ITEM 1. BUSINESS.
OVERVIEW
Carver Bancorp, Inc., a Delaware corporation (the “Company”), is the holding company for Carver Federal Savings Bank (“Carver Federal” or the “Bank”), a federally chartered savings bank. The Company is headquartered in New York, New York. The Company conducts business as a unitary savings and loan holding company, and the principal business of the Company consists of the operation of its wholly-owned subsidiary, Carver Federal. Carver Federal was founded in 1948 to serve African-American communities whose residents, businesses and institutions had limited access to mainstream financial services. The Bank remains headquartered in Harlem, and predominantly all of its seven branches 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 sixth consecutive "Outstanding" rating, issued by the Office of the Comptroller of the Currency (the "OCC") following its most recent Community Reinvestment Act (“CRA”) examination in March 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 needs through its community development lending, investing and service activities. The Bank had approximately $730.0 million in assets and 109 employees as of March 31, 2025.
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 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 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 seven 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 more than 75-year history in its market area, its community involvement and relationships, targeted products and services and personal service consistent with community banking, help the Bank compete with competitors that have entered its market.
The Bank formalized its many community focused investments on August 18, 2005, by forming Carver Community Development Corporation ("CCDC"). CCDC oversees the Bank's participation in local economic development and other 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.
GENERAL
Carver Bancorp, Inc.
The Company is the holding company for Carver Federal and its other active direct subsidiary, Carver Statutory Trust I (the “Trust”), a Delaware trust.
The principal business of the Company consists of the operation of its wholly-owned subsidiary, the Bank. The Company's administrative offices are located at 1825 Park Avenue, New York, New York 10034. The home office of the Bank is located at 75 West 125th Street, New York, New York 10027. The Company's telephone number is (718) 230-2900.
Carver Federal Savings Bank
Carver Federal was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally chartered mutual savings and loan association, at which time it obtained federal deposit insurance and became a member of the Federal Home Loan Bank of New York (the “FHLB-NY”). Carver Federal was founded as an African- and Caribbean-American operated institution to provide residents of underserved communities the ability to invest their savings and obtain credit. Carver Federal Savings and Loan Association converted to a federal savings bank in 1986 and changed its name at that time to Carver Federal Savings Bank.
On March 8, 1995, Carver Federal formed CFSB Realty Corp. as a wholly-owned subsidiary to hold real estate acquired through foreclosure pending eventual disposition. At March 31, 2025, this subsidiary had $268 thousand in total assets. During the fourth quarter of the fiscal year ended March 31, 2003, Carver Federal formed Carver Asset Corporation (“CAC”), a wholly-owned subsidiary which qualifies as a real estate investment trust (“REIT”) pursuant to the Internal Revenue Code of 1986, as amended. This subsidiary may, among other things, be utilized by Carver Federal to raise capital in the future. As of March 31, 2025, CAC owned mortgage loans carried at approximately $3.2 million and total assets of $129.3 million. On August 18, 2005, Carver Federal formed CCDC, a wholly-owned community development entity, to facilitate and develop innovative approaches to financial literacy, address the needs of the unbanked and participate in local economic development and other community-based activities. As part of its operations, CCDC manages the Bank's applications for government grants and other awards to help fund these community activities.
Carver Statutory Trust I
Carver Statutory Trust (the "Trust") was formed in 2003 for the purpose of issuing $13.0 million aggregate liquidation amount of floating rate Capital Securities due September 17, 2033 (“Capital Securities”) and $0.4 million of common securities, which are wholly owned by Carver Bancorp, Inc. and the sole voting securities of the Trust. The Company has fully and unconditionally guaranteed the Capital Securities along with all obligations of the Trust under the trust agreement relating to the Capital Securities. In accordance with the Financial Accounting Standards Board's Accounting Standards Codification (“ASC”) 810, "Consolidations," the Trust is not consolidated with the Company for financial reporting purposes. Debenture interest payments are subject to prior approval from the Federal Reserve Bank. A streamlined process has been developed for the Company to request regulatory approval to make debenture interest payments, although there is no assurance that the Federal Reserve Bank will continue to approve such quarterly payments. All quarterly interest payments up to and including the March 2025 payment were made. The Company deferred the interest payment due June 17, 2025 in order to manage liquidity. Debenture interest payments may be deferred for up to twenty consecutive quarters under the terms of the Indenture.
While Carver has suspended its regular quarterly cash dividend on its common stock, in the future, the Company may rely on dividends from Carver Federal to pay cash dividends to its stockholders and to engage in share repurchase programs. In recent years, Carver has been successful in obtaining cash independently through its capital raising efforts, which may include cash from government grants or below market-rate loans. Under the Formal Agreement, the OCC will monitor all capital distributions, including dividend payments, by Carver Federal to the Company. The Board of Governors of the Federal Reserve (the "FRB") regulates dividends paid by the Company. As the subsidiary of a savings and loan association holding company,
Carver Federal must file a notice or an application (depending on the proposed dividend amount) with the OCC (and an application with the FRB) prior to the declaration of each capital distribution. The OCC will disallow any proposed dividend that, among other reasons, would result in Carver Federal’s failure to meet the OCC minimum capital requirements.
Subsequent Events
On May 14, 2025, the Bank entered into a formal written agreement with the OCC. The Formal Agreement specifically provides that the Bank will take the following actions within the time frames specified:
•Establish a Compliance Committee of its Board of Directors to specifically monitor and oversee the Bank's compliance with the Formal Agreement. This Committee has already been established and is actively underway; .
•Prepare a three-year strategic plan for the OCC's review, with such strategic plan to establish objectives specifically focusing on the Bank's earnings performance that will include measures for growth, capital, liquidity and balance sheet mix; and
•Prepare an earnings program for the OCC's review designed to improve and sustain the earnings of the Bank.
The Formal Agreement specifically addresses the items referenced above through a new three-year strategic plan. The Bank's board of directors and management will address these provisions within the required time frames. Further, the Bank's board of directors and management are fully committed to, as expeditiously as possible, achieving sustainable earnings through a more robust and viable strategic plan, which are part of the Bank's new ongoing operations and actions under the leadership of its new Chief Executive Officer.
The foregoing description of the Formal Agreement is qualified in its entirety by reference to the Formal Agreement issued to the Bank, which is included herein as Exhibit 10.5.
The Individual Minimum Capital Ratio letter issued by the OCC on June 29, 2016, which requires the Bank to maintain minimum regulatory capital levels of 9% for its Tier 1 leverage ratio and 12% for its total risk-based capital ratio, remains in effect, as do the Company's resolutions requiring, among other things, written approval from the Federal Reserve Bank of Philadelphia prior to the declaration or payment of dividends, any increase in debt by the Company, or the redemption of Company common stock.
Human Capital Resources
At March 31, 2025, the Company had 109 employees, nearly all of whom are full-time and of which approximately 47% were female and 86% were minorities. The majority of our employees are based in New York. Our goal is to attract, develop, retain and plan for succession of key talent and executives to achieve strategic objectives. We are continually investing in our workforce to further emphasize diversity and inclusion and to foster our employees' growth and career development.
We offer a comprehensive benefits program to our employees and design our compensation programs to attract, retain and motivate employees, as well as to align with Company performance. None of the Company's employees are a member of a collective bargaining agreement and we consider our relations with our employees to be good.
We have implemented significant operating environmental changes that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities. This includes implementing a hybrid working model where our employees work in the office 2 to 3 times a week, simultaneously, continuing to implement safety measures for employees while on-site.
The Company team members actively share their talents in their communities through volunteer activities in education, economic development, human and health services, and Community Reinvestment. Additionally, the Company's management team works with leaders of community organizations, community development organizations, and consumer financial educations organizations to identify the credit, investment, and service needs of its community.
Available Information
The Company makes available on or through its internet website, http://www.carverbank.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. Such reports are available free of charge and as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). The SEC maintains an internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including the Company, at http://www.sec.gov.
In addition, certain other basic corporate documents, including the Company's Corporate Governance Principles, Code of Ethics, the charters of the Company's Finance and Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee and the date of the Company's annual meeting are posted on the Company's website. Printed copies of these documents are also available free of charge to any stockholder who requests them. Stockholders seeking additional information should contact the Corporate Secretary's office by mail at 1825 Park Avenue, New York, New York 10035 or by e-mail at corporatesecretary@carverbank.com. Information provided on the Company's website is not part of this annual report.
Lending Activities
General. Carver Federal's loan portfolio consists primarily of mortgage and business loans originated by the Bank's lending teams and secured primarily by commercial real estate including multifamily, mixed-use and owner-occupied properties and general UCC-1 filings on C&I loans against business assets. Substantially almost all of the Bank's mortgage loans are secured by properties located within the Bank's main market area. From time to time, the Bank may participate or purchase loans that comply with the Bank's underwriting standards from other financial institutions or in contiguous market geographies to achieve loan growth and strategic objectives that fall outside of core markets, but offer asset and geographical diversification.
In recent years, Carver Federal has focused on the origination of commercial real estate loans extended primarily to owner-occupied and mixed-use commercial loans, and to a lesser extent, multifamily transactions in a scaled manner. These loans generally have higher yields and shorter maturities than one-to-four family residential properties, and include prepayment penalties that the Bank collects if the loans payoff prior to the contractual maturity. The Bank's increased emphasis remains on effective portfolio management and monitoring of the commercial real estate and multifamily mortgage loans relative to the level of credit risk inherent in this market segment. During fiscal year 2023, the Bank strengthened its qualitative factors and assessment criteria due to the economic climate in general and its impact on the New York City ("NYC") metropolitan area in which the Company operates. In spite of the strict analysis applied to our qualitative reserves, the Company's overall allowance declined moderately as the rolling 20 quarter loss look back period revealed little in recorded losses. During fiscal year 2025, the Bank's allowance for credit losses increased as a result of a series of qualitative factor adjustments and increase in individually analyzed loan reserves. Additionally, Carver Federal continually reviews the composition of its mortgage loan portfolio and underwriting standards to manage the risk in the portfolio.
Loan Portfolio Composition. Total loans receivable decreased $9.2 million, or 1.5%, to $613.7 million at March 31, 2025, compared to $622.9 million at March 31, 2024. Carver Federal's total loans receivable as a percentage of total assets increased to 83.2% at March 31, 2025, compared to 81.5% at March 31, 2024.
The following is a summary of loans receivable, net of allowance for credit losses, as of: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2025 | | March 31, 2024 | | March 31, 2023 | | March 31, 2022 | | March 31, 2021 |
$ in thousands | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % |
Gross loans receivable: | | | | | | | | | | | | | | | | | | | |
One-to-four family | $ | 74,387 | | | 12.1 | % | | $ | 82,787 | | | 13.3 | % | | $ | 65,808 | | | 11.0 | % | | $ | 69,297 | | | 12.0 | % | | $ | 76,313 | | | 15.9 | % |
Multifamily | | | | | | | | | | | | | | | | | | | |
Owner occupied | 10,214 | | | | | 11,078 | | | | | 11,894 | | | | | 7,687 | | | | | 6,599 | | | |
Nonowner occupied | 155,598 | | | | | 166,125 | | | | | 167,223 | | | | | 153,113 | | | | | 96,985 | | | |
| 165,812 | | | 27.0 | % | | 177,203 | | | 28.4 | | | 179,117 | | | 30.0 | | | 160,800 | | | 27.9 | | | 103,584 | | | 21.6 | |
Commercial real estate (1) | 178,257 | | | 29.1 | % | | 175,384 | | | 28.2 | | | 178,424 | | | 29.8 | | | 174,270 | | | 30.2 | | | 150,114 | | | 31.2 | |
Construction | 4,567 | | | 0.7 | % | | 2,203 | | | 0.4 | | | — | | | — | | | — | | | — | | | — | | | — | |
Business (2) | 164,964 | | | 26.9 | % | | 169,602 | | | 27.2 | | | 166,908 | | | 27.9 | | | 170,497 | | | 29.6 | | | 148,020 | | | 30.8 | |
Consumer (3) | 25,697 | | | 4.2 | % | | 15,699 | | | 2.5 | | | 7,639 | | | 1.3 | | | 1,623 | | | 0.3 | | | 2,439 | | | 0.5 | |
Total loans receivable | $ | 613,684 | | | 100.0 | % | | $ | 622,878 | | | 100.0 | % | | $ | 597,896 | | | 100.0 | % | | $ | 576,487 | | | 100.0 | % | | $ | 480,470 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Unamortized premiums, deferred costs and fees, net | — | | | | | — | | | | | — | | | | | 3,017 | | | | | 3,079 | | | |
| | | | | | | | | | | | | | | | | | | |
Allowance for credit losses | (6,337) | | | | | (5,871) | | | | | (5,229) | | | | | (5,624) | | | | | (5,140) | | | |
Total loans receivable, net | $ | 607,347 | | | | | $ | 617,007 | | | | | $ | 592,667 | | | | | $ | 573,880 | | | | | $ | 478,409 | | | |
(1)Consists of non-owner occupied commercial real estate loans.
(2)As of March 31, 2025, 2024, 2023, 2022 and 2021, business loans include $110.9 million, $124.8 million, $118.0 million, $98.4 million and $56.6 million, respectively, of owner occupied commercial real estate loans.
(3)Includes personal loans.
One-to-four Family Residential Lending. Carver Federal generally purchases first mortgage loans secured by one-to-four family properties that serve as the primary residence of the owner and non-qualified mortgages for one-to-four family residential loans. There were no purchases of one-to-four family residential loans during fiscal year 2025 based around market conditions and pricing. The Bank purchased $20.0 million of one-to-four family residential loans during fiscal year 2024. Approximately 33.2% of the one-to-four family residential mortgage loans maturing in greater than one year at March 31, 2025 were adjustable rate and approximately 66.8% were fixed-rate. One-to-four family residential real estate loans decreased $8.4 million, or 10.1%, to $74.4 million at March 31, 2025, compared to $82.8 million at March 31, 2024.
