primarily due to a$9.2 million decrease in other liabilities related to an outstanding teller check from the prior fiscal year that cleared during the first quarter of the current fiscal year. Net cash used in investing activities of$4.4 million was attributable to loan originations and purchases, net of principal repayments and payoffs, and the purchase of a$5.0 million bank-owned life insurance policy during the first quarter, partially offset by investment paydowns. Net cash used in financing activities of$3.9 million resulted from a net decrease in deposits of$18.9 million , offset by an increase of$15.0 million in FHLB-NY advances and other borrowings. The Bank secured a$15.0 million overnight advance from the FHLB-NY onDecember 30, 2022 . 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 allU.S. banks, Carver Federal'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 onJanuary 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 beginningJanuary 1, 2016 . OnJanuary 1, 2019 , the full capital conservation buffer requirement of 2.5% became effective, making its minimum CET1 plus buffer 7%, its minimum Tier 1 capital plus buffer 8.5% and its minimum total capital plus buffer 10.5%. Regardless of Basel III's minimum requirements, Carver Federal, as a result of the Formal Agreement, was issued an Individual Minimum 34 -------------------------------------------------------------------------------- Capital Ratio ("IMCR") letter by the OCC, which requires the Bank to maintain minimum regulatory capital levels of 9% for its Tier1 leverage ratio and 12% for its total risk-based capital ratio. In accordance with the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies have adopted, effectiveJanuary 1, 2020 , a final rule whereby financial institutions and financial institution holding companies that have less than$10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, will be eligible to opt into a "Community Bank Leverage Ratio" framework. Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies' capital rules and will be considered to have met the "well capitalized" ratio requirements under the Prompt Corrective Action statutes. The CARES Act and implementing rules temporarily reduced theCommunity Bank Leverage Ratio to 8%, to be gradually increased back to 9% by 2022. The CARES Act also provides that, during the same time period, if a qualifying community banking organization falls no more than 1% below the community bank leverage ratio, it will have a two quarter grace period to satisfy the community bank leverage ratio. The agencies reserved the authority to disallow the use of the Community Bank Leverage Ratio by a financial institution or holding company based on the risk profile of the organization. The table below presents the capital position of the Bank atDecember 31, 2022 : December 31, 2022 ($ in thousands) Amount Ratio Tier 1 leverage capital Regulatory capital $ 75,042 10.57 % Individual minimum capital requirement 63,885 9.00 % Minimum capital requirement 28,393 4.00 % Excess over individual minimum capital requirement 11,157 1.57 % Common equity Tier 1 Regulatory capital $ 75,042 12.84 % Minimum capital requirement 40,920 7.00 % Excess 34,122 5.84 % Tier 1 risk-based capital Regulatory capital $ 75,042 12.84 % Minimum capital requirement 49,689 8.50 % Excess 25,353 4.34 % Total risk-based capital Regulatory capital $ 80,304 13.74 % Individual minimum capital requirement 70,149 12.00 % Minimum capital requirement 61,380 10.50 % Excess over individual minimum capital requirement 10,155 1.74 % Bank Regulatory Matters OnMay 24, 2016 , the Bank entered into a Formal Agreement ("the Agreement") with the OCC to undertake certain compliance-related and other actions. As a result of the Agreement, the Bank was required to obtain the approval of the OCC prior to effecting any change in its directors or senior executive officers, paying dividends and 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. As a result of the Agreement, Carver 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. As further discussed in Note 13 "Subsequent Events" of the Notes to Consolidated Financial Statements (Unaudited) included herein, the Agreement was terminated onJanuary 18, 2023 . The IMCR remains in effect. AtDecember 31, 2022 , the Bank's capital level exceeded the regulatory requirements and its IMCR requirements with a Tier 1 leverage capital ratio of 10.57%, Common Equity Tier 1 capital ratio of 12.84%, Tier 1 risk-based capital ratio of 12.84%, and a total risk-based capital ratio of 13.74%. 35 -------------------------------------------------------------------------------- The Company continues to be subject to similar requirements that the Bank was subject to under the Agreement. The Company must provide notice to the FRB prior to affecting any change in its directors or senior executive officers. The Company is also subject to the restrictions on golden parachute and indemnification payments, as set forth in 12 C.F.R. Part 359. Written approval of theFederal Reserve Bank is required prior to: (1) the declaration or payment of dividends by the Company to its stockholders, (2) the declaration or payment of dividends by the Bank to the Company, (3) any distributions of interest or principal by the Company on subordinated debentures or trust preferred securities, (4) any purchases or redemptions of the Company's stock and (5) the Company incurring, increasing or guaranteeing certain long-term debt outside the ordinary course of business. These limitations could affect our operations and financial performance.
