CARVER BANCORP INC

Previous wording

•the impact of recent bank closings and the risks related to continued disruption in the banking industry and financial markets;

Current wording

•the impact of bank closings and the risks related to disruption in the banking industry and financial markets;

Previous wording

•the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for credit losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings;

Current wording

•the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for credit losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits;

Previous wording

Carver Bancorp, Inc. is the holding company for Carver Federal Savings Bank, a federally chartered savings bank. The Company is headquartered in New York, New York. The Company conducts business as a unitary savings and loan holding company, and the principal business of the Company consists of the operation of Carver Federal. Carver Federal was founded in 1948 to serve African-American communities whose residents, businesses and institutions had limited access to mainstream financial services. The Bank remains headquartered in Harlem, and predominantly all of its seven branches and four stand-alone 24/7 ATM centers are located in low- to moderate-income neighborhoods. Many of these historically underserved communities have experienced unprecedented growth and diversification of incomes, ethnicity and economic opportunity, after decades of public and private investment.

Current wording

Carver Bancorp, Inc. is the holding company for Carver Federal Savings Bank, a federally chartered savings bank. The Company is headquartered in New York, New York. The Company conducts business as a unitary savings and loan holding company, and the principal business of the Company consists of the operation of Carver Federal. Carver Federal was founded in 1948 to serve African-American communities whose residents, businesses and institutions had limited access to mainstream financial services. The Bank remains headquartered in Harlem, and predominantly all of its 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.

Previous wording

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 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 $775.3 million in assets and 107 employees as of December 31, 2023.

Current wording

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 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 $746.5 million in assets and 110 employees as of June 30, 2024.

Previous wording

Carver Federal's 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 in its market.

Current wording

Carver Federal's 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.

Previous wording

The ACL reflects management's evaluation of the loans presenting identified loss potential, as well as the risk inherent in various components of the portfolio. There is significant judgment applied in estimating the ACL. These assumptions and estimates are susceptible to significant changes based on the current environment. In a continued effort to combat inflation, the Federal Reserve approved an 11th interest rate hike in July 2023, raising the overnight borrowing rate 25 basis points to a target range of 5.25% to 5.5%, the highest it has been in 22 years. Interest rates were held steady at the January 2024 meeting and the

Current wording

The ACL reflects management's evaluation of the loans presenting identified loss potential, as well as the risk inherent in various components of the portfolio. There is significant judgment applied in estimating the ACL. These assumptions and estimates are susceptible to significant changes based on the current environment. In a continued effort to combat inflation, the Federal Reserve approved the 11th interest rate hike in July 2023, raising the overnight borrowing rate 25 basis points to a target range of 5.25% to 5.5%, the highest it has been in 22 years. Interest rates were held steady at the July 2024 meeting, although the Federal Reserve may begin cutting rates later this year. A high interest rate environment can negatively impact the Company if the higher debt service costs on adjustable-rate loans lead to borrowers' inability to pay contractual obligations. Further, any change in the size of the loan portfolio or any of its components could necessitate an increase in the ACL even though there may not be a decline in credit quality or an increase in potential problem loans. As such, there can never be assurance that the ACL accurately reflects the actual loss potential inherent in a loan portfolio.

Previous wording

The ACL is a valuation account that is deducted from the loan portfolio's amortized cost basis to present the net amount expected to be collected on the loans. Loan losses are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Management continues its collection efforts on previously charged-off balances and applies recoveries as additions to the ACL. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The discounted cash flow ("DCF") methodology is used for substantially all pools, where the ACL reflects the difference between the amortized cost and the present value of the expected cash flows.

Current wording

The ACL is a valuation account that is deducted from the loan portfolio's amortized cost basis to present the net amount expected to be collected on the loans. Additions to the allowance are recognized through the provision for credit losses. 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. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The discounted cash flow ("DCF") methodology is used for substantially all pools, applied with a 4-quarter reasonable and supportable forecast period and the loss rate reverts back to the long-term historical loss average with a 12-quarter straight-line reversion period where the ACL reflects the difference between the amortized cost and the present value of the expected cash flows.

Previous wording

•Multifamily - Carver Federal originates and purchases recourse and non-recourse multifamily loans. Multifamily property lending entails additional risks compared to one-to-four family 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 demand for multifamily units. 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.

Current wording

•Multifamily - Carver Federal originates and purchases recourse and non-recourse multifamily loans. The Bank generally requires a debt service coverage ratio at origination of at least 1.30x, and that the maximum loan-to-value ("LTV") at origination not exceed 70% based on the appraised value of the mortgaged property. Multifamily property lending entails additional risks compared to one-to-four family 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 demand for multifamily units. 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.