Historically, Carver Federal's fixed-rate, one-to-four family residential mortgage loans were generally underwritten in accordance with applicable secondary market underwriting guidelines and requirements for sale. From time to time in the past, the Bank has sold such loans to Fannie Mae, the State of New York Mortgage Agency (“SONYMA”) and other third parties. These loans were normally sold with limited recourse on a servicing retained basis except to SONYMA where the sales were made with servicing released. Carver Federal uses a servicing firm to sub-service mortgage loans, whether held in portfolio or sold with servicing retained. At March 31, 2025, the Bank, through its sub-servicer, serviced $10.6 million in loans for FNMA and $133 thousand for other third parties. The Bank has recorded $130 thousand in related mortgage servicing rights.
The retention of adjustable-rate loans in Carver Federal's portfolio helps reduce Carver Federal's exposure to increases in prevailing market interest rates. However, there are credit risks resulting from potential increases in costs to borrowers in the event of upward repricing of adjustable-rate loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate loans may increase due to increases in interest costs to borrowers. Although adjustable-rate loans allow the Bank to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest rate sensitivity is limited by periodic and lifetime interest rate adjustment limitations. Accordingly, there can be no assurance that yields on the Bank's adjustable-rate loans will fully adjust to compensate for increases in the Bank's cost of funds.
Additionally, on a limited basis, the Bank previously originated or purchased a limited amount of subprime loans (which are defined by the Bank as those loans where the borrowers have FICO scores of 660 or less at origination). At March 31, 2025, the Bank had $2.6 million in subprime loans, or 0.4% of its total loan portfolio, of which $673 thousand are non-performing loans. No subprime loans were purchased during fiscal year 2025.
Multifamily Real Estate Lending. Carver Federal originates and purchases recourse and non-recourse multifamily loans. There were no multifamily loan purchases during fiscal years 2025 and 2024. Multifamily property lending entails additional risks compared to one-to-four family residential lending. These loans are dependent on the successful operation of
such buildings and can be significantly impacted by economic conditions, industry concentration, valuation of the underlying properties, lease terms, occupancy/vacancy rates, and changes in market conditions/demand for multifamily units. Carver Federal's multifamily real estate loan portfolio decreased $11.4 million, or 6.4%, to $165.8 million in fiscal 2025, or 27.0% of Carver Federal's total loan portfolio at March 31, 2025.
In making multifamily real estate loans, the Bank primarily considers the property's ability to generate net operating income sufficient to support the debt service, the financial resources, income level and managerial expertise of the borrower, the marketability of the property and the Bank's lending experience with the owner/guarantor, when applicable. Carver Federal's multifamily real estate product guidelines generally require that the maximum loan-to-value ("LTV") at origination not exceed 75% based on the appraised value of the mortgaged property, and a debt service coverage ratio at origination of at least 1.20 (with personal guarantees), which requires the properties to generate cash flow after expenses and allowances in excess of the principal and interest payment. The Bank originates and purchases multifamily real estate loans, which are predominantly fixed rate for the first five years, then adjusts for the second five years, if applicable. These loans generally amortize on the basis of a 15-, 20-, 25-, or 30-year period and require a balloon payment after the first five years, or the borrower may have an option to extend the loan for additional periods. The Bank occasionally originates fixed rate loans with greater than five year terms on a limited basis. Personal guarantees may be obtained for additional comfort and support to these transactions.
To help ensure continued collateral protection and asset quality for the term of multifamily real estate loans, Carver Federal employs a risk rating system for its loans and internally tracks against local market studies and performance. All commercial loans, including multifamily real estate loans, are risk rated internally at the time of origination. Management continually monitors all commercial loans in order to update risk ratings when necessary (see "Asset Classification and Allowance for Credit Losses" for additional information on asset classification and risk ratings). In addition, to assist with ensuring that the Bank remains consistent with its established procedures and practices, and is effectively evaluating and monitoring changes in the credit profile of the borrower and the underlying collateral, an independent consulting firm reviews, evaluates and prepares a written report for a sample of our commercial loan relationships. Accordingly, on a triannual basis, the independent loan review company i) reviews 70% to 75% of the average commercial loan portfolio, ii) this includes all new and renewed loans greater than $100,000, and iii) all criticized and classified loans. Summary reports documenting the loan reviews are then reviewed by management for changes in the credit profile of individual borrowers and the portfolio as a whole, and regularly presented to Senior Management and the Bank's Asset Liability and Interest Rate Risk Committee for risk assessment and monitoring.
Commercial Real Estate Lending. Commercial real estate ("CRE") lending consists predominantly of originating loans for the purpose of purchasing or refinancing office, mixed-use properties, retail and church buildings in the Bank's market area. Mixed-use property loans are secured by buildings/structures that are intended for both commercial and residential use, but predominantly commercial, and are classified as CRE. There were no commercial real estate loan purchases during fiscal years 2025 and 2024. At March 31, 2025, Carver Federal's CRE loan portfolio increased $2.9 million, or 1.7%, to $178.3 million, or 29.1% of the Bank's total loan portfolio.
The following table provides details of the Bank's commercial real estate loans by major industry type at March 31, 2025:
| | | | | | | | | | | |
| March 31, 2025 |
$ in thousands | Amount | | % |
Real Estate and Rental and Leasing | $ | 66,643 | | | 37.4 | % |
General Commercial | 106,070 | | | 59.4 | % |
Religious | 4,987 | | | 2.8 | % |
Other | 557 | | | 0.3 | % |
| $ | 178,257 | | | 99.9 | % |
| | | |
Although Carver Federal has had a favorable loss track record associated with CRE loans, these loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the complexities involved in valuing the underlying collateral. In addition, such loans typically involve larger loan balances to single borrowers or groups of related borrowers and the payment experience is dependent on the successful operation of the commercial and/or mixed-use properties or larger overall structure. In originating CRE loans, the Bank primarily considers the ability of the net operating income generated by the real estate to support the debt service, the financial resources, income level and managerial expertise of the borrower, the marketability of the property and the Bank's lending experience with the borrower. Carver Federal's maximum LTV ratio on CRE loans at origination is generally 75% based on the latest appraised fair market value of the mortgaged property and the Bank generally requires a debt service coverage ratio at origination of at least
1.20 (with guarantor recourse). The Bank also requires the assignment of rents of all tenants' leases in the mortgaged property and personal guarantees may be obtained for additional security from these borrowers.
The Bank normally offers 5-year terms for our commercial mortgages. At times, we can offer greater than 5 years for terms of up to 15 years and amortization schedules up to 25 years; however, the interest rate generally resets on the 5th year anniversary. Interest rates currently offered by the Bank are adjusted at the beginning of each adjustment period and are mostly based upon a fixed spread above the FHLB-NY corresponding regular advance rate.
Historically, Carver Federal has been a New York City metropolitan area leader in the origination of loans to churches. At March 31, 2025, there were 27 loans to churches totaling $26.6 million, or 4.3% of the Bank's loan portfolio. These loans typically have five-, seven-, or ten-year terms with 15-, 20- or 25-year amortization periods, a balloon payment due at the end of the term and generally have no greater than a 70% LTV ratio at origination. The Bank has also provided construction financing for churches in the past, and would have generally provided permanent financing upon completion of construction.
Loans secured by real estate owned by faith-based organizations generally are larger and involve greater risks than one-to-four family residential mortgage loans and standard commercial real estate transactions. Because payments on loans secured by such properties are often dependent on voluntary contributions by members of the church's congregation, repayment of such loans may be subject to a greater extent to adverse conditions in the economy. The Bank seeks to minimize these risks in a variety of ways, including reviewing the organization's financial condition, limiting the size of such loans and establishing the quality of the collateral securing such loans. The Bank determines the appropriate amount and type of security for such loans based in part upon the governance structure of the particular organization, the length of time the church has been established in the community and a cash flow analysis to determine the church's ability to service the proposed loan. Carver Federal will obtain a first mortgage on the underlying real property and often requires personal guarantees of key members of the congregation and/or key person life insurance that generally includes the pastor at a minimum, depending on the church make-up. The Bank may also require the church to obtain key person life insurance on specific members of the church's leadership. While asset quality in the church loan category historically has been one of the strongest asset classes, recent economic conditions have produced higher delinquencies in this portfolio dating back to the early stages of the pandemic, but have since normalized or leveled off. While management believes that Carver Federal will remain a leading lender to churches in its market area, Carver Federal will continue to conduct disciplined underwriting and maintain focused portfolio management.
Construction Lending. Carver Federal has historically originated or participated in construction loans for new construction and renovation of multifamily buildings, residential developments, community service facilities, churches, and affordable housing programs; however, the Bank no longer directly originates construction loans. The loans provide for disbursement in stages as construction is completed. Construction loans increased $2.4 million to $4.6 million, or 0.7% of the total loan portfolio at March 31, 2025, stemming solely from participations.
Construction loans generally present an increased level of risk from the effect of general economic conditions and uncertainties surrounding construction costs. Borrowers must satisfy all credit requirements that apply to the Bank's permanent mortgage loan financing for the mortgaged property. Carver Federal has additional criteria for construction loans including an engineer's plan and periodic cost reviews on all construction budgets and monitoring, but has only been applied in a limited manner as of late through participation with experienced partners.
Business Loans. Carver Federal's small business (Commercial and Industrial, or "C&I") lending portfolio decreased $4.6 million to $165.0 million, comprising 26.9% of the Bank's total loan portfolio as of March 31, 2025, which includes $206 thousand remaining of PPP loans. There were no purchases of business loans during fiscal year 2025. The Bank purchased $0.3 million business loans during fiscal year 2024. Carver Federal originates and purchases business and SBA loans, placing particular focus on organic loan growth through the financing of local entrepreneurs and organizations located in its primary market area and surrounding areas. Carver Federal provides revolving credit, working capital and term loan facilities to small businesses with annual sales of approximately $1 million to $25 million in various business segments, including educational, health care, personal services, light industrial, wholesale and trade contractors generally through select programs and other customized financial parameters around Required Capital Partner Loans in conjunction with Deloitte, MWBE vendor loans guaranteed by a Fortune 100 Company and leverage/syndication loans through Banc Alliance. Business loans are typically personally guaranteed by the owners outside of syndicated transactions/participations and may also be secured by additional collateral, including real estate, equipment, accounts receivable and inventory. SBA loans are guaranteed by the U.S. government based on the percentage of each individual program.
Consumer and Other Loans. At March 31, 2025, the Bank had $25.7 million in consumer and other loans, or 4.2%, of the Bank's loan portfolio. This includes $0.6 million of student loans to medical students enrolled in several Caribbean schools purchased in
fiscal 2017. During fiscal year 2025, the Bank generated $15.4 million of consumer loans, purchased primarily through its strategic partnerships that included $7.2 million through Upstart Holdings, Inc. based on the Bank's credit criteria, $6.2 million in select Bankers Healthcare Group, LLC purchases that had a LMI focus, and approximately $2.0 million in a targeted auto loan pool from Valley National Bank for scaled entry into the space and added diversification, along with a correlated CDFI classification component.
Consumer loans are typically unsecured and more susceptible to declining economic conditions. Collection of a delinquent loan is dependent on the borrower's continuing financial stability and is more likely to be adversely affected by changes in employment, marital status, health and other personal financial factors. Further, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered. These loans may also give rise to claims and defenses by a borrower against Carver Federal, including defenses against any applicable underlying collateral. In underwriting unsecured consumer loans other than secured credit cards, Carver Federal considers the borrower's credit history, an analysis of the borrower's income, expenses and ability to repay the loan. In the instances of underwriting for secured credit cards, the Bank generally only takes the value of the underlying collateral into consideration. See “Asset Quality-Non-performing Assets.”
Loan Processing. Carver Federal's loan originations are derived from a number of sources, including referrals by realtors, builders, depositors, borrowers and mortgage brokers, as well as walk-in and dial-in customers. Loans are originated by the Bank's personnel who receive a base salary, commissions and other incentive compensation. Real estate, business and unsecured loan applications are forwarded to the Bank's Lending Department for processing, and to the Credit Group for underwriting pursuant to standards established in Carver Federal's Loan Policy. The underwriting and loan processing for one-to-four family residential loans are performed by an outsourced third party loan originator using lending standards established by the Bank.
A commercial real estate loan application is completed for all multifamily and non-residential income producing properties that the Bank finances. Prior to loan approval, the property is inspected by a loan officer. As part of the loan approval process, consideration is given to an independent appraisal, location, accessibility, stability of the neighborhood, environmental assessment, personal credit history and the financial capacity of the applicant(s).
Upon receipt of a completed loan application from a prospective borrower, a credit report and other verifications are ordered to confirm specific information relating to the loan applicant's income and credit standing. It is the Bank's policy to obtain an appraisal of the real estate intended to secure a proposed mortgage loan from an independent appraiser approved by the Bank, along with applicable appraisal reviews.
It is Carver Federal's policy to record a lien on the real estate securing the loan and to obtain a title insurance policy that insures that the property is free of prior encumbrances. Borrowers must also obtain hazard insurance policies prior to closing and, when the property is in a flood zone or plain as designated by the Department of Housing and Urban Development, obtain flood insurance. Most borrowers are also required to make payments on a monthly basis, which can include principal and interest, along with mortgage payment escrows from which the Bank makes disbursements for items such as real estate taxes and hazard insurance. Written confirmation of the guarantee, as applicable, for SBA loans and evidence of the UCC filing is also required.
Business loan applications are completed for all business loans. Most business loans are secured by Uniform Commercial Code ("UCC") lien filings and in some cases, other collateral enhancements that can include real estate, marketable securities, along with personal guarantees, and/or guarantees by the United States Small Business Administration ("SBA"), as applicable. The loan approval process considers the credit history of the applicant, collateral, cash flow and purpose and stability of the business.