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. The Bank has not received a request to repurchase any of these loans
since the second quarter of fiscal 2015, and there have not been any additional
requests from FNMA for loans to be reviewed. At December 31, 2022 , the Bank
continues to service 79 loans with a principal balance of $12.5 million for FNMA
that had been sold with standard representations and warranties.
The following table presents information on open requests from
Loans sold to FNMA
Open claims as of March 31, 2022 (1) $ 1,363
Gross new demands received -
Loans repurchased/made whole -
Demands rescinded -
Advances on open claims -
Principal payments received on open claims 26
Open claims as of December 31, 2022 (1) $ 1,389
(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 table below summarizes changes in our representation and
warranty reserves during the nine months ended December 31, 2022 :
$ in thousands December 31, 2022
Representation and warranty repurchase reserve, March 31, 2022 (1) $ 123
Net adjustment to reserve for repurchase losses (2) (25)
Representation and warranty repurchase reserve,
$ 98
(1) Reported in our consolidated statements of financial condition as a component of other liabilities. (2) Component of other non-interest expense.
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Comparison of Financial Condition at
Assets
AtDecember 31, 2022 , total assets were$712.2 million , reflecting a decrease of$23.1 million , or 3.1%, from total assets of$735.3 million atMarch 31, 2022 . The decrease was primarily attributable to decreases of$17.1 million in cash and cash equivalents and$17.1 million in the Bank's investment portfolio, partially offset by increases of$7.7 million in the Bank's net loan portfolio and$3.6 million in other assets. Total cash and cash equivalents decreased$17.1 million , or 28.0%, from$61.0 million atMarch 31, 2022 to$43.9 million atDecember 31, 2022 . The decrease in cash was primarily due to a decrease in deposits and increased net loan activity, partially offset by an increase in borrowings and paydowns received on investment securities. Total investment securities decreased$17.1 million , or 23.5%, to$55.8 million atDecember 31, 2022 , compared to$72.9 million atMarch 31, 2022 due to scheduled principal payments received of approximately$7.1 million and a$7.0 million increase in unrealized losses in the available-for-sale portfolio. In addition, there was an early payoff of a$2.5 million mortgage-backed security in the held-to-maturity portfolio during the second quarter. Gross portfolio loans increased$7.2 million , or 1.2%, to$586.7 million atDecember 31, 2022 , compared to$579.5 million atMarch 31, 2022 due to new loan originations of$92.4 million and loan pool purchases of$11.2 million . These were partially offset by attrition and payoffs of$90.3 million . The unexpected high level of payoffs was primarily due to commercial real estate borrowers who perceived the rising rate environment, coupled with high inflation, as the right time to exit contractual debt. Other assets increased$3.6 million , or 50.3%, to$10.8 million atDecember 31, 2022 , compared to$7.2 million atMarch 31, 2022 primarily due to the purchase of a$5.0 million bank-owned life insurance policy during the first quarter of fiscal year 2023 as a channel to add to the Company's non-interest income revenue by means of an investment considered safe and sound by the Company's regulators. Liabilities and Equity Total liabilities decreased$13.1 million , or 1.9%, to$667.1 million atDecember 31, 2022 , compared to$680.2 million atMarch 31, 2022 , primarily due to decreases in total deposits and other liabilities, partially offset by an increase in advances from the FHLB-NY. Deposits decreased$18.9 million , or 3.0%, to$609.2 million atDecember 31, 2022 , compared to$628.1 million atMarch 31, 2022 . The decline was primarily related to a large withdrawal of by one customer, who had previously informed Carver of the intended withdrawal due to concerns regarding a large deposit