Previous wording

•Commercial Real Estate ("CRE") - 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 loans are secured by properties that are intended for both commercial and residential use, but predominantly commercial, and are classified as CRE. 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 owner/guarantor. The Bank also requires the assignment of rents of all tenants' leases in the mortgaged property and personal guarantees may be obtained for additional security from these borrowers. CRE loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the complexities involved in valuing the underlying collateral.

Current wording

•Commercial Real Estate ("CRE") - 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 loans are secured by properties that are intended for both commercial and residential use, but predominantly commercial, and are classified as CRE. 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 owner/guarantor. The maximum LTV ratio on CRE loans at origination is generally 70% 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 1.30x. The Bank also requires the assignment of rents of all tenants' leases in the mortgaged property and personal guarantees may be obtained for additional security from these borrowers. CRE loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the complexities involved in valuing the underlying collateral.

Previous wording

•Consumer (including Overdraft accounts) - The Consumer portfolio includes student loans to medical students enrolled in several Caribbean schools, as well as unsecured consumer loans purchased from or originated through strategic partnerships with Bankers Healthcare Group, LLC and Upstart Holdings, Inc. Consumer loans are typically unsecured and more susceptible to declining economic conditions.

Current wording

•Consumer (including Overdraft accounts) - The Consumer portfolio includes student loans to medical students enrolled in several medical schools, throughout the United States and the Caribbean, as well as unsecured consumer loans purchased from or originated through strategic partnerships with Bankers Healthcare Group, LLC and Upstart Holdings, Inc. Consumer loans are typically unsecured and more susceptible to declining economic conditions.

Previous wording

Because expected loss predictions may not adequately project the level of losses inherent in a portfolio, the Bank reviews a number of qualitative factors to determine if reserves should be adjusted based upon any of those factors. As the risk ratings worsen, some of the qualitative factors tend to increase. A number of qualitative factors are considered including economic forecast uncertainty, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, impact of rising rates, external factors and other considerations. Although the quantitative calculation includes a measurement of statistical economic conditions based on national averages, an additional analysis is performed at the qualitative level that applies specifically to the Company's geographic area and the banking industry that includes reasonable and supportable forecasts.

Current wording

Because expected loss predictions may not adequately project the level of losses inherent in a portfolio, the Bank reviews a number of qualitative factors to determine if reserves should be adjusted based upon any of those factors. As the risk ratings deteriorate, some of the qualitative factors tend to increase. A number of qualitative factors are considered including economic forecast uncertainty, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, impact of rising rates, external factors and other considerations. Although the quantitative calculation includes a measurement of statistical economic conditions based on national averages, an additional analysis is performed at the qualitative level that applies specifically to the Company's geographic area and the banking industry that includes reasonable and supportable forecasts.

Previous wording

Management believes Carver Federal’s short-term assets have sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash requirements, including interest payments on our subordinated debt securities. Additionally, Carver Federal has other sources of liquidity including the ability to borrow from the Federal Home Loan Bank of New York (“FHLB-NY”) utilizing unpledged mortgage-backed securities and certain mortgage loans, the sale of available-for-sale securities and the sale of certain mortgage loans. Net borrowings decreased $4.5 million, or 8.8%, to $46.6 million at December 31, 2023, compared to $51.1 million at March 31, 2023. The Bank repaid a $10.0 million overnight advance secured from the FHLB-NY on March 31, 2023 and secured a $3.0 million 18-month advance from the new FHLB-NY 0% Development Advance (ZDA) Program during the second quarter of the current fiscal year. At December 31, 2023, the Bank had $28.0 million outstanding advances from the FHLB-NY. At December 31, 2023, based on available collateral held at the FHLB-NY, Carver Federal had the ability to borrow an additional $8.2 million on a secured basis, utilizing mortgage-related loans and securities as collateral. The Bank has the ability to pledge additional loans as collateral in order to borrow up to 30% of its total assets. The Company also had $13.4 million in subordinated debt securities and $5.0 million in low interest loans outstanding as of December 31, 2023.