Loan Approval. Except for real estate and business loans in excess of $6.0 million, mortgage and business loan approval authority has been delegated by the Bank's Board of Directors to the Board's Asset Liability and Interest Rate Risk Committee. The Asset Liability and Interest Rate Risk Committee has delegated loan approval up to $1.0 million (dual authority) to the Bank's Chief Lending Officer ("CLO") and Chief Credit Officer ("CCO"), and to the Management Loan Committee, which consists of certain members of executive management, loan approval authority from $1.0 million to $2.0 million for real estate and business loans. Real estate and business loans from $2.0 million to $6.0 million must be approved by the Asset Liability and Interest Rate Risk Committee, and loans greater than $6.0 million must be approved by the full Board. Purchased loans are subject to the same approval process as originated loans. One-to-four family mortgage loans that conform to FNMA, Federal Housing Administration and Federal Home Loan Mortgage Corporation ("FHLMC") standards and limits may be approved by the outsourced third party loan originator.
Loans-to-One-Borrower. Under the loans-to-one-borrower limits of the OCC, with certain limited exceptions, loans and extensions of credit to a single or related group of borrowers outstanding at one time generally may not exceed 15% of the capital and surplus of a savings bank. The Bank includes all outstanding debt and any unfunded commitments under contractually binding commitments for purposes of its legal limit calculation. See “Regulation and Supervision-Federal Banking Regulation-Loans-to-One-Borrower Limitations.” At March 31, 2025, the maximum loans-to-one-borrower under this test was $10.6 million and the Bank had no relationships that exceeded this limit.
Loan Originations and Purchases. Loan originations were $39.1 million in fiscal 2025 compared to $61.7 million in fiscal 2024. There were $15.4 million loan purchases during fiscal 2025 and $31.5 million loan purchases in fiscal 2024.
The following table sets forth certain information with respect to Carver Federal's loan originations and advances, purchases and sales for the fiscal years ended March 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2025 | | 2024 | | 2023 |
$ in thousands | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Loans Originated: | | | | | | | | | | | |
One-to-four family | $ | — | | | — | % | | $ | 2,256 | | | 2.4 | % | | $ | — | | | — | % |
Multifamily | 750 | | | 1.4 | % | | 4,980 | | | 5.3 | % | | 43,023 | | | 34.1 | % |
Commercial real estate | 17,232 | | | 31.7 | % | | 37,482 | | | 40.3 | % | | 53,643 | | | 42.5 | % |
Construction | 2,593 | | | 4.8 | % | | 2,981 | | | 3.2 | % | | — | | | — | % |
Business | 17,846 | | | 32.8 | % | | 13,399 | | | 14.4 | % | | 12,075 | | | 9.6 | % |
Consumer (1) | 643 | | | 1.2 | % | | 587 | | | 0.6 | % | | 3,136 | | | 2.5 | % |
Total loans originated | 39,064 | | | 71.8 | % | | 61,685 | | | 66.2 | % | | 111,877 | | | 88.7 | % |
Loans purchased | | | | | | | | | | | |
One-to-four family | — | | | — | % | | 19,998 | | | 21.5 | % | | 3,960 | | | 3.1 | % |
Multifamily | — | | | — | % | | — | | | — | % | | — | | | — | % |
Commercial real estate | — | | | — | % | | — | | | — | % | | 5,804 | | | 4.6 | % |
Business | — | | | — | % | | 267 | | | 0.3 | % | | 613 | | | 0.5 | % |
Consumer | 15,369 | | | 28.2 | % | | 11,261 | | | 12.1 | % | | 3,912 | | | 3.1 | % |
Total loans purchased | 15,369 | | | 28.2 | % | | 31,526 | | | 33.8 | % | | 14,289 | | | 11.3 | % |
Total loans originated and purchased | 54,433 | | | 100.0 | % | | 93,211 | | | 100.0 | % | | 126,166 | | | 100.0 | % |
Loans sold/participated (2) | (263) | | | | | (289) | | | | | (5,608) | | | |
Net additions to loan portfolio | $ | 54,170 | | | | | $ | 92,922 | | | | | $ | 120,558 | | | |
(1)Comprised of personal loans.
(2)Comprised of one-to-four family, business and commercial real estate loans.
Loans purchased by the Bank entail certain risks not necessarily associated with loans the Bank originates. The Bank's purchased loans are generally acquired without recourse to the seller, with certain exceptions related to the seller's compliance with representations and warranties, and in accordance with the Bank's underwriting criteria for originations. In addition, purchased loans have a variety of terms, including maturities, interest rate caps and indices for adjustment of interest rates, that may differ from those offered at that time by the Bank. The Bank initially seeks to purchase loans in its market area. However, the Bank may purchase loans secured by property outside its market area to meet its financial objectives. The market areas in which the properties that secure the purchased loans are located may differ from Carver Federal's market area and may be subject to economic and real estate market conditions that may significantly differ from those experienced in Carver Federal's market area. There can be no assurance that economic conditions in these out-of-state markets will not deteriorate in the future, resulting in increased loan delinquencies and loan losses among the loans secured by property in these areas.
In an effort to reduce risks, the Bank has sought to ensure that purchased loans satisfy the Bank's underwriting standards and do not otherwise have a higher risk of collection or loss than loans originated by the Bank. A review of each loan is conducted prior to purchase, and the Bank also requires appropriate documentation and further seeks to reduce its risk by requiring, in each buy/sell agreement, a series of warranties and representations as to the underwriting standards and the enforceability of the related legal documents. These warranties and representations remain in effect for the life of the loan. Any misrepresentation must be cured within 90 days of discovery or trigger certain repurchase provisions in the buy/sell agreement.
Loan Maturity Schedule. The following table sets forth information at March 31, 2025 regarding the amount of loans maturing in Carver Federal's portfolio, including scheduled repayments of principal, based on contractual terms to maturity. Demand loans, loans having no schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or
less. The table below does not include any estimate of prepayments, which significantly shorten the average life of all mortgage loans and may cause Carver Federal's actual repayment experience to differ significantly from that shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loan Maturities |
$ in thousands | <1 Yr. | | 1-5 Yrs. | | 5-15 Yrs | | 15+ Yrs. | | Total |
One-to-four family | $ | 1 | | | $ | 1,489 | | | $ | 9,488 | | | $ | 63,409 | | | $ | 74,387 | |
Multifamily | 14,080 | | | 35,558 | | | 105,615 | | | 10,559 | | | 165,812 | |
Commercial real estate | 33,337 | | | 28,731 | | | 106,504 | | | 9,685 | | | 178,257 | |
Construction | — | | | 4,567 | | | — | | | — | | | 4,567 | |
Business | 21,136 | | | 43,459 | | | 94,849 | | | 5,520 | | | 164,964 | |
Consumer | 753 | | | 17,992 | | | 6,952 | | | — | | | 25,697 | |
Total | $ | 69,307 | | | $ | 131,796 | | | $ | 323,408 | | | $ | 89,173 | | | $ | 613,684 | |
The following table sets forth as of March 31, 2025, amounts in each loan category that are contractually due after March 31, 2026 and whether such loans have fixed or adjustable interest rates. Scheduled contractual principal repayments of loans do not necessarily reflect the actual lives of such assets. The average life of long-term loans is substantially less than their contractual terms due to prepayments. In addition, due-on-sale clauses in mortgage loans generally give Carver Federal the right to declare a conventional loan due and payable in the event, among other things, that a borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan market rates are higher than rates on existing mortgage loans and tends to decrease when current mortgage loan market rates are lower than rates on existing mortgage loans:
| | | | | | | | | | | | | | | | | |
| Due After March 31, 2026 |
$ in thousands | Fixed | | Adjustable | | Total |
One-to-four family | $ | 49,688 | | | $ | 24,698 | | | $ | 74,386 | |
Multifamily | 36,472 | | | 115,260 | | | 151,732 | |
Commercial real estate | 37,329 | | | 107,591 | | | 144,920 | |
Construction | — | | | 4,567 | | | 4,567 | |
Business | 32,416 | | | 111,412 | | | 143,828 | |
Consumer | 24,944 | | | — | | | 24,944 | |
Total | $ | 180,849 | | | $ | 363,528 | | | $ | 544,377 | |
Asset Quality
General. One of the Bank's key operating objectives continues to be to maintain a high level of asset quality. Through a variety of strategies, including, but not limited to, monitoring loan delinquencies and borrower workout arrangements, the Bank has been proactive in addressing problem loans and non-performing assets.
The underlying credit quality of the Bank's loan portfolio is dependent primarily on each borrower's ability to continue to make required loan payments and, in the event a borrower is unable to continue to do so, the adequacy of the value of the collateral securing the loan. For non-owner occupied non-residential real estate and multifamily real estate loans, the borrower's ability to pay typically is dependent on rental income, which can be impacted primarily by vacancies and general market conditions. For owner-occupied one-to-four family loans, a borrowers' ability to pay typically is dependent primarily on employment and other sources of income. For owner occupied non-residential real estate, a borrower's ability to pay typically is dependent primarily on the success of the borrower's business. For all of the Bank's loans, a borrower's ability to pay is also impacted by general economic and other factors, such as unanticipated expenditures or changes in the financial markets. Collateral values, particularly real estate values, are also impacted by a variety of factors, including general economic conditions, demographics, maintenance and collection or foreclosure delays.
Non-performing Assets. Non-performing assets consist of nonaccrual loans, loans held-for-sale, and property acquired in settlement of loans or 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 Small Business Administration (“SBA”). Loans that remain delinquent are reviewed for reserve provisions and charge-off. The Bank's collection efforts continue after the loan is charged off, except when a determination is made that collection efforts have been exhausted or are not productive.
In certain circumstances, the Bank may agree to modify the contractual terms of a borrower's loan, including extension of maturity date, reduction in the stated interest rate, rescheduling of future cash flows, reduction in the face amount of the debt or reduction of past accrued interest. In cases where such modifications are made to a borrower experiencing financial difficulty, the loan is placed on nonaccrual status until the Bank determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate performance according to the restructured terms for a period of at least six months. At March 31, 2025, modified loans to a borrower experiencing financial difficulty totaled $6.0 million, of which $5.7 million were classified as performing.
The following table sets forth information with respect to Carver Federal's non-performing assets, which includes nonaccrual loans, loans held-for-sale, and property acquired in settlement of loans as of March 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ in thousands | 2025 | | 2024 | | 2023 | | 2022 | | 2021 |
Loans accounted for on a nonaccrual basis (1): | | | | | | | | | |
Gross loans receivable: | | | | | | | | | |
One-to-four family | $ | 1,519 | | | $ | 3,554 | | | $ | 4,001 | | | $ | 4,892 | | | $ | 3,524 | |
Multifamily | 3,937 | | | 2,238 | | | 71 | | | 515 | | | 369 | |
Commercial real estate | 6,747 | | | 4,522 | | | 7,190 | | | 4,601 | | | 918 | |
| | | | | | | | | |
Business | 12,359 | | | 1,417 | | | 998 | | | 1,448 | | | 2,290 | |
Consumer | 33 | | | 44 | | | 1 | | | 25 | | | 90 | |
Total nonaccrual loans | 24,595 | | | 11,775 | | | 12,261 | | | 11,481 | | | 7,191 | |
| | | | | | | | | |
Other non-performing assets (2) | | | | | | | | | |
Real estate owned | 52 | | | 52 | | | 60 | | | 60 | | | 60 | |
| | | | | | | | | |
Total other non-performing assets | 52 | | | 52 | | | 60 | | | 60 | | | 60 | |
Total non-performing assets (3) | $ | 24,647 | | | $ | 11,827 | | | $ | 12,321 | | | $ | 11,541 | | | $ | 7,251 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Nonaccrual loans to total loans | 4.01 | % | | 1.89 | % | | 2.05 | % | | 1.98 | % | | 1.49 | % |
Non-performing loans to total loans | 4.01 | % | | 1.89 | % | | 2.05 | % | | 1.98 | % | | 1.49 | % |
Non-performing assets to total assets | 3.38 | % | | 1.56 | % | | 1.70 | % | | 1.57 | % | | 1.07 | % |
(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) Modified loans to borrowers experiencing financial difficulty that are 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. Modified loans included in the nonaccrual category above totaled $0.4 million at 2025, $1.1 million at 2024, $1.6 million at 2023, $1.7 million at 2022, and $1.8 million at 2021. Modified loans that have performed in accordance with their modified terms for a period of at least six months are generally considered performing loans and are not presented in the table above. Performing modified loans were $5.7 million at 2025 and 2024, respectively, $6.0 million at 2023, $5.2 million at 2022, and $5.8 million at 2021.
At March 31, 2025, total non-performing assets increased by $12.8 million to $24.6 million, compared to $11.8 million at March 31, 2024, as a result of a $12.8 million increase in nonaccrual loans, year over year. Nonaccrual loans at March 31, 2025 consisted of seven one-to-four family, four multifamily, three commercial real estate, six business, and three consumer loans. Management believes that there may be losses associated with certain delinquent loans in the future, but also notes that the amount of losses may be reduced by the value of properties securing these delinquent loans and the Bank's reserves. Other non-performing assets at year-end 2025 includes real estate owned assets consisting of one foreclosed residential property. At March 31, 2025, Carver had 6 loans secured by one-to-four family residential real estate properties in the process of foreclosure with a total outstanding balance of $1.3 million.
Although the Company believes that substantially all risk elements at March 31, 2025 have been disclosed, other factors, including economic conditions, may cause borrowers to be unable to comply with the contractual repayment terms on certain real estate and commercial loans. For additional information about certain factors that may affect the future performance of the Company's loan portfolio, please see "Item 1A - Risk Factors" and "Forward Looking Statements."
Asset Classification and Allowance for Credit Losses. Federal regulations and the Bank's policies require the classification of assets on the basis of credit quality on a quarterly basis. An asset is classified as “substandard” if it is determined to be inadequately protected by the current sound net worth and paying capacity of the obligor or of the current value of the collateral pledged, if any. An asset is classified as “doubtful” if it has all the weaknesses inherent in those
classified as "substandard," with the added characteristic that full collection, based on current facts, conditions and values, is highly questionable and improbable. An asset is classified as “loss” if it is considered uncollectible with insignificant value, even if a partial recovery could be expected in the future. The regulations also provide for a “special mention” designation, described as assets that do not currently expose a savings institution to a sufficient degree of risk to warrant one of the above classifications but do possess credit deficiencies or potential weaknesses that deserve management's close attention.