concentration with one bank. This was partially offset by increases in certificate of deposit and money market accounts due to an increase in interest rates, coupled with significant outreach efforts from the retail team. Advances from the FHLB-NY and other borrowed money increased$15.1 million to$31.0 million atDecember 31, 2022 , compared to$15.9 million atMarch 31, 2022 . The Bank secured a$15.0 million overnight advance from the FHLB-NY onDecember 30, 2022 . Other liabilities decreased$8.7 million , or 39.9%, to$13.1 million atDecember 31, 2022 , compared to$21.8 million atMarch 31, 2022 due to a decrease in outstanding teller checks from the prior fiscal year that cleared during the first quarter. Total equity decreased$10.0 million , or 18.1%, to$45.1 million atDecember 31, 2022 , compared to$55.1 million atMarch 31, 2022 . The decrease was due to a net loss of$2.9 million , coupled with an increase of$7.0 million in unrealized losses on securities available-for-sale for the nine month period endedDecember 31, 2022 . 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 37 --------------------------------------------------------------------------------
capital effectively without taking undue risks, to maintain adequate liquidity and to manage its exposure to changes in interest rates.
The economic environment is uncertain regarding future interest rate trends. Management monitors the Company's cumulative gap position, which is the difference between the sensitivity to rate changes on the Company's interest-earning assets and interest-bearing liabilities. In addition, the Company uses various tools to monitor and manage interest rate risk, such as a model that projects net interest income based on increasing or decreasing interest rates.
Off-Balance Sheet Arrangements and Contractual Obligations
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and in connection with its overall investment strategy. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are not recorded in the consolidated financial statements. Such instruments primarily include lending obligations, including commitments to originate mortgage and consumer loans and to fund unused lines of credit.
The following table reflects the Bank's outstanding commitments as of
Lines of credit$ 3,488
Commitment to fund private equity investment 253 Total
$ 3,741
Comparison of Operating Results for the Three and Nine Months Ended
2022 and 2021
Overview
The Company reported net loss of $1.1 million for the three months ended
December 31, 2022 , compared to net income of $0.7 million for the comparable
prior year quarter. For the nine months ended December 31, 2022 , the Company
reported a net loss of $2.9 million , compared to a net loss of $1.0 million for
the prior year period. The change in our results was primarily driven by a
decrease in non-interest income and an increase in non-interest expense,
partially offset by an increase in net interest income after recoveries of loan
losses compared to the prior year periods.
38
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The following table reflects selected operating ratios for the three and nine
months ended
Nine Months Ended
Three Months Ended December 31, December 31,
Selected Financial Data: 2022 2021 2022 2021
Return on average assets (1) (0.61) % 0.39 % (0.55) % (0.19) %
Return on average stockholders' equity (2) (9.52) % 4.86 % (7.75) % (2.40) %
Return on average stockholders' equity,
excluding AOCI (2) (8) (7.29) % 4.72 % (6.35) % (2.34) %
Net interest margin (3) 3.34 % 2.95 % 3.31 % 2.96 %
Interest rate spread (4) 3.09 % 2.82 % 3.12 % 2.82 %
Efficiency ratio (5) 122.28 % 87.14 % 117.63 % 102.36 %
Operating expenses to average assets (6) 4.24 % 3.38 % 4.26 % 4.22 %
Average stockholders' equity to average assets
(7) 6.45 % 8.05 % 7.04 % 7.78 %
Average stockholders' equity, excluding AOCI, to
average assets (7) (8) 8.43 % 8.28 % 8.58 % 8.01 %
Average interest-earning assets to average
interest-bearing liabilities 1.30 x 1.40 x 1.30 x 1.37 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.