Current wording

Management believes Carver Federal’s short-term assets have sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash requirements, including interest payments on our subordinated debt securities. Additionally, Carver Federal has other sources of liquidity including the ability to borrow from the Federal Home Loan Bank of New York (“FHLB-NY”) utilizing unpledged mortgage-backed securities and certain mortgage loans, the sale of available-for-sale securities and the sale of certain mortgage loans. Net borrowings increased $1.8 million, or 3.9%, to $48.3 million at June 30, 2024, compared to $46.5 million at March 31, 2024. The Bank secured a $1.8 million 12-month fixed-rate advance through the second round of the FHLB-NY 0% Development Advance (ZDA) Program, which provides members with subsidized funding in the form of interest rate credits to assist in originating or purchasing loans that meet an eligibility criteria. At June 30, 2024, the Bank had $29.8 million outstanding advances from the FHLB-NY. At June 30, 2024, based on available collateral held at the FHLB-NY, Carver Federal had the ability to borrow an additional $1.9 million on a secured basis, utilizing mortgage-related loans and securities as collateral. The Bank has the ability to pledge additional loans as collateral in order to borrow up to 30% of its total assets. The Company also had $13.4 million in subordinated debt securities and $5.0 million in low interest loans outstanding as of June 30, 2024.

Previous wording

The Bank's most liquid assets are cash and short-term investments. The level of these assets is dependent on the Bank's operating, investing and financing activities during any given period. At December 31, 2023 and March 31, 2023, assets qualifying for short-term liquidity, including cash and cash equivalents, totaled $75.2 million and $42.6 million, respectively.

Current wording

The Bank's most liquid assets are cash and short-term investments. The level of these assets is dependent on the Bank's operating, investing and financing activities during any given period. At June 30, 2024 and March 31, 2024, assets qualifying for short-term liquidity, including cash and cash equivalents, totaled $46.3 million and $59.0 million, respectively.

Previous wording

During fiscal year 2022, the Company entered into a sales agreement with an agent to sell, from time to time, our common stock having an aggregate offering price of up to $20.0 million, in an “at the market offering.” During fiscal year 2022, we sold an aggregate of 397,367 shares of our common stock pursuant to the terms of such sales agreement, for aggregate gross proceeds of approximately $3.1 million. Aggregate net proceeds received were approximately $3.0 million, after deducting expenses and commissions paid to the agent. There were no additional offerings during fiscal year 2023 and the nine months ended December 31, 2023.

Current wording

During fiscal year 2022, the Company entered into a sales agreement with an agent to sell, from time to time, our common stock having an aggregate offering price of up to $20.0 million, in an “at the market offering.” During fiscal year 2022, we sold an aggregate of 397,367 shares of our common stock pursuant to the terms of such sales agreement, for aggregate gross proceeds of approximately $3.1 million. Aggregate net proceeds received were approximately $3.0 million, after deducting expenses and commissions paid to the agent. There were no additional offerings during fiscal years 2023, 2024 and the three months ended June 30, 2024.

Previous wording

The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During the nine months ended December 31, 2023, total cash and cash equivalents increased $32.6 million to $75.2 million at December 31, 2023, compared to $42.6 million at March 31, 2023, reflecting cash provided by financing activities of $58.9 million, partially offset by cash used in investing activities of $22.5 million and cash used in operating activities of $3.7 million. Net cash provided by financing activities of $58.9 million resulted from a net increase in deposits of $62.4 million and a $5.5 million increase in long-term borrowings. The Bank secured a $3.0 million 18-month advance from the new FHLB-NY 0% Development Advance (ZDA) Program during the second quarter of the current fiscal year and the Company borrowed $2.5 million through a long-term unsecured, below-market rate term loan from a third party to finance eligible loans offered through the Bank's community investment initiatives and loan programs. In addition, the Company issued common shares in a private placement transaction during the second quarter for gross proceeds of $1.0 million. These were offset by the repayment of a $10.0 million FHLB-NY overnight advance secured on March 31, 2023. Net cash used in investing activities of $22.5 million was attributable to loan purchases and originations, net of repayments and payoffs, partially offset by investment paydowns. Net cash used in operating activities in the prior period was primarily due to a $9.2 million decrease in other liabilities related to the clearing of a $10.5 million outstanding teller check from the previous fiscal year.

Current wording

The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During the three months ended June 30, 2024, total cash and cash equivalents decreased $12.7 million to $46.3 million at June 30, 2024, compared to $59.0 million at March 31, 2024, reflecting cash used in financing activities of $6.7 million, cash used in investing activities of $3.6 million and cash used in operating activities of $2.3 million. Net cash used in financing activities of $6.7 million resulted from a net decrease in deposits of $8.5 million, partially offset by a $1.8 million increase in long-term borrowings. Certificates of deposit decreased $6.6 million, primarily due to an $8.5 million decrease in brokered deposits from the maturity of DTC brokered CDs that had been secured during fiscal year 2024 to ensure the availability of sufficient liquidity for projected loan closings. In addition, the Bank secured a $1.8 million 12-month fixed-rate advance through the second round of the FHLB-NY 0% Development Advance (ZDA) Program. Net cash used in investing activities of $3.6 million was attributable to loan purchases and originations, net of repayments and payoffs, partially offset by investment paydowns.