The OCC, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for credit losses ("ACL"). The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of ACLs. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the ability to collect the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Management is responsible for determining the adequacy of the ACL and provisions for credit losses included in the consolidated financial statements. The evaluation process is undertaken on a quarterly basis, but may increase in frequency should conditions arise that would require management's prompt attention, such as business combinations and opportunities to dispose of non-performing and marginally performing loans by bulk sale or any development which may indicate an adverse trend. Although management believes that adequate general and specific reserve allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of general and specific allowances may become necessary. For additional information regarding Carver Federal's ACL policy, refer to Note 2 of Notes to Consolidated Financial Statements, “Summary of Significant Accounting Policies.”
The Board has designated the CECL Committee for management to perform a review on a quarterly basis of the Bank's asset quality, determine and properly identify and monitor credit risk in the loan portfolio and determine that the Bank's ACL is proper and appropriate and submit their report to the Board for review. Carver Federal's methodology for establishing the ACL takes into consideration the measurement of expected credit losses based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Management estimates the reserves needed for each segment of the loan portfolio, including loans analyzed individually and loans analyzed on a pooled basis. Although management believes it uses the best information available to make determinations with respect to the ACL, future adjustments may be necessary if economic conditions differ from the economic conditions in the assumptions used in making the initial determinations, or if circumstances pertaining to individual loans change, or new information pertaining to individual loans or the loan portfolio is identified. The Bank has a centralized loan servicing structure that relies upon outside servicers, each of which generates a monthly report of delinquent loans. The Asset Liability and Interest Rate Risk Committees of the Board establish policy relating to internal classification of loans and also provide input to the Credit Review Committee in its review of classified assets. In originating loans, Carver Federal recognizes that credit losses will occur and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan.
It is management's policy to maintain a general allowance based on, among other things, regular reviews of delinquencies and loan portfolio quality, character and size, the Bank's and the industry's historical experience and current and forecasted economic conditions and certain qualitative factors. In addition, considerable uncertainty exists as to the future improvement or deterioration of the real estate market. See “Lending Activities-Loan Purchases and Originations.” Loan losses are charged off against the allowance when management believes a loan balance is deemed as uncollectible. Management continues its collection efforts on previously charged-off balances and applies recoveries as additions to the ACL. Specific allowances are provided for impaired loans that have been identified and reviewed for individual analysis. Individual loans reviewed for impairment include all nonaccrual, substandard and doubtful criticized and classified loans, loans to borrowers experiencing financial difficulty and any other loans that the Chief Credit Officer deems appropriate for impairment analysis. A charge-off is recognized on collateral dependent loans when the estimated fair value of the property that collateralizes the impaired loan less costs to sell, if any, is less than the current loan exposure. The impairment for cash flow dependent loans is calculated using a discounted cash flow analysis of the amount of funds that the borrower will be able to repay based on the estimated payment structure.
At the date of foreclosure or other repossession, the Bank transfers the property to real estate acquired in settlement of loans, or other real estate owned ("OREO"), at fair value less estimated selling costs. Fair value is defined as the amount in cash or cash-equivalent value of other consideration that a real estate parcel would yield in a current sale between a willing buyer and a willing seller. Any amount of cost in excess of fair value is charged off against the ACL prior to the transfer of the property into OREO. Carver Federal records an allowance for estimated selling costs of the property immediately after foreclosure. Subsequent to taking possession of the property, management periodically evaluates the property and an allowance
is established if the estimated fair value of the property, less estimated costs to sell, declines. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of real estate is recorded, providing the Bank did not provide financing for the sale.
The following table sets forth an analysis of Carver Federal's allowance for credit losses at and for the years ended March 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ in thousands | 2025 | | 2024 | | 2023 | | 2022 | | 2021 |
Beginning Balance | $ | 5,871 | | | $ | 5,229 | | | $ | 5,624 | | | $ | 5,140 | | | $ | 4,946 | |
Impact of CECL adoption | — | | | 668 | | | — | | | — | | | — | |
Less Charge-offs: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Commercial real estate | — | | | — | | | (586) | | | — | | | — | |
| | | | | | | | | |
Business | (289) | | | (10) | | | — | | | — | | | (24) | |
Consumer and other | (581) | | | (160) | | | (141) | | | (257) | | | (54) | |
Total Charge-offs | $ | (870) | | | $ | (170) | | | $ | (727) | | | $ | (257) | | | $ | (78) | |
Add Recoveries: | | | | | | | | | |
One-to-four family | — | | | — | | | 90 | | | 13 | | | 88 | |
| | | | | | | | | |
Commercial real estate | — | | | — | | | 10 | | | — | | | — | |
| | | | | | | | | |
Business | 10 | | | 55 | | | 127 | | | 102 | | | 278 | |
Consumer and other | 135 | | | 6 | | | 5 | | | 23 | | | 6 | |
Total Recoveries | $ | 145 | | | $ | 61 | | | $ | 232 | | | $ | 138 | | | $ | 372 | |
Net recoveries (charge-offs) | (725) | | | (109) | | | (495) | | | (119) | | | 294 | |
Provision for (recovery of) losses | | | | | | | | | |
One-to-four family | (206) | | | 69 | | | (105) | | | (340) | | | (85) | |
Multifamily | 100 | | | 3 | | | (5) | | | 234 | | | (131) | |
Commercial real estate | 243 | | | (95) | | | 1,233 | | | 250 | | | 95 | |
Construction | 2 | | | 1 | | | — | | | — | | | — | |
Business | 510 | | | (274) | | | (1,485) | | | 540 | | | 34 | |
Consumer and other | 589 | | | 321 | | | 462 | | | 192 | | | 1 | |
Unallocated | (47) | | | 58 | | | — | | | (273) | | | (14) | |
Total provision for (recovery of) losses | 1,191 | | | 83 | | | 100 | | | 603 | | | (100) | |
Ending balance | $ | 6,337 | | | $ | 5,871 | | | $ | 5,229 | | | $ | 5,624 | | | $ | 5,140 | |
| | | | | | | | | |
Ratios: | | | | | | | | | |
Net recoveries (charge-offs) to average loans outstanding: | | | | | | | | | |
One-to-four family | — | % | | — | % | | 0.13 | % | | 0.02 | % | | 0.10 | % |
| | | | | | | | | |
| | | | | | | | | |
Multifamily | — | % | | — | % | | — | % | | — | % | | — | % |
| | | | | | | | | |
| | | | | | | | | |
Commercial real estate | — | % | | — | % | | (0.33) | % | | — | % | | — | % |
| | | | | | | | | |
| | | | | | | | | |
Business | (0.17) | % | | 0.03 | % | | 0.08 | % | | 0.06 | % | | 0.23 | % |
| | | | | | | | | |
| | | | | | | | | |
Consumer and other | (2.64) | % | | (1.25) | % | | (5.60) | % | | (11.55) | % | | (1.62) | % |
| | | | | | | | | |
| | | | | | | | | |
Total loans | (0.12) | % | | (0.02) | % | | (0.09) | % | | (0.02) | % | | 0.06 | % |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Allowance to total loans | 1.03 | % | | 0.94 | % | | 0.87 | % | | 0.97 | % | | 1.06 | % |
Allowance to nonaccrual loans | 25.77 | % | | 49.86 | % | | 42.65 | % | | 48.99 | % | | 71.48 | % |
The following table allocates the allowance for credit losses by asset category at March 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2025 | | 2024 | | 2023 | | 2022 | | 2021 |
$ in thousands | Amount | | % of Total ACL | | Amount | | % of Total ALLL | | Amount | | % of Total ALLL | | Amount | | % of Total ALLL | | Amount | | % of Total ALLL |
One-to-four family | $ | 1,799 | | | 28.4 | % | | $ | 2,005 | | | 34.1 | % | | $ | 716 | | | 13.7 | % | | $ | 731 | | | 13.0 | % | | $ | 1,058 | | | 20.6 | % |
Multifamily | 820 | | | 12.9 | % | | 720 | | | 12.3 | % | | 1,109 | | | 21.2 | % | | 1,114 | | | 19.8 | % | | 880 | | | 17.1 | % |
Commercial real estate | 1,465 | | | 23.1 | % | | 1,222 | | | 20.8 | % | | 1,814 | | | 34.7 | % | | 1,157 | | | 20.6 | % | | 907 | | | 17.6 | % |
Construction | 3 | | | 0.0 | % | | 1 | | | 0.0 | % | | — | | | — | % | | — | | | — | % | | — | | | 0.0 | % |
Business | 1,646 | | | 26.0 | % | | 1,415 | | | 24.1 | % | | 1,139 | | | 21.8 | % | | 2,497 | | | 44.4 | % | | 1,855 | | | 36.1 | % |
Consumer and other | 593 | | | 9.4 | % | | 450 | | | 7.7 | % | | 449 | | | 8.6 | % | | 123 | | | 2.2 | % | | 165 | | | 3.2 | % |
Unallocated | 11 | | | 0.2 | % | | 58 | | | 1.0 | % | | 2 | | | 0.0 | % | | 2 | | | 0.0 | % | | 275 | | | 5.4 | % |
Total Allowance | $ | 6,337 | | | 100.0 | % | | $ | 5,871 | | | 100.0 | % | | $ | 5,229 | | | 100.0 | % | | $ | 5,624 | | | 100.0 | % | | $ | 5,140 | | | 100.0 | % |
The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
Investment Activities
General. The Bank utilizes mortgage-backed and other investment securities in its asset/liability management strategy. In making investment decisions, the Bank considers, among other things, its yield and interest rate objectives, its interest rate and credit risk position and its liquidity and cash flow.
Generally, the investment policy of the Bank is to invest funds among categories of investments and maturities based upon the Bank's asset/liability management policies, investment quality, loan and deposit volume and collateral requirements, liquidity needs and performance objectives. Securities are classified into one of three categories: trading, held-to-maturity, and available-for-sale. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value with unrealized gains and losses included in earnings. Debt securities for which the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. All other securities not classified as trading or held-to-maturity are classified as available-for-sale and reported at fair value with unrealized gains and losses included, on an after-tax basis, in a separate component of stockholders' equity. At March 31, 2025, the Bank had no securities classified as trading. At March 31, 2025, $44.5 million, or 96.2% of the Bank's mortgage-backed and other investment securities, were classified as available-for-sale. The remaining $1.8 million, or 3.8%, were classified as held-to-maturity.
The following table sets forth the amortized cost, fair value and weighted average yields of the Bank's investment portfolio at March 31, 2025, categorized by remaining period to contractual maturity:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Due < 1 Year | | Due 1 - 5 Years | | Due 5 - 10 Years | | Due after 10 Years |
$ in thousands | | Amortized Cost | | Fair Value | | Yield | | Amortized Cost | | Fair Value | | Yield | | Amortized Cost | | Fair Value | | Yield | | Amortized Cost | | Fair Value | | Yield |
Available-for-Sale: | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | |
Government National Mortgage Association | | $ | — | | | $ | — | | | — | % | | $ | — | | | $ | — | | | — | % | | $ | — | | | $ | — | | | — | % | | $ | 204 | | | $ | 209 | | | 4.64 | % |
Federal Home Loan Mortgage Corporation | | — | | | — | | | — | % | | — | | | — | | | — | % | | — | | | — | | | — | % | | 18,779 | | | 14,762 | | | 1.6 | % |
Federal National Mortgage Association | | — | | | — | | | — | % | | — | | | — | | | — | % | | — | | | — | | | — | % | | 10,231 | | | 8,101 | | | 1.61 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total mortgage-backed securities | | — | | | — | | | — | % | | — | | | — | | | — | % | | — | | | — | | | — | % | | 29,214 | | | 23,072 | | | 1.63 | % |
U.S. Government Agency Securities | | — | | | — | | | — | % | | 847 | | | 843 | | | 5.62 | % | | — | | | — | | | — | % | | 3,479 | | | 3,467 | | | 5.63 | % |
Corporate Bonds | | — | | | — | | | — | % | | — | | | — | | | — | % | | — | | | — | | | — | % | | 5,262 | | | 2,820 | | | 2.61 | % |
Muni securities | | — | | | — | | | — | % | | — | | | — | | | | | 9,677 | | | 8,061 | | | 2.32 | % | | 7,996 | | | 6,259 | | | 2.31 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total available-for-sale | | $ | — | | | $ | — | | | — | % | | $ | 847 | | | $ | 843 | | | 5.62 | % | | $ | 9,677 | | | $ | 8,061 | | | 2.32 | % | | $ | 45,951 | | | $ | 35,618 | | | 2.22 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Held-to-Maturity: | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | |
Government National Mortgage Association | | — | | | — | | | — | % | | $ | — | | | $ | — | | | — | % | | $ | — | | | $ | — | | | — | % | | $ | 249 | | | $ | 240 | | | 4.37 | % |
Federal National Mortgage Association | | — | | | — | | | — | % | | 1,292 | | | 1,255 | | | 2.69 | % | | 181 | | | 175 | | | 2.40 | % | | 28 | | | 28 | | | — | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total held-to-maturity | | $ | — | | | $ | — | | | — | % | | $ | 1,292 | | | $ | 1,255 | | | 2.69 | % | | $ | 181 | | | $ | 175 | | | 2.40 | % | | $ | 277 | | | $ | 268 | | | 3.92 | % |
Mortgage-Backed Securities. The Bank has invested in mortgage-backed securities to help achieve its asset/liability management goals and collateral needs. Although mortgage-backed securities generally yield less than whole loans, they present substantially lower credit risk, are more liquid than individual mortgage loans and may be used to collateralize obligations of the Bank. Because Carver Federal receives regular payments of principal and interest from its mortgage-backed securities, these investments provide more consistent cash flows than investments in other debt securities, which generally only pay principal at maturity. Mortgage-backed securities also help the Bank meet certain definitional tests for favorable treatment under federal banking and tax laws. See “Regulation and Supervision-Federal Banking Regulation-Qualified Thrift Lender Test” and “Federal and State Taxation.”