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.
Nine Months Ended
Three Months Ended December 31, December 31,
$ in thousands 2022 2021 2022 2021
Average Stockholders' Equity
Average Stockholders' Equity $ 45,743 $ 57,305 $ 49,930 $ 54,131
Average AOCI (14,042) (1,638) (10,975) (1,562)
Average Stockholders' Equity, excluding AOCI $ 59,785 $
58,943
Return on Average Stockholders' Equity (9.52) % 4.86 % (7.75) % (2.40) % Return on Average Stockholders' Equity, excluding AOCI (7.29) %
4.72 % (6.35) % (2.34) %
Average Stockholders' Equity to Average Assets 6.45 % 8.05 % 7.04 % 7.78 %
Average Stockholders' Equity, excluding AOCI,
to Average Assets 8.43 % 8.28 % 8.58 % 8.01 %
39--------------------------------------------------------------------------------
Analysis of Net Interest Income
The Company's profitability is primarily dependent upon net interest income and is also affected by the provision for loan losses, non-interest income, non-interest expense and income taxes. Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned and paid. The Company's net interest income is significantly impacted by changes in interest rate and market yield curves. Net interest income increased$0.6 million , or 11.8%, to$5.7 million for the three months endedDecember 31, 2022 , compared to$5.1 million for the same quarter last year. Net interest income increased$2.2 million , or 14.8%, to$17.1 million for the nine months endedDecember 31, 2022 , compared to$14.9 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 nine months endedDecember 31, 2022 and 2021. 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 adjustment to yield. For the Three Months Ended December 31, 2022 2021 Average Average Average Average $ in thousands Balance Interest Yield/Cost Balance Interest Yield/Cost Interest-Earning Assets: Loans(1)$ 578,490 $ 6,380 4.41 %$ 527,924 $ 5,379 4.08 % Mortgage-backed securities 30,070 150 2.00 % 44,067 150 1.36 % Investment securities(2) 34,117 273 3.20 % 41,644 109 1.05 % Money market investments 45,863 395 3.42 % 73,868 27 0.15 % Total interest-earning assets 688,540 7,198 4.18 % 687,503 5,665 3.30 % Non-interest-earning assets 20,784 24,556 Total assets$ 709,324 $ 712,059 Interest-Bearing Liabilities: Deposits Interest-bearing checking$ 56,644 $ 20 0.14 %$ 52,646 $ 7 0.05 % Savings and clubs 110,349 54 0.19 % 111,647 31 0.11 % Money market 195,862 613 1.24 % 151,372 94 0.25 % Certificates of deposit 138,054 439 1.26 % 156,379 342 0.87 % Mortgagors deposits 3,091 2 0.26 % 3,259 2 0.24 % Total deposits 504,000 1,128 0.89 % 475,303 476 0.40 % Borrowed money 27,534 327 4.71 % 16,902 117 2.75 % Total interest-bearing liabilities 531,534 1,455 1.09 % 492,205 593 0.48 % Non-interest-bearing liabilities Demand deposits 104,801 136,165 Other liabilities 27,246 26,384 Total liabilities 663,581 654,754 Stockholders' equity 45,743 57,305 Total liabilities and equity$ 709,324 $ 712,059 Net interest income$ 5,743 $ 5,072 Average interest rate spread
3.09 % 2.82 %
Net interest margin 3.34 % 2.95 %
(1) Includes nonaccrual loans
(2) Includes FHLB-NY stock
40
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For the Nine Months Ended December 31,
2022 2021
Average Average Average Average
$ in thousands Balance Interest Yield/Cost Balance Interest Yield/Cost
Interest-Earning Assets:
Loans(1) $ 571,506 $ 18,362 4.28 % $ 503,782 $ 15,541 4.11 %
Mortgage-backed securities 33,319 466 1.86 % 46,903 552 1.57 %
Investment securities(2) 35,913 639 2.37 % 43,668 543 1.66 %