Previous wording

On May 24, 2016, the Bank entered into a Formal Agreement ("the Agreement") with the OCC to undertake certain compliance-related and other actions. As a result of the Agreement, Carver was issued an IMCR letter by the OCC, which requires the Bank to maintain minimum regulatory capital levels of 9% for its Tier1 leverage ratio and 12% for its total risk-based capital ratio. The Bank was released from the Agreement on January 18, 2023. The IMCR remains in effect. At December 31, 2023, the Bank's capital level exceeded the regulatory requirements and its IMCR requirements with a Tier 1 leverage capital ratio of 9.77%, Common Equity Tier 1 capital ratio of 11.72%, Tier 1 risk-based capital ratio of 11.72%, and a total risk-based capital ratio of 12.69%.

Current wording

On May 24, 2016, the Bank entered into a Formal Agreement ("the Agreement") with the OCC to undertake certain compliance-related and other actions. As a result of the Agreement, Carver was issued an IMCR letter by the OCC, which requires the Bank to maintain minimum regulatory capital levels of 9% for its Tier1 leverage ratio and 12% for its total risk-based capital ratio. The Bank was released from the Agreement on January 18, 2023. The IMCR remains in effect. At June 30, 2024, the Bank's capital level exceeded the regulatory requirements and its IMCR requirements with a Tier 1 leverage capital ratio of 9.53%, Common Equity Tier 1 capital ratio of 11.67%, Tier 1 risk-based capital ratio of 11.67%, and a total risk-based capital ratio of 12.66%.

Previous wording

The Company continues to be subject to similar requirements that the Bank was subject to under the Agreement. The Company must provide notice to the FRB prior to affecting any change in its directors or senior executive officers. The Company is also subject to the restrictions on golden parachute and indemnification payments, as set forth in 12 C.F.R. Part 359. Written approval of 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 could affect our operations and financial performance.

Current wording

Company must provide notice to the FRB prior to effecting any change in its directors or senior executive officers. The Company is also subject to the restrictions on golden parachute and indemnification payments, as set forth in 12 C.F.R. Part 359. Written approval of 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 could affect our operations and financial performance.

Previous wording

During the period 2004 through 2009, the Bank originated 1-4 family residential mortgage loans and sold the loans to the Federal National Mortgage Association (“FNMA”). The loans were sold to FNMA with the standard representations and warranties for loans sold to the Government Sponsored Entities ("GSEs"). The Bank may be required to repurchase these loans in the event of breaches of these representations and warranties. In the event of a repurchase, the Bank is typically required to pay the unpaid principal balance as well as outstanding interest and fees. The Bank then recovers the loan or, if the loan has been foreclosed, the underlying collateral. The Bank is exposed to any losses on repurchased loans after giving effect to any recoveries on the collateral. The Bank has not received a request to repurchase any of these loans since the second quarter of fiscal 2015, and there have not been any additional requests from FNMA for loans to be reviewed. At December 31, 2023, the Bank continues to service 76 loans with a principal balance of $11.6 million for FNMA that had been sold with standard representations and warranties.

Current wording

During the period 2004 through 2009, the Bank originated 1-4 family residential mortgage loans and sold the loans to the Federal National Mortgage Association (“FNMA”). The loans were sold to FNMA with the standard representations and warranties for loans sold to the Government Sponsored Entities ("GSEs"). The Bank may be required to repurchase these loans in the event of breaches of these representations and warranties. In the event of a repurchase, the Bank is typically required to pay the unpaid principal balance as well as outstanding interest and fees. The Bank then recovers the loan or, if the loan has been foreclosed, the underlying collateral. The Bank is exposed to any losses on repurchased loans after giving effect to any recoveries on the collateral. The Bank has not received a request to repurchase any of these loans since the second quarter of fiscal 2015, and there have not been any additional requests from FNMA for loans to be reviewed. At June 30, 2024, the Bank continues to service 74 loans with a principal balance of $11.2 million for FNMA that had been sold with standard representations and warranties.