Mortgage-backed securities constituted 3.4% of total assets at March 31, 2025, compared to 3.5% at March 31, 2024. Carver Federal maintains a portfolio of mortgage-backed securities in the form of Government National Mortgage Association (“GNMA”) pass-through certificates, FNMA mortgage-backed securities and FHLMC mortgage-backed securities. GNMA pass-through certificates are guaranteed as to the payment of principal and interest by the full faith and credit of the United States Government, while FNMA and FHLMC securities are each guaranteed by their respective agencies as to principal and interest. Mortgage-backed securities generally entitle Carver Federal to receive a pro-rata portion of the cash flows from an identified pool of mortgages. The cash flows from such pools are segmented and paid in accordance with a predetermined priority to various classes of securities issued by the entity. Carver Federal has also invested in pools of loans guaranteed as to principal and interest by the SBA.
The Bank seeks to manage interest rate risk in part by investing in adjustable-rate mortgage-backed securities, which at March 31, 2025, constituted $367 thousand, or 1.5%, of the mortgage-backed securities portfolio. Mortgage-backed securities, however, expose Carver Federal to certain unique risks. In a declining rate environment, accelerated prepayments of loans underlying these securities expose Carver Federal to the risk that it will be unable to obtain comparable yields upon reinvestment of the proceeds. In the event the mortgage-backed security has been funded with an interest-bearing liability with maturity comparable to the original estimated life of the mortgage-backed security, the Bank's interest rate spread could be adversely affected. Conversely, in a rising interest rate environment, the Bank may experience a lower than estimated rate of repayment on the underlying mortgages, effectively extending the estimated life of the mortgage-backed security and exposing the Bank to the risk that it may be required to fund the asset with a liability bearing a higher rate of interest. For additional information regarding Carver Federal's mortgage-backed securities portfolio and its maturities, refer to Note 3 of Notes to Consolidated Financial Statements, “Investment Securities.”
Other Investment Securities. In addition to mortgage-backed securities, the Bank also invests in assets such as government and agency obligations, corporate bonds and mutual funds. Carver Federal is permitted under federal law to make certain investments, including investments in securities issued by various federal agencies and state and municipal governments, deposits at the FHLB-NY, certificates of deposit in federally insured institutions, certain bankers' acceptances and federal funds. The Bank may also invest, subject to certain limitations, in commercial paper having one of the two highest investment ratings of a nationally recognized credit rating agency, and certain other types of corporate debt securities and mutual funds (See Note 3 of Notes to Consolidated Financial Statements).
Other Earning Assets. Federal regulations require the Bank to maintain an investment in FHLB-NY stock and a sufficient amount of liquid assets which may be invested in cash and specified securities. For additional information, see “Regulation and Supervision-Federal Banking Regulation-Liquidity.”
Securities Impairment. The Bank’s available-for-sale securities portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income (loss). Securities that the Bank has the intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. The fair values of securities in the Bank's portfolio are based on published or securities dealers’ market values and are affected by changes in interest rates. The Bank conducts periodic reviews to identify and evaluate each investment that has an unrealized holding loss. For available-for-sale ("AFS") securities in an unrealized loss position, management determines whether the Company has the intent to sell the security, or will more likely than not be required to sell the security before the recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, any previously recognized ACL is written off and the amortized cost is adjusted to fair value. If any incremental credit loss occurs, the amortized cost is adjusted further by the credit loss and recorded in earnings. For AFS securities that do not meet the above criteria, management evaluates whether the decline in fair value has resulted from credit loss or other factors. In making this assessment, management may consider various factors including downgrades in the rating of the security by rating agencies, failure of the issuer to make scheduled interest or principal payments or adverse conditions specifically related to the security. If the decline in fair value is due to credit loss, the loss is recorded through ACL, limited by the amount that the fair value is less than the amortized cost basis. Non-credit related losses are recorded through other comprehensive income. Management has reviewed the Bank's AFS portfolio at March 31, 2025 and believes that the unrealized losses are a direct result of the current rate environment and the Company has the ability and intent to hold the securities until maturity or the valuations recover. The Bank's held-to-maturity portfolio consists of mortgage-backed securities that are either fully guaranteed or issued by a government sponsored enterprise, which has a credit rating and perceived credit risk comparable to the U.S. government. As such, no allowance for credit losses on securities available-for-sale or held-to-maturity have been established as of March 31, 2025 and 2024.
Sources of Funds
General. Deposits are the primary source of Carver Federal's funds for lending and other investment purposes. In addition to deposits, Carver Federal derives funds from loan principal repayments, loan and investment interest payments, maturing investments and fee income. Loan and mortgage-backed securities repayments and interest payments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by prevailing market interest rates, pricing of deposits, competition and general economic conditions. Borrowed money may be used to supplement the Bank's available funds, and from time to time the Bank borrows funds from the FHLB-NY and has borrowed funds through trust preferred debt securities.
Deposits. Carver Federal attracts deposits from consumers, businesses, non-profit organizations and public entities through its seven branches principally from within its market area by offering a variety of deposit instruments, including passbook and statement accounts and certificates of deposit, which range in term from 3 months to five years. Deposit terms vary, principally on the basis of the minimum balance required, the length of time the funds must remain on deposit and the interest rate. Carver Federal also offers Individual Retirement Accounts. Carver Federal's policies are designed primarily to attract deposits from local residents and businesses through the Bank's branches, although the Bank has expanded its digital online account presence across the Northeast and in Washington, D.C. Carver Federal also holds deposits from various governmental agencies or authorities and corporations.
Carver Federal utilizes brokered deposits as an additional funding source and to assist in the management of the Bank's interest rate risk. Carver Federal has obtained brokered certificates of deposit when the interest rate on these deposits is below the prevailing interest rate for non-brokered certificates of deposit with similar maturities in our market, or when obtaining them allowed us to extend the maturities of our deposits at favorable rates compared to borrowing funds with similar maturities, or when we are seeking to extend the maturities of our funding to assist in the management of our interest rate risk. Carver has obtained brokered deposits from a variety of brokerage firms. In addition, Carver has obtained brokered deposits through the
Depository Trust Company ("DTC"). This allows us to better manage the maturity of our deposits and our interest rate risk. Carver Federal has also utilized brokers to obtain money market account deposits. The rate we pay on brokered money market accounts is the same or below the rate we pay on non-brokered money market accounts. These accounts are similar to brokered certificates of deposit accounts in that we only maintain one account for the total deposit per broker, with the broker maintaining the detailed records of each depositor. As of March 31, 2025, Carver had a total of $55.0 million in brokered deposits, compared to $60.0 million as of March 31, 2024.
As of March 31, 2025, the Bank had $90.0 million of reciprocal deposits acquired through its participation in the Certificate of Deposit Account Registry Service (“CDARS”). The Bank's CDARS deposits totaled $76.7 million as of March 31, 2024. The CDARS network arranges for placement of Carver Federal's customer funds into certificate of deposit accounts issued by other CDARS member banks. The certificate of deposit accounts are in increments of less than the individual FDIC insurance limit amount, to ensure that both principal and interest are eligible for full FDIC deposit insurance. This allows the Bank to maintain its customer relationship while still providing its customers with FDIC insurance for the full amount of their deposits, up to $50 million per customer. In exchange, Carver Federal receives from other member banks their customers' deposits in like amounts. Depositors are allowed to withdraw funds early, with a penalty, from these accounts. Carver Federal may elect to participate in the program by making or receiving deposits without making or receiving a reciprocal deposit. As a result of the Dodd-Frank Act, the standard maximum deposit insurance amount is $250,000.
Deposit interest rates, maturities, service fees and withdrawal penalties on deposits are established based on the Bank's funds acquisition and liquidity requirements, the rates paid by the Bank's competitors, current market rates, the Bank's growth goals and applicable regulatory restrictions and requirements. For additional information regarding the Bank's deposit accounts and the related weighted average interest rates paid, and amount and maturities of certificates of deposit in specified weighted average interest rate categories, refer to Note 8 of the Notes to Consolidated Financial Statements, “Deposits.”
Borrowed Funds. While deposits are the primary source of funds for Carver Federal's lending, investment and general operating activities, Carver Federal is authorized to use advances from the FHLB-NY and securities sold under agreements to repurchase (“Repos”) from approved primary dealers to supplement its supply of funds and to meet deposit withdrawal requirements. The FHLB-NY functions as a central bank providing credit for savings institutions and certain other member financial institutions. As a member of the FHLB system, Carver Federal is required to own stock in the FHLB-NY and is authorized to apply for advances. Advances are made pursuant to several different programs, each of which has its own interest rate and range of maturities. Advances from the FHLB-NY are secured by Carver Federal's stock in the FHLB-NY and a pledge of Carver Federal's mortgage loan and mortgage-backed and agency securities portfolios. The Bank takes into consideration the term of borrowed money with the repricing cycle of the mortgage loans on the balance sheet.
On September 17, 2003, Carver Statutory Trust I issued 13,000 shares, liquidation amount $1,000 per share, of floating rate capital securities. Gross proceeds from the sale of these trust preferred debt securities of $13.0 million, and proceeds from the sale of the trust's common securities of $0.4 million, were used to purchase approximately $13.4 million aggregate principal amount of the Company's floating rate junior subordinated debt securities due 2033. The trust preferred debt securities are redeemable at par quarterly at the option of the Company and have a mandatory redemption date of September 17, 2033. Cash distributions on the trust preferred debt securities are cumulative and payable at a floating rate per annum resetting quarterly with a margin of 3.05% over the three-month LIBOR. Debenture interest payments are subject to prior approval from the Federal Reserve Bank. A streamlined process has been developed for the Company to request regulatory approval to make debenture interest payments, although there is no assurance that the Federal Reserve Bank will continue to approve such quarterly payments. All quarterly payments up to and including the March 2025 payment were made. The Company deferred the interest payment due June 17, 2025 in order to manage liquidity. Debenture interest payments may be deferred for up to twenty consecutive quarters under the terms of the Indenture. The interest rate was 7.6% at March 31, 2025.
While Carver has suspended its regular quarterly cash dividend on its common stock, in the future, Carver may rely on dividends from Carver Federal to pay cash dividends to its stockholders and to engage in share repurchase programs. In recent years, Carver has been successful in obtaining cash independently through its capital raising efforts, which may include cash from government grants or below market-rate loans. Under the Formal Agreement, the OCC will monitor all capital distributions, including dividend payments, by Carver Federal to the Company, and the FRB regulates dividends paid by the Company. As the subsidiary of a savings and loan association holding company, Carver Federal must file a notice or an application (depending on the proposed dividend amount) with the OCC (and an application with the FRB) prior to the declaration of each capital distribution. The OCC will disallow any proposed dividend, for among other reasons, that would result in Carver Federal’s failure to meet the OCC minimum capital requirements.
REGULATION AND SUPERVISION
Enforcement Actions
On May 14, 2025, the Bank entered into the Formal Agreement with the OCC. The Formal Agreement specifically provides that the Bank will take the following actions within the time frames specified:
•Establish a Compliance Committee of its Board of Directors to specifically monitor and oversee the Bank's compliance with the Formal Agreement. This Committee has already been established and is actively underway; .
•Prepare a three-year strategic plan for the OCC's review, with such strategic plan to establish objectives specifically focusing on the Bank's earnings performance that will include measures for growth, capital, liquidity and balance sheet mix; and
•Prepare an earnings program for the OCC's review designed to improve and sustain the earnings of the Bank.
The Formal Agreement specifically addresses the items referenced above through a new three-year strategic plan. The Bank's board of directors and management will address these provisions within the required time frames. Further, the Bank's board of directors and management are fully committed to, as expeditiously as possible, achieving sustainable earnings through a more robust and viable strategic plan, which are part of the Bank's new ongoing operations and actions under the leadership of its new Chief Executive Officer.
The foregoing description of the Formal Agreement is qualified in its entirety by reference to the Formal Agreement issued to the Bank, which is included herein as Exhibit 10.5.
The OCC has established higher minimum capital requirements for the Bank. For further information with respect to the Individual Minimum Capital Ratios (“IMCR”), effective June 29, 2016, refer to “Capital and Liquidity - Carver Federal’s Capital Position.”
The Company continues to be subject to certain requirements pursuant to the Memorandum of Understanding dated October, 20, 2016 with the FRB. The Company is subject to the restrictions on golden parachute and indemnification payments, as set forth in 12 C.F.R. Part 359. Written approval of the Federal 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 may affect our operations and financial performance.
General
The Bank is subject to extensive regulation, examination and supervision by its primary regulator, the OCC. The Bank's deposit accounts are insured up to applicable limits by the FDIC under the Deposit Insurance Fund. The Bank is a member of the FHLB-NY. The Bank must file reports with the OCC concerning its activities and financial condition, and it must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The Company, as a unitary savings and loan holding company, is subject to regulation, examination and supervision by the FRB and is required to file certain reports with, and otherwise comply with, the rules and regulations of the FRB and of the SEC under the federal securities laws. The OCC periodically performs safety and soundness examinations of the Bank and tests compliance with various regulatory requirements. The OCC has primary enforcement responsibility over federally chartered savings banks and has substantial discretion to impose enforcement action on an institution that fails to comply with applicable regulatory requirements, particularly with respect to its capital requirements. In addition, the FDIC has the authority to recommend to the Director of the OCC that enforcement action be taken with respect to a particular federally chartered savings bank and, if action is not taken by the Director, the FDIC has authority to take such action under certain circumstances.
The description of statutory provisions and regulations applicable to federally chartered savings banks and their holding companies and of tax matters set forth in this document does not purport to be a complete description of all such statutes and regulations and their effects on the Bank and the Company. Any change in such laws and regulations whether by the OCC, the FDIC, the FRB or through legislation could have a material adverse impact on the Bank and the Company and their operations and stockholders.