Money market investments 46,231 829 2.38 % 75,412 76 0.13 % Total interest-earning assets 686,969 20,296 3.93 % 669,765 16,712 3.32 % Non-interest-earning assets 22,571 25,649 Total assets$ 709,540 $ 695,414 Interest-Bearing Liabilities: Deposits Interest-bearing checking$ 57,831 $ 47 0.11 %$ 50,344 $ 21 0.06 % Savings and clubs 112,188 139 0.16 % 111,865 93 0.11 % Money market 188,116 1,164 0.82 % 147,043 270 0.24 % Certificates of deposit 136,242 1,015 0.99 % 150,605 1,043 0.92 % Mortgagors deposits 3,078 1 0.04 % 2,834 8 0.37 % Total deposits 497,455 2,366 0.63 % 462,691 1,435 0.41 % Borrowed money 29,681 870 3.89 % 25,184 389 2.05 % Total interest-bearing liabilities 527,136 3,236 0.81 % 487,875 1,824 0.50 % Non-interest-bearing liabilities Demand deposits 105,164 125,806 Other liabilities 27,310 27,602 Total liabilities 659,610 641,283 Stockholders' equity 49,930 54,131 Total liabilities and equity$ 709,540 $ 695,414 Net interest income$ 17,060 $ 14,888 Average interest rate spread 3.12 % 2.82 % Net interest margin 3.31 % 2.96 % (1) Includes nonaccrual loans (2) Includes FHLB-NY stock Interest Income Interest income increased$1.5 million , or 26.3%, to$7.2 million for the three months endedDecember 31, 2022 , compared to$5.7 million for the prior year quarter. For the nine months endedDecember 31, 2022 , interest income increased$3.6 million , or 21.6%, to$20.3 million , compared to$16.7 million for the prior year period. Interest income on loans increased$1 million and$2.9 million for the three and nine months endedDecember 31, 2022 , respectively, primarily due to an increase in average loan balances for the two comparative periods of$50.6 million , or 9.6%, and$67.7 million , or 13.4%, respectively. Interest income on money market investments increased$0.4 million and$0.7 million for the three and nine months endedDecember 31, 2022 , respectively, due to an increase in interest rates on the Bank's interest-bearing account at theFederal Reserve Bank . Interest income on investment securities was also higher, despite a decrease in average balances, due to an increase in yields compared to the prior year periods.
Interest Expense
Interest expense increased$0.9 million to$1.5 million for the three months endedDecember 31, 2022 , compared to$0.6 million for the prior year quarter. For the nine months endedDecember 31, 2022 , interest expense increased$1.4 million , or 77.8%, to$3.2 million , compared to$1.8 million for the prior year period. The higher interest rate environment is reflected in the average cost of interest-bearing deposits and borrowing costs for the comparative periods. Interest expense on deposits 41 -------------------------------------------------------------------------------- increased$0.6 million and$1.0 million for the three and nine months endedDecember 31, 2022 , respectively, primarily due to an increase in the average balances and rates paid on money market accounts. Interest expense on borrowings increased$0.2 million and$0.5 million for the three and nine months endedDecember 31, 2022 , respectively, due to an increase in the average borrowing rates compared to the prior year 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 general valuation allowance applied to those loans not deemed to be impaired is determined using a three step process: •Trends of historical losses where the net charge-offs on each category are reviewed over a 20 quarter look back period. •Assessment of several qualitative factors which are adjusted to reflect changes in the current environment. •Loss Emergence Period reserve "LEP" which takes into account that borrowers have the potential to have suffered some form of loss-causing event or circumstance but that the lender may be unaware of the event. During fiscal year 2021, we increased our qualitative factors and assessment criteria due to the ongoing pandemic. In fiscal year 2022, we adjusted our qualitative factors and assessment criteria from high to medium based on improving economic factors, such as unemployment and overall increased activity due to less pandemic related restrictions. The increase in the qualitative reserves was related to the overall increase in our loan portfolio. These increases in reserves were partially offset by decreases in our quantitative reserve analysis as the rolling 20 quarter historical loss look back period improved for most of our loan categories. The Bank continues to maintain a$271 thousand unallocated reserve, or 5.3% of ALLL as ofDecember 31, 2022 . 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. Loans made under the PPP are fully guaranteed by the SBA; therefore, these loans do not have an associated allowance. 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 onDecember 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 endedMarch 31, 2022 . 42 -------------------------------------------------------------------------------- The following table summarizes the activity in the ALLL for the nine month periods endedDecember 31, 2022 and 2021 and the fiscal year endedMarch 31, 2022 : Nine Months Ended Fiscal Year Ended Nine Months Ended $ in thousands December 31, 2022 March 31, 2022 December 31, 2021 Beginning Balance 5,624$ 5,140 $ 5,140 Less: Charge-offs One-to-four family - - - Multifamily - - - Commercial real estate - - - Business - - - Consumer (130) (257) (222) Unallocated - - (1) Total charge-offs (130) (257) (223) Add: Recoveries One-to-four family 90 13 - Multifamily - - - Commercial real estate 10 - - Business 53 102 82 Consumer 4 23 21 Total recoveries 157 138 103 Net recoveries (charge-offs) 27 (119) (120) Provision for (recovery of) loan losses (497) 603 468 Ending Balance $ 5,154$ 5,624 $ 5,488 Ratios: Net recoveries (charge-offs) to average loans outstanding (annualized) One-to-four family 0.18 % 0.02 % - % Multifamily - % - % - % Commercial real estate 0.01 % - % - % Business 0.04 % 0.06 % 0.07 % Consumer (10.69) % (11.55) % (12.54) % Total loans 0.01 % (0.02) % (0.05) % Allowance to total loans 0.88 % 0.97 % 0.99 % Allowance to nonaccrual loans 41.61 % 48.99 % 70.65 % The Company recorded a$281 thousand recovery of loan loss for the three months endedDecember 31, 2022 , compared to a$192 thousand provision for loan loss for the prior year quarter. Net chargeoffs of$74 thousand were recognized during the third quarter, compared to net chargeoffs of$219 thousand for the prior year quarter. For the nine months endedDecember 31, 2022 , the Company recorded a$497 thousand recovery of loan loss, compared to a$468 thousand provision for loan loss for the prior year period. Net recoveries of$27 thousand were recognized for the nine months endedDecember 31, 2022 , compared to net chargeoffs of$120 thousand in the prior year period. AtDecember 31, 2022 , nonaccrual loans totaled$12.4 million , or 1.7% of total assets, compared to$11.5 million , or 1.6% of total assets atMarch 31, 2022 . The ALLL was$5.2 million atDecember 31, 2022 , which represents a ratio of the ALLL to nonaccrual loans of 41.6% compared to a ratio of 49.0% atMarch 31, 2022 . The ratio of the allowance for loan losses to total loans was 0.88% atDecember 31, 2022 , compared to 0.97% atMarch 31, 2022 . Consistent with regulatory guidance and the provisions of the CARES Act, loans less than 30 days past due atDecember 31, 2019 that were granted COVID-19 related payment deferrals continued to be considered current and not reported as TDRs. For the fiscal year endedMarch 31, 2021 , the Bank received 83 applications for payment deferrals on approximately$90.4 million of loans. AtDecember 31, 2022 andMarch 31, 2022 , no loans were on COVID-related deferrals as the remaining 90-day loan deferments expired and borrowers became current. 43 --------------------------------------------------------------------------------
Non-performing Assets
Non-performing assets consist of nonaccrual loans, loans held-for-sale and
property acquired in settlement of loans, which is known as other real estate
owned (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 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 performance according to the restructured terms for a period of at
least six months. At December 31, 2022 , loans classified as TDR totaled $6.8
million , of which $6.0 million were classified as performing. At March 31, 2022 ,
loans classified as TDR totaled $6.9 million , of which $5.2 million were
classified as performing.