Capital and Liquidity
Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the OCC is authorized and, in some cases, required to take supervisory actions against undercapitalized savings banks. For this purpose, a savings bank would be placed in one of the following five categories based on the bank's regulatory capital: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized.
The severity of the action authorized or required to be taken under the prompt corrective action regulations increases as a bank's capital decreases within the three undercapitalized categories. All banks are prohibited from paying dividends or other capital distributions or paying management fees to any controlling person if, following such distribution, the bank would be undercapitalized. Generally, a capital restoration plan must be filed with the OCC within 45 days of the date a bank receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” In addition, various mandatory supervisory actions become immediately applicable to the institution, including restrictions on growth of assets and other forms of expansion.
Under OCC regulations, a federally chartered savings bank is treated as well-capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 8% or greater, its common equity Tier 1 capital ratio is 6.5% or greater, and its leverage ratio is 5% or greater, and it is not subject to any order or directive by the OCC to meet a specific capital level. In assessing an institution's capital adequacy, the OCC takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions as they deem necessary.
The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, required that the OCC and other federal banking agencies revise their risk-based capital standards to ensure that the standards take into account interest rate risk ("IRR") concentration of risk and the risks of non-traditional activities. The OCC monitors the IRR of individual institutions through a variety of means, including an analysis of the change in net portfolio value ("NPV"). NPV is defined as the net present value of the expected future cash flows of an entity's assets and liabilities and, therefore, hypothetically represents the value of an institution's net worth. The OCC has also used this NPV analysis as part of its evaluation of certain applications or notices submitted by thrift institutions. In addition, OCC Bulletin 2010-1 provides guidance on the management of IRR and the responsibility of boards of directors in that area. The OCC, through its general oversight of the safety and soundness of savings associations, retains the right to impose minimum capital requirements on individual institutions to the extent the institution is not in compliance with certain written guidelines established by the OCC regarding NPV analysis.
Carver Federal's Capital Position. Federal regulations require depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets ratio of 8%, and a Tier 1 capital to total assets leverage ratio of 4%. Federal savings banks must also meet a tangible capital ratio of 1.5%.
For purposes of the regulatory capital requirements, a higher risk weight (150%) is assigned to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. Unrealized gains and losses on certain “available-for-sale” securities holdings are required to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. Carver Federal has chosen to opt-out and, therefore, does not include accumulated other comprehensive income (AOCI) in its regulatory capital determinations. Additional constraints are also imposed on the inclusion in regulatory capital of certain mortgage-servicing assets, deferred tax assets and minority interests. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the OCC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions when deemed necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit 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 common equity Tier 1capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.
Legislation enacted in May 2018 required the federal banking agencies, including the OCC, to establish for qualifying institutions with assets of less than $10 billion a “community bank leverage ratio” that ranges between 8 to 10% of consolidated assets. Institutions with capital complying with the ratio and otherwise meeting the specified requirements (including off-balance sheet exposures of 25% or less of total assets and trading assets and liabilities of 5% or less of total assets) and electing
the alternative framework are considered to comply with the applicable regulatory capital requirements, including the risk-based requirements. Such institutions are also considered "well-capitalized" for prompt corrective action purposes.
Effective January 1, 2020, the federal banking agencies adopted a rule to establish for institutions with assets of less than $10 billion that meet other specified criteria a "community bank leverage ratio" (the ratio of a bank's tangible equity capital to average total consolidated assets) of 9% that such institutions may elect to utilize in lieu of the generally applicable leverage and risk-based capital requirements. A "qualifying community bank" with capital exceeding 9% will be considered compliant with all applicable regulatory capital and leverage requirements, including the requirement to be "well capitalized." As of March 31, 2025, the Bank has elected to continue to utilize the generally applicable leverage and risk-based requirements and not apply the community bank leverage ratio.
Carver Federal, as a matter of prudent management, targets as its goal the maintenance of capital ratios which exceed minimum requirements and are consistent with Carver Federal’s risk profile. The IMCR established by the OCC on June 29, 2016, requires the Bank to maintain minimum regulatory capital levels of 9% for its Tier 1 leverage ratio and 12% for its total risk-based capital ratio. At March 31, 2025, Carver Federal's capital level exceeded the regulatory requirements to be considered "well capitalized," but did not meet its IMCR requirements. The Tier 1 leverage ratio was 8.70%, below the 9% IMCR requirement, and the total risk-based capital ratio was 11.56% below the 12% IMCR requirement. The Bank is working on taking appropriate actions with the goal of achieving the IMCR targets.
Limitation on Capital Distributions. There are various restrictions on a bank's ability to make capital distributions, including cash dividends, payments to repurchase or otherwise acquire its shares and other distributions charged against capital. A savings institution that is the subsidiary of a savings and loan holding company, such as the Bank, must file a notice with the FRB at least 30 days before making a capital distribution and receive the FRB's nonobjection. The Bank must also file an application or notice for prior approval with the OCC if the total amount of its capital distributions (including each proposed distribution), for the applicable calendar year would exceed the Bank's net income for that year plus the Bank's retained net income for the previous two years, if the Bank is not an "eligible savings association" as defined in OCC regulations or the capital distributions would violate a prohibition contained in any statute, regulation or agreement.
The Bank may be prohibited from making capital distributions and its application or notice disapproved if:
(1) the Bank would be undercapitalized following the distribution;
(2) the proposed capital distribution raises safety and soundness concerns; or
(3) the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
Liquidity. The Bank maintains a liquidity policy to maintain sufficient liquidity to ensure its safe and sound operations. In the normal course of business, the levels of liquid assets during any given period are dependent on operating, investing and financing activities. Cash and due from banks, federal funds sold and repurchase agreements with maturities of three months or less are the Bank's most liquid assets. Management believes Carver Federal’s short-term assets have sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash requirements, including interest payments on our subordinated debt securities.
Standards for Safety and Soundness
Standards for Safety and Soundness. The OCC has adopted guidelines prescribing safety and soundness standards. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. OCC regulations authorize the OCC to order an institution that has been given notice that it is not satisfying these safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement an accepted compliance plan, the OCC must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the “prompt corrective action” provisions of federal law. If an institution fails to comply with such an order, the OCC may seek to enforce such order in judicial proceedings and to impose civil money penalties.
In 2023, the OCC issued guidance along with the FDIC and FRB on risks banks may face from third party relationships (e.g. relationships under which the third party provides services to the bank). The guidance outlines the agencies'
views on sound risk management principles related to third party relationships, including as related to the performance of adequate due diligence on the third party, appropriate documentation of the relationship, and performance of adequate oversight and auditing in order to the limit the risks to the bank.
Enforcement. The OCC has primary enforcement responsibility over the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices.
Other Supervision and Regulation
Activity Powers. The Bank derives its lending and investment powers from the Home Owners' Loan Act (“HOLA”), as amended, and federal regulations. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities and certain other assets. The Bank may also establish service corporations that may engage in certain activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. The Bank's authority to invest in certain types of loans or other investments is limited by federal law. These investment powers are subject to various limitations, including (1) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four highest rating categories, (2) a limit of 400% of an association's capital on the aggregate amount of loans secured by non-residential real estate property, (3) a limit of 20% of an association's assets on commercial loans, with the amount of commercial loans in excess of 10% of assets being limited to small business loans, (4) a limit of 35% of an association's assets on the aggregate amount of consumer loans and acquisitions of certain debt securities, (5) a limit of 5% of assets on non-conforming loans (certain loans in excess of the specific limitations of HOLA), and (6) a limit of the greater of 5% of assets or an association's capital on certain construction loans made for the purpose of financing what is or is expected to become residential property.
Loans-to-One Borrower Limitations. The Bank is generally subject to the same limits on loans-to-one borrower as a national bank. With specified exceptions, the Bank's total loans or extension of credit to a single borrower or group of related borrowers may not exceed 15% of the Bank's unimpaired capital and unimpaired surplus, which does not include accumulated other comprehensive income. The Bank currently complies with applicable loans-to-one borrower limitations. At March 31, 2025, the Bank's limit on loans-to-one borrower based on its unimpaired capital and surplus was $10.6 million.
Qualified Thrift Lender Test. Under HOLA, the Bank must comply with a Qualified Thrift Lender (“QTL”) test. Under this test, the Bank is required to maintain at least 65% of its “portfolio assets” in certain “qualified thrift investments” on a monthly basis in at least nine months of the most recent twelve-month period. “Portfolio assets” means, in general, an association's total assets less the sum of (a) specified liquid assets up to 20% of total assets, (b) goodwill and other intangible assets and (c) the value of property used to conduct the Bank's business. “Qualified thrift investments” include various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities and consumer loans. If the Bank fails the QTL test, it must operate under certain restrictions on its activities. The Dodd-Frank Act made noncompliance potentially subject to agency enforcement action for violation of law. At March 31, 2025, the Bank maintained approximately 97% of its portfolio assets in qualified thrift investments. The Bank had also met the QTL test in each of the prior 12 months and was, therefore, a qualified thrift lender.
Branching. Subject to certain limitations, federal law permits the Bank to establish branches in any state of the United States. The authority for the Bank to establish an interstate branch network would facilitate a geographic diversification of the Bank's activities. This authority under federal law and regulations preempts any state law purporting to regulate branching by federal savings associations.
Community Reinvestment Act ("CRA") Under the CRA, as amended, and implemented by OCC regulations, the Bank has a continuing and affirmative obligation to help meet the credit needs of its entire community, including those in low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for the Bank nor does it limit the Bank's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA does, however, require the primary regulator, in connection with its examination of the Bank, to assess the Bank's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the Bank.
The current evaluation system focuses on three tests:
(1)a lending test, to evaluate the institution's record of making loans in its assessment areas;
(2)an investment test, to evaluate the institution's record of investing in community development projects, affordable housing and programs benefiting low or moderate income individuals and businesses; and
(3)a service test, to evaluate the institution's delivery of banking services through its branches, ATM centers and other offices.
The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received an “Outstanding” CRA rating in its most recent examination conducted in March 2022.
Regulations require that Carver Federal publicly disclose certain agreements that are in fulfillment of the CRA. The Bank has no such agreements in place at this time.
On October 24, 2023, the OCC and the other federal banking agencies issued a final rule to strengthen and modernize the CRA regulations. However, on March 28, 2025, the OCC, Federal Reserve and FDIC (collectively "the agencies") announced their intent to issue a proposal to rescind the 2023 CRA final rule due to litigation. The proposal would reinstate the CRA framework that existed prior to the October 2023 final rule. For the OCC, this framework includes the OCC guidance issued in 2021, which upholds rules adopted by the agencies in 1995.
Transactions with Related Parties. The Bank's authority to engage in transactions with its “affiliates” is limited by federal regulations and by Sections 23A and 23B of the Federal Reserve Act. In general, these transactions must be on terms which are as favorable to the Bank as comparable transactions with non-affiliates. Additionally, certain types of these transactions are restricted to an aggregate percentage of the Bank's capital. Collateral in specified amounts must usually be provided by affiliates to receive loans from the Bank. In addition, OCC regulations prohibit a savings bank from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to its directors, executive officers, and 10% shareholders ("insiders"), as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions require that all loans or extensions of credit to insiders (a) be made on terms that are substantially the same as and follow credit underwriting procedures that are not less stringent than those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations, individually and in the aggregate, which limits are based, in part, on the amount of the Bank's capital. In addition, extensions of credit in excess of certain limits must be approved by the Bank's Board. The aggregate amount of related party deposits was $3.2 million and there were no related party loans at March 31, 2025.
Assessment. The OCC charges assessments to recover the cost of examining savings associations and their affiliates. These assessments are based on three components: the size of the association, on which the basic assessment is based; the association's supervisory condition, which results in an additional assessment based on a percentage of the basic assessment for any savings institution with a composite rating of 3, 4, or 5 in its most recent safety and soundness examination; and the complexity of the association's operations, which results in an additional assessment based on a percentage of the basic assessment for any savings association that managed over $1 billion in trust assets, serviced for others loans aggregating more than $1 billion, or had certain off-balance sheet assets aggregating more than $1 billion. For fiscal 2025, Carver paid $109 thousand in regulatory assessments.
Insurance of Deposit Accounts
Under the FDIC's risk-based assessment system, institutions deemed less risky pay lower assessments. Assessments for institutions of less than $10 billion of assets are now based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of an institution's failure within three years.
The Dodd-Frank Act required the FDIC to revise its procedures to base assessments upon each insured institution's total assets less tangible equity instead of deposits. The current assessment range (inclusive of possible adjustments) for insured institutions of less than $10 billion of total assets is 2.5 basis points to 32 basis points.
The FDIC has authority to further increase insurance assessments and therefore management cannot predict what insurance assessment rates will be in the future. A significant increase in insurance premiums may have an adverse effect on the operating expenses and results of operations of the Bank. For fiscal 2025, Carver paid $701 thousand in FDIC insurance.
Anti-Money Laundering and Customer Identification
The Bank is subject to federal regulations implementing the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”). The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act ("BSA"), Title III of the USA PATRIOT Act took measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the United States Commodity Exchange Act of 1936, as amended.
Title III of the USA PATRIOT Act and the related federal regulations imposed the following requirements with respect to financial institutions:
•Establish a Board approved policy and perform a risk assessment of BSA, Anti-Money Laundering and Office of Foreign Assets Control;
•Designate a qualified BSA officer;
•Establish an effective training program;
•Establish anti-money laundering programs;
•Establish a program specifying procedures for obtaining identifying information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time;
•Establish enhanced due diligence policies, procedures and controls designed to detect and report money laundering; and
•Prohibit correspondent accounts for foreign shell banks and compliance with record keeping obligations with respect to correspondent accounts of foreign banks
In addition, bank regulators were directed to consider a holding company's effectiveness in combating money laundering when ruling on certain corporate applications.