At December 31, 2022 , non-performing assets totaled $12.4 million , or 1.7% of
total assets compared to $11.5 million , or 1.6% of total assets at March 31,
2022 . The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated:
Non Performing Assets
$ in thousands December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021
Loans accounted for on a nonaccrual basis (1):
Gross loans receivable:
One-to-four family $ 4,066 $ 4,371 $ 4,600 $ 4,892 $ 4,919
Multifamily 71 - 109 515 516Commercial real estate 7,275 9,455 6,170 4,601 185 Business 973 1,179 1,234 1,448 2,091 Consumer - 87 - 25 57 Total nonaccrual loans 12,385 15,092 12,113 11,481 7,768 Other non-performing assets (2): Real estate owned 60 60 60 60 60 Total non-performing assets (3) $ 12,445 $ 15,152$ 12,173 $ 11,541 $
7,828
Nonaccrual loans to total loans 2.11 % 2.63 % 2.18 % 1.98 % 1.41 % Non-performing loans to total loans 2.11 % 2.63 % 2.18 % 1.98 % 1.41 % Non-performing assets to total assets 1.75 % 2.00 % 1.76 % 1.57 % 1.08 % Allowance to total loans 0.88 % 0.96 % 1.01 % 0.97 % 0.99 % Allowance to nonaccrual loans 41.61 % 36.50 % 46.26 % 48.99 %
70.65 %
(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. AtDecember 31, 2022 , there were$6.0 million TDR loans that have performed in accordance with their modified terms for a period of at least six months. These loans are generally considered performing loans and are not presented in the table above.
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). AtDecember 31, 2022 , the Bank had$2.9 million in subprime loans, or 0.5% of its total loan portfolio, of which$0.7 million are non-performing loans. 44 --------------------------------------------------------------------------------
Non-Interest Income
Non-interest income decreased$1.4 million , or 77.8%, to$0.4 million for the three months endedDecember 31, 2022 , compared to$1.8 million for the prior year quarter. For the nine months endedDecember 31, 2022 , non-interest income decreased$4.4 million , or 66.7%, to$2.2 million , compared to$6.6 million for the prior year period. Non-interest income in the prior year included$1.8 million grant income recognized from the Bank's award through theCDFI Fund's Rapid Response Program. In addition, the Bank recognized$0.5 million loss on the sale of a loan in the current period. Other non-interest income includes correspondent banking fees related to the Bank's servicing of PPPLF activity for a correspondent bank that were$1.0 million and$2.3 million higher for the three and nine months endedDecember 31, 2021 , compared to the current year periods, respectively.
Non-Interest Expense
Non-interest expense increased$1.5 million , or 25.0%, to$7.5 million for the three months endedDecember 31, 2022 , compared to$6.0 million for the prior year quarter. For the nine months endedDecember 31, 2022 , non-interest expense increased$0.7 million , or 3.2%, to$22.7 million , compared to$22.0 million for the prior year period. Employee compensation and benefits and consulting fees were higher compared to the prior year period due to agency fees and the increased use of consultants for temporary assistance in the underwriting department as the Company sought to add permanent staff due to increased loan volume. Net equipment expense increased as a result of additional hardware/software maintenance contracts put in place for new business strategies being implemented and data processing expense was higher due to upgraded cybersecurity systems and an improved remote work environment. Other non-interest expense in the prior year period included a$2.1 million loss contingency accrual related to a wire fraud matter that occurred during the first quarter, with the Bank recovering approximately$896 thousand during the second and third quarters of fiscal year 2022.
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