Federal Home Loan Bank System
The Bank is a member of the FHLB-NY, which is one of the eleven regional banks composing the FHLB System. Each regional bank provides a central credit facility primarily for its member institutions. The Bank, as a FHLB-NY member, is required to acquire and hold shares of capital stock in the FHLB-NY in specified amounts. The Bank was in compliance with this requirement with an investment in the capital stock of the FHLB-NY at March 31, 2025 of $853 thousand. Any advances from the FHLB-NY must be secured by specified types of collateral, and all long-term advances may be obtained only for the purpose of providing funds for residential housing finance.
FHLB-NY is required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLB-NY can pay as dividends to its members and could also result in the FHLB-NY imposing a higher rate of interest on advances to its members. If dividends were reduced, or interest on future FHLB-NY advances increased, the Bank's net interest income would be adversely affected. Dividends from FHLB-NY to the Bank amounted to $184 thousand and $154 thousand for fiscal years 2025 and 2024, respectively. The dividend rate paid on FHLB-NY stock at March 31, 2025 was 8.0%.
Privacy and Cybersecurity
Carver Federal is subject to OCC regulations implementing the privacy protection provisions of federal law. These regulations require the Bank to disclose its privacy policy, including identifying with whom it shares “nonpublic personal information” to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require the Bank to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, to the extent its sharing of such information is not exempted, the Bank is required to provide its customers with the ability to opt-out of having the Bank share their nonpublic personal information with unaffiliated third parties before they can disclose such information, subject to certain exceptions.
The Bank is subject to regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of the Gramm-Leach-Bliley Act, as amended ("GLB"). The guidelines describe the agencies' expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to insure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. The Bank has a policy to comply with the foregoing guidelines.
In November 2021, the federal bank regulatory agencies issued a final rule requiring banking organizations to notify their primary federal regulator as soon as possible and no later than 36 hours of determining that a “computer-security incident” that rises to the level of a “notification incident,” as those terms are defined in the final rule, has occurred. A notification incident is a “computer-security incident” that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the banking organization's ability to deliver services to a material portion of its customer base, jeopardize the viability of key operations of the banking organization, or impact the stability of the financial sector. The final rule also requires bank service providers to notify any affected bank to or on behalf of which the service provider provides services “as soon as possible” after determining that it has experienced an incident that materially disrupts or degrades, or is reasonably likely to materially disrupt or degrade, covered services provided to such bank for four or more hours. The rule was effective April 1, 2022, with compliance required by May 1, 2022.
On July 26, 2023, the SEC issued a final rule that requires registrants, such as the Company, to (i) report material cybersecurity incidents on Form 8-K, (ii) include updated disclosure in Forms 10-K and 10-Q of previously disclosed cybersecurity incidents and disclose previously undisclosed individually immaterial incidents when a determination is made that they have become material on an aggregated basis, (iii) disclose cybersecurity policies and procedures and governance practices, including at the board and management levels in Form 10-K, and (iv) disclose the board of directors' cybersecurity expertise.
Holding Company Regulation
The Company is a savings and loan holding company regulated by the FRB. As such, the Company is registered with and subject to FRB examination and supervision, as well as certain reporting requirements. The FRB has enforcement authority over the Company and its subsidiaries. Among other things, this authority permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of a subsidiary savings institution.
The GLB restricts the powers of new unitary savings and loan holding companies. Unitary savings and loan holding companies that are “grandfathered,” i.e., unitary savings and loan holding companies in existence or with applications filed with the regulator on or before May 4, 1999, such as the Company, retain their authority under the prior law. All other unitary savings and loan holding companies are limited to financially related activities permissible for financial holding companies and certain other activities specified by FRB regulations. GLB also prohibits nonfinancial companies from acquiring grandfathered unitary savings and loan holding companies.
Restrictions Applicable to All Savings and Loan Holding Companies. Federal law prohibits a savings and loan holding company, including the Company, directly or indirectly, from acquiring:
(1)control (as defined under the HOLA), of another savings institution (or a holding company parent) without prior FRB approval;
(2)through merger, consolidation, or purchase of assets, another savings institution or a holding company thereof, or acquiring all or substantially all of the assets of such institution (or a holding company), without prior FRB approval; or
(3)control of any depository institution not insured by the FDIC.
A savings and loan holding company may not acquire as a separate subsidiary an insured institution that has a principal office outside of the state where the principal office of its subsidiary institution is located, except:
(1)in the case of certain emergency acquisitions approved by the FDIC;
(2)if such holding company controls a savings institution subsidiary that operated a home or branch office in such additional state as of March 5, 1987; or
(3)if the laws of the state in which the savings institution to be acquired is located specifically authorize a savings institution chartered by that state to be acquired by a savings institution chartered by the state where the acquiring savings institution or savings and loan holding company is located or by a holding company that controls such a state chartered association.
In evaluating applications by holding companies to acquire savings associations, the FRB must consider issues such as the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.
The FRB has promulgated consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to their subsidiary depository institutions, including a community bank leverage ratio alternative. However, holding companies with less than $3.0 billion of consolidated assets, such as the Company, are generally not subject to consolidated capital requirements unless otherwise advised by the FRB.
The FRB promulgated regulations implementing the “source of strength” policy that requires holding companies act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
The FRB has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends’ previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also provides for regulatory consultation prior to a holding company redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses or redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies could affect the ability of the Company to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Federal Securities Laws
The Company is subject to the periodic reporting, proxy solicitation, tender offer, insider trading restrictions and other requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Delaware Corporation Law
The Company is incorporated under the laws of the State of Delaware. Thus, it is subject to regulation by the State of Delaware and the rights of its shareholders are governed by the General Corporation Law of the State of Delaware.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank currently file a consolidated federal income tax return on the basis of a taxable year ending March 31 using the accrual method of accounting, and are subject to federal income taxation in the same manner as other corporations with some exceptions, including in particular the Bank's tax reserve for bad debts. The Bank has a subsidiary which files a REIT tax return which reports its income for tax purposes on the basis of a taxable year ending December 31. The REIT does not join in the consolidated return and it pays tax on its undistributed taxable income. The REIT has and intends to continue to distribute its taxable income and therefore not pay tax at the REIT level. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company.
Distributions. To the extent that the Bank makes “non-dividend distributions” to shareholders, such distributions will be considered to result in distributions from the Bank's “base year reserve,” i.e., its reserve as of March 31, 1988, to the extent thereof and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in the Bank's taxable income. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not constitute non-dividend distributions and, therefore, will not be included in the Bank's taxable income.
The amount of additional taxable income created from a non-dividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately 1.2 times the non-dividend distribution would be includable in gross income for federal income tax purposes, assuming a 21% federal corporate income tax rate.
In December 2017, "The Tax Cuts and Jobs Act" was signed into law. At March 31, 2018, the Company made a reasonable estimate and recorded a remeasurement of the Company’s net deferred income tax assets and liabilities based on the new reduced U.S. corporate income tax rate. The impact on the net deferred tax asset before valuation allowances was a reduction of $3.1 million, which was offset by a corresponding decrease in the valuation allowance of the same amount. The Company recorded a benefit of $0.3 million for alternative minimum tax credits which, under the new tax law, was refundable.
State and Local Taxation
State of New York. The Bank and the Company (including the REIT) file tax returns on a combined basis and are subject to New York State franchise tax on their entire net income or one of several alternative bases, whichever results in the highest tax. “Entire net income” means federal taxable income with adjustments. If, however, the application of an alternative tax (based on capital allocated to New York or a fixed minimum fee) results in a greater tax, the alternative tax will be imposed. The Company was subject to tax based upon capital for New York State for fiscal 2025. In addition, New York State imposes a tax surcharge of 30% of the New York State Franchise Tax allocable to business activities carried on in the Metropolitan Commuter Transportation District. For fiscal 2025, the New York State franchise tax rate computed on capital was 0.1875%.
New York City. The Bank and the Company (including the REIT) file on a combined basis and are also subject to a similarly calculated New York City banking corporation tax on capital allocated to New York City. For fiscal 2025, the New York City banking corporation tax rate computed on capital is 0.15%.
Delaware Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware.
ITEM 1A.RISK FACTORS.
The material risks that management believes affect the Company are described below. You should carefully consider the risks as described below, together with all of the information included herein. The risks described below are not the only risks the Company faces. Additional risks not presently known also may have a material adverse effect on the Company’s results of operations and financial condition.
Risks Related to Lending Activities
Our loan portfolio exhibits a high degree of risk.
We have a significant amount of commercial real estate loans that have a higher risk of default and loss than single-family residential mortgage loans. Commercial real estate loans amount to $178.3 million, or 29.1% of our loan portfolio at March 31, 2025. Commercial real estate loans generally are considered to involve a higher degree of risk due to a variety of factors, including generally larger loan balances and loan terms which often do not require full amortization of the loan over its term and, instead, provide for a balloon payment at the stated maturity date. Repayment of commercial real estate loans generally is dependent on income being generated by the rental property or underlying business in amounts sufficient to cover operating expenses and debt service. Failure to adequately underwrite and monitor these loans may result in significant losses to Carver Federal.
The allowance for credit losses could be insufficient to cover Carver's actual loan losses.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. If our assumptions are incorrect, our allowance for credit losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. Material additions to the allowance would materially decrease net income.
In addition, the OCC periodically reviews the allowance for credit losses and may require us to increase our provision for credit losses or recognize further loan charge-offs. A material increase in the allowance for credit losses or loan charge-offs as required by the regulatory authorities would have a material adverse effect on the Company's financial condition and results of operations. Moreover, additions to the allowance may be necessary based on changes in economic and real estate market conditions, new information regarding existing loans and leases, identification of additional impaired loans and leases and other factors, both within and outside of our control. Additions to the allowance could have a negative impact on our results of operations.
Risks Related to Laws and Regulation and Their Enforcement
Failure to comply with the Formal Agreement could adversely affect our business.
In May 2025, the Bank entered into the Formal Agreement with the OCC. The Formal Agreement requires the Bank to, among other things: establish a Compliance Committee of its Board of Directors to specifically monitor and oversee the Bank's compliance with the Formal Agreement. This Committee has already been established and is actively underway. The Formal Agreement also requires the Bank to prepare a three-year strategic plan for the OCC's review, with such strategic plan to establish objectives specifically focusing on the Bank's earnings performance that will include measures for growth, capital, liquidity and balance sheet mix. Finally, the Formal Agreement requires the Bank to prepare an earnings program for the OCC's review designed to improve and sustain the earnings of the Bank. Failure to comply with the Formal Agreement could result in additional supervisory and enforcement actions against the Bank, its directors, or senior executive officers, including the issuance of a cease and desist order or the imposition of civil money penalties.
Any regulatory examination scrutiny or new regulatory requirements arising from the recent events in the banking industry could increase the Company’s expenses and affect the Company’s operations.
The Company anticipates increased regulatory scrutiny, in the course of routine examinations and otherwise, and new regulations directed towards banks, all of which may increase the Company’s costs of doing business and reduce its profitability. Among other things, there may be an increased focus by both regulators and investors on deposit composition and the level of uninsured deposits. As a result, the Bank could face increased scrutiny by regulators and the investor community.
Carver is subject to more stringent capital requirements, which may adversely impact the Company's return on equity, or constrain it from paying dividends or repurchasing shares.
Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management personnel if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier
1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. Regardless of the federal regulatory minimum requirements, 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 Tier 1 leverage ratio and 12% for its total risk-based capital ratio. At March 31, 2025, the Bank's capital level exceeded the regulatory requirements to be considered "well capitalized," but did not meet its IMCR requirements. The Tier 1 leverage ratio was 8.70%, below the 9% IMCR requirement, and the total risk-based capital ratio was 11.56%, below the 12% IMCR requirement. The Bank is working on taking appropriate actions with the goal of achieving the IMCR targets. The application of these capital requirements, including the higher IMCR requirements, could, among other things, result in lower returns on equity, result in regulatory actions if we are unable to comply with such requirements and could limit the Bank's ability to pay dividends to the Company.
There can be no assurance that our regulator will approve payment of our deferred interest on our outstanding trust preferred securities.
Carver is a unitary savings and loan association holding company regulated by the FRB and almost all of its operating assets are owned by Carver Federal. Carver relies, in part, on dividends from the Bank to pay cash dividends to its stockholders, and to engage in share repurchase programs. Under the Formal Agreement, the OCC will monitor all capital distributions, including dividend payments, by the Bank to the Company, and the FRB regulates dividends paid by the Company. As the subsidiary of a savings and loan association holding company, Carver Federal must file a notice or an application (depending on the proposed dividend amount) with the OCC (and a notice with the FRB) prior to the declaration of each capital distribution. The OCC will disallow any proposed dividend, for among other reasons, that would result in the Bank’s failure to meet the OCC minimum capital requirements. Carver has suspended its regular quarterly cash dividend on its common stock. There are no assurances that dividend payments to the Company will resume.
Debenture interest payments on the Carver Statutory Trust I capital securities are subject to prior approval from the Federal Reserve Bank. A streamlined process has been developed for the Company to request regulatory approval to make debenture interest payments, although there is no assurance that the Federal Reserve Bank will continue to approve such quarterly payments. All quarterly payments up to and including the March 2025 payment were made. The Company deferred the interest payment due June 17, 2025 in order to manage liquidity.
The Company and the Bank operate in a highly regulated industry, which limits the manner and scope of business activities.
Carver Federal is subject to extensive supervision, regulation and examination by the OCC, as the Bank's chartering authority and, to a lesser extent, by the FDIC, as insurer of its deposits. The Company is subject to extensive supervision, regulation and examination by the FRB, as regulator of the holding company. As a result, Carver Federal and the Company are limited in the manner in which Carver Federal and the Company conducts its business, undertakes new investments and activities and obtains financing. This regulatory structure is designed primarily for the protection of the deposit insurance funds and depositors, and not to benefit the Company's stockholders. This regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to capital levels, the timing and amount of dividend payments, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. In addition, Carver Federal must comply with significant anti-money laundering and anti-terrorism laws. Government agencies have substantial discretion to impose significant monetary penalties on institutions which fail to comply with these laws.
The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. It also provides that the listing standards of the national securities exchanges shall require listed companies to implement and disclose “clawback” policies mandating the recovery of incentive compensation paid to executive officers in connection with accounting restatements.
The Financial Accounting Standards Board, the SEC and other regulatory entities, periodically change the financial accounting and reporting guidance that governs the preparation of the Company's consolidated financial statements. These changes can be difficult to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply new or revised guidance retroactively.
Risks Related to the Economic Conditions
Carver's results of operations are affected by economic conditions in the New York metropolitan area.
At March 31, 2025, a significant majority of the Bank's lending portfolio was concentrated in the New York metropolitan area. As a result of this geographic concentration, Carver's results of operations are largely dependent on economic conditions in this area. Decreases in real estate values could adversely affect the value of property used as collateral for loans to our borrowers. Adverse changes in the economy caused by inflation, recession, unemployment, state or local real estate laws and regulations or other factors beyond the Bank's control may also continue to have a negative effect on the ability of borrowers to make timely mortgage or business loan payments, which would have an adverse impact on earnings.
The soundness of other financial institutions could negatively affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations.
Risks Related to Market Interest Rates
Changes in interest rates may adversely affect our profitability and financial condition.
We derive our income mainly from the difference or “spread” between the interest earned on loans, securities and other interest-earning assets and interest paid on deposits, borrowings and other interest-bearing liabilities. In general, the larger the spread, the more we earn. When market rates of interest change, the interest we receive on our assets and the interest we pay on our liabilities will fluctuate. This can cause decreases in our spread and can adversely affect our income. From an interest rate risk perspective, for many years the Company was asset sensitive, which indicated that assets were generally re-pricing faster than liabilities. For the past few years, Carver has been liability sensitive, which indicates that liabilities generally re-price faster than assets. In a rising rate environment, liability sensitivity is not preferable as it results in a reduction to our net interest margin.
Inflationary pressure appears to have decreased, but rates remain high. The target interest rate range had been held steady at its highest point between 5.25% to 5.5%, since July 2023, until the Federal Reserve lowered the rates by 50 basis points in September 2024, easing monetary policy for the first time since regular increases began in March 2022. The Federal Reserve approved two additional cuts in November and December 2024, lowering the overnight borrowing rate to a range between 4.25% to 4.5%, but has left interest rates unchanged since its January 2025 meeting.
Interest rates also affect how much money we lend. For example, when interest rates rise, the cost of borrowing increases and loan originations tend to decrease. A rising rate environment can also negatively impact the Company if the higher debt service costs on adjustable-rate loans lead to borrowers' inability to pay contractual obligations. In addition, changes in interest rates can affect the average life of loans and securities. For example, a reduction in interest rates generally results in increased prepayments of loans and mortgage-backed securities, as borrowers refinance their debt in order to reduce their borrowing cost. This causes reinvestment risk, because we generally are not able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities in a declining rate environment.
Changes in market interest rates also impact the value of our interest-earning assets and interest-bearing liabilities. In particular, the unrealized gains and losses on securities available for sale are reported, net of taxes, as accumulated other comprehensive income which is a component of stockholders’ equity. Consequently, declines in the fair value of these instruments resulting from changes in market interest rates may adversely affect stockholders’ equity.
Rising interest rates have decreased the value of the Company’s held-to-maturity securities portfolio, and the Company would realize losses if it were required to sell such securities to meet liquidity needs.
While inflationary pressure appears to have decreased, interest rates remain high and the trading value of previously issued government and other fixed income securities has declined significantly. These securities make up a majority of the
securities portfolio of most banks in the U.S., including a significant portion of the Company’s, resulting in unrealized losses embedded in the U.S. banks’ securities portfolios. While the Company does not currently intend to sell these securities, if the Company were required to sell such securities to meet liquidity needs, it may incur losses, which could impair the Company’s capital, financial condition, and results of operations and require the Company to raise additional capital on unfavorable terms, thereby negatively impacting its profitability. While the Company has taken actions to maximize its funding sources, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs.
Risks Related to the Bank's Operations
Failure to maintain effective systems of internal control over financial reporting and disclosure controls and procedures could have a material adverse effect on the Company’s results of operation and financial condition.
Effective internal control over financial reporting and disclosure controls and procedures are necessary for the Company to provide reliable financial reports and effectively prevent fraud, and to operate successfully as a public company. If the Company cannot provide reliable financial reports or prevent fraud, its reputation and operating results would be harmed. As part of the Company’s ongoing monitoring of internal controls, it may discover material weaknesses or significant deficiencies in its internal controls that require remediation. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The Company continually works on improving its internal controls. However, the Company cannot be certain that these measures will ensure that it implements and maintains adequate controls over its financial processes and reporting. Any failure to maintain effective controls or to timely implement any necessary improvement of the Company’s internal control over financial reporting and disclosure controls and procedures could, among other things, result in losses from fraud or error, harm the Company’s reputation, or cause investors to lose confidence in the Company’s reported financial information, all of which could have a material adverse effect on the Company’s results of operation and financial condition.
A lack of liquidity could adversely affect the Company’s financial condition and results of operations.
Liquidity is essential to the Company’s business. The Company relies on its ability to generate deposits and effectively manage the repayment of its liabilities to ensure that there is adequate liquidity to fund operations. An inability to raise funds through deposits, borrowings, the sale and maturities of loans and securities and other sources could have a substantial negative effect on liquidity. The Company’s most important source of funds is its deposits. Deposit balances can decrease when customers perceive alternative investments as providing a better risk adjusted return, which are strongly influenced by such external factors as the direction of interest rates, local and national economic conditions and the availability and attractiveness of alternative investments. Further, the demand for deposits may be reduced due to a variety of factors such as current negative trends in the banking sector, the level of and/or composition of our uninsured deposits, demographic patterns, changes in customer preferences, reductions in consumers’ disposable income, the monetary policy of the FRB or regulatory actions that decrease customer access to particular products. If customers move money out of bank deposits and into other investments such as money market funds, the Company would lose a relatively low-cost source of funds, which would increase its funding costs and reduce net interest income. Any changes made to the rates offered on deposits to remain competitive with other financial institutions may also adversely affect profitability and liquidity. Other primary sources of funds consist of cash flows from operations, maturities and sales of investment securities and/or loans, brokered deposits, borrowings from the FHLB of New York and/or FRB discount window, and unsecured borrowings. The Company also may borrow funds from third-party lenders, such as other financial institutions. The Company’s access to funding sources in amounts adequate to finance or capitalize its activities, or on terms that are acceptable, could be impaired by factors that affect the Company directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry, a decrease in the level of the Company’s business activity as a result of a downturn in markets or by one or more adverse regulatory actions against the Company or the financial sector in general. Any decline in available funding could adversely impact the Company’s ability to originate loans, invest in securities, meet expenses, or to fulfill obligations such as meeting deposit withdrawal demands, any of which could have a material adverse impact on its liquidity, business, financial condition and results of operations.
Carver may not be able to utilize its income tax benefits.
The Company's ability to utilize the deferred tax asset generated by New Markets Tax Credit income tax benefits as well as other deferred tax assets depends on its ability to generate sufficient taxable income from operations in the future. Since the Bank has not generated sufficient taxable income to utilize tax credits as they were earned, a deferred tax asset has been recorded in the Company's financial statements.
The future recognition of Carver's deferred tax asset is highly dependent upon Carver's ability to generate sufficient taxable income. A valuation allowance is required to be maintained for any deferred tax assets that we estimate are more likely than not to be unrealizable, based on available evidence at the time the estimate is made. In assessing Carver's need for a valuation allowance, we rely upon estimates of future taxable income. Although we use the best available information to estimate future taxable income, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances influencing our projections. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, statutory rates, and future taxable income levels. The Company determined that it would not be able to realize all of its net deferred tax assets in the future, as such a charge to income tax expense in the second quarter of fiscal 2011 was made. Conversely, if the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of the net carrying amounts, the Company would decrease the recorded valuation allowance through a decrease in income tax expense in the period in which that determination was made.
On June 29, 2011, the Company raised $55 million of equity. The capital raise triggered a change in control under Section 382 of the Internal Revenue Code. Generally, Section 382 limits the utilization of an entity's net operating loss carry forwards, general business credits, and recognized built-in losses upon a change in ownership. The Company is subject to an annual limitation of approximately $0.9 million. The Company has a net deferred tax asset (“DTA”) of approximately $32.9 million. Based on management's calculations, the Section 382 limitation has resulted in previous reductions of the deferred tax asset of $5.8 million. The Company also continues to maintain a valuation allowance for the remaining net deferred tax asset of $32.9 million. The Company is unable to determine how much, if any, of the remaining DTA will be utilized.
Risks associated with cybersecurity could negatively affect our earnings.
The financial services industry has experienced an increase in both the number and severity of reported cyber attacks aimed at gaining unauthorized access to bank systems as a way to misappropriate assets and sensitive information, corrupt and destroy data, or cause operational disruptions.
We have established policies and procedures to prevent or limit the impact of security breaches, but such events may still occur or may not be adequately addressed if they do occur. Although we rely on security safeguards to secure our data, these safeguards may not fully protect our systems from compromises or breaches.
We also rely on the integrity and security of a variety of third party processors, payment, clearing and settlement systems, as well as the various participants involved in these systems, many of which have no direct relationship with us. Failure by these participants or their systems to protect our customers' transaction data may put us at risk for possible losses due to fraud or operational disruption.
Our customers are also the target of cyber attacks and identity theft. Large scale identity theft could result in customers' accounts being compromised and fraudulent activities being performed in their name. We have implemented certain safeguards against these types of activities but they may not fully protect us from fraudulent financial losses.
The occurrence of a breach of security involving our customers' information, regardless of its origin, could damage our reputation and result in a loss of customers and business and subject us to additional regulatory scrutiny, and could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.
System failure or breaches of Carver’s network security could subject it to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure Carver and its third-party service providers use has been, and in the future, could be vulnerable to unforeseen problems. Carver’s operations are dependent upon its ability to protect its computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in Carver’s operations could have a material adverse effect on its financial condition and results of operations. Computer break-ins, phishing and other disruptions may occur, and in infrequent cases have occurred, and could jeopardize the security of information stored in and transmitted through Carver’s computer systems and network infrastructure, which may result in significant liability to Carver and may cause existing and potential customers to refrain from doing business with Carver. Although Carver, with the help of third-party service providers, intends to continue to implement security technology and establish operational procedures designed to prevent such damage, its security measures may not be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other
developments could result in a compromise or breach of the algorithms Carver and its third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on Carver’s financial condition and results of operations.
It is possible that a significant amount of time and money may be spent to rectify the harm caused by a breach or hack. While Carver has general liability insurance, there are limitations on coverage as well as dollar amount. Furthermore, cyber incidents carry a greater risk of injury to Carver’s reputation. Finally, depending on the type of incident, banking regulators can impose restrictions on Carver’s business and consumer laws may require reimbursement of customer loss.
We are subject to risks and losses resulting from fraudulent activities that could adversely impact our financial performance and results of operations.
As a bank, we are susceptible to fraudulent activity that has been, and in the future may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. We are most subject to fraud and compliance risk in connection with the origination of loans, ACH transactions, wire transactions, ATM transactions, checking transactions, and debit cards that we have issued to our customers and through our online banking portals.
The Company's business could suffer if it fails to retain skilled people.
The Company's success depends on its ability to attract and retain key employees reflecting current market opportunities and challenges. Competition for the best people is intense, and the Company's size and limited resources may present additional challenges in being able to retain the best possible employees, which could adversely affect the results of operations.
Risks Related to Future Stock Issuances
We may be limited in our ability to access sufficient funding through a public or private equity offering or convertible debt offering.
Nasdaq rules impose restrictions on our ability to raise funds through a private offering of our common stock, convertible debt or similar instruments without obtaining stockholder approval. Under Nasdaq rules, an offering of more than 20% of our total shares outstanding at a price per share less than (i) the closing price of our common stock on the Nasdaq Capital Market immediately preceding the signing of the binding agreement, or (ii) the average closing price of our common stock on the Nasdaq Capital Market for the five trading days immediately preceding the signing of the binding agreement requires stockholder approval unless the offering qualifies as a “public offering” for purposes of the Nasdaq rules. As of March 31, 2025, we had 5,283,564 shares of common stock outstanding. SEC rules impose restrictions on our ability to raise funds through the registered offering of our securities pursuant to a “shelf” registration statement on Form S-3. Under SEC rules, we are prohibited from selling securities under such a registration statement if the aggregate market value of the securities sold thereunder in any twelve-month period exceeds one-third of the market value of our outstanding common stock held by non-affiliates. We may be limited in our ability to access sufficient funding through a public or private equity offering or convertible debt offering.
A future issuance of stock could dilute the value of our common stock.
We may sell additional shares of common stock, or securities convertible into or exchangeable for such shares, in subsequent public or private offerings. As of March 31, 2025, there were 5,283,564 shares of our common stock outstanding. Future issuance of any new shares could cause further dilution in the value of our outstanding shares of common stock. We cannot predict the size of future issuances of our common stock, or securities convertible into or exchangeable for such shares, or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock or the perception that such sales could occur, may adversely affect prevailing market prices of our common stock.
Risks Related to Competitive Matters
Strong competition within the Bank's market areas could adversely affect profits and slow growth.
The New York metropolitan area has a high density of financial institutions, of which many are significantly larger than Carver Federal and with greater financial resources. Additionally, various large out-of-state financial institutions may continue to enter the New York metropolitan area market. All are considered competitors to varying degrees.
Carver Federal faces intense competition both in making loans and attracting deposits. Competition for loans, both locally and in the aggregate, comes principally from mortgage banking companies, commercial banks, savings banks and savings and loan associations. Most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations and credit unions. The Bank also faces competition for deposits from money market mutual funds and other corporate and government securities funds, as well as from other financial intermediaries, such as brokerage firms and insurance companies. Market area competition is a factor in pricing the Bank's loans and deposits, which could reduce net interest income. Competition also makes it more challenging to effectively grow loan and deposit balances. The Company's profitability depends upon its continued ability to successfully compete in its market areas.