Previous wording

Management has established a representation and warranty reserve for losses associated with the repurchase of mortgage loans sold by the Bank to FNMA that we consider to be both probable and reasonably estimable. These reserves are reported in the consolidated statement of financial condition as a component of other liabilities. The table below summarizes changes in our representation and warranty reserves during the nine months ended December 31, 2023:

Current wording

Management has established a representation and warranty reserve for losses associated with the repurchase of mortgage loans sold by the Bank to FNMA that we consider to be both probable and reasonably estimable. These reserves are reported in the consolidated statement of financial condition as a component of other liabilities. The table below summarizes changes in our representation and warranty reserves during the three months ended June 30, 2024:

Previous wording

At December 31, 2023, total assets were $775.3 million, reflecting an increase of $52.1 million, or 7.2%, from total assets of $723.2 million at March 31, 2023. The increase was primarily attributable to increases of $32.6 million in cash and cash equivalents and $26.1 million in the Bank's net loan portfolio, partially offset by a decrease of $5.0 million in the Bank's investment portfolio.

Current wording

At June 30, 2024, total assets were $746.5 million, reflecting a decrease of $10.3 million, or 1.4%, from total assets of $756.8 million at March 31, 2024. The decrease was primarily attributable to decreases of $12.7 million in cash and cash equivalents and $1.1 million in the Bank's investment portfolio, partially offset by an increase of $3.9 million in the Bank's net loan portfolio.

Previous wording

Total cash and cash equivalents increased $32.6 million, or 76.5%, from $42.6 million at March 31, 2023 to $75.2 million at December 31, 2023. The increase in cash was primarily due to an increase in total deposits and paydowns received on investment securities, partially offset by net loan activity and a decrease in advances from the FHLB-NY and other borrowed money. In addition, the Bank received $2.5 million during the second quarter for the CDFI Fund's Equitable Recovery Program (ERP) award.

Current wording

Total cash and cash equivalents decreased $12.7 million, or 21.5%, from $59.0 million at March 31, 2024 to $46.3 million at June 30, 2024. The decrease in cash was primarily due to a decrease in total deposits and increase in net loan activity, partially offset by paydowns received on investment securities and an increase in advances from the FHLB-NY and other borrowed money.

Previous wording

Total investment securities decreased $5.0 million, or 8.9%, to $51.2 million at December 31, 2023, compared to $56.2 million at March 31, 2023 due to scheduled principal payments received of approximately $4.7 million and a $0.1 million increase in unrealized losses in the available-for-sale portfolio.

Current wording

Total investment securities decreased $1.1 million, or 2.2%, to $48.9 million at June 30, 2024, compared to $50.0 million at March 31, 2024 due to scheduled principal payments received of approximately $0.8 million and a $0.3 million increase in unrealized losses in the available-for-sale portfolio.

Previous wording

Gross portfolio loans increased $26.8 million, or 4.5%, to $624.7 million at December 31, 2023, compared to $597.9 million at March 31, 2023 due to new loan originations of $50.6 million and loan pool purchases of $29.5 million. These were partially offset by attrition and payoffs of $53.5 million. The level of payoffs during the current fiscal year, significantly lower than the prior period's, can be attributed to borrowers continuing to sell commercial real estate, although now at a slower pace, in order to lock in values, as well as paydowns on lines of credit for borrowers looking for opportunities to reduce interest expense in the current rate environment.

Current wording

Gross portfolio loans increased $4.0 million, or 0.6%, to $626.9 million at June 30, 2024, compared to $622.9 million at March 31, 2024, primarily due to new loan originations of $14.9 million and loan pool purchases of $1.2 million. These were partially offset by attrition and payoffs of $11.7 million. The level of payoffs can be attributed to borrowers continuing to sell commercial real estate, although now at a slower pace, in order to lock in values, as well as paydowns on lines of credit for borrowers looking for opportunities to reduce interest expense in the current rate environment.

Previous wording

Total liabilities increased $54.6 million, or 8.1%, to $732.6 million at December 31, 2023, compared to $678.0 million at March 31, 2023, primarily due to an increase in total deposits, partially offset by a decrease in advances from the FHLB-NY and other borrowed money.

Current wording

Total liabilities decreased $7.9 million, or 1.1%, to $706.6 million at June 30, 2024, compared to $714.5 million at March 31, 2024, primarily due to a decrease in total deposits, partially offset by an increase in advances from the FHLB-NY and other borrowed money.

Previous wording

Total equity decreased $2.5 million, or 5.5%, to $42.7 million at December 31, 2023, compared to $45.2 million at March 31, 2023. The decrease was due to a net loss of $3.0 million, coupled with an increase of $0.1 million in unrealized losses on securities available-for-sale for the nine month period ended December 31, 2023. In addition, the Bank recorded a $0.7 million decrease to retained earnings to reflect the cumulative effect adjustment related to the adoption of CECL (Topic 326), effective April 1, 2023. These decreases were partially offset by a $1.0 million increase in capital as a result of the issuance of common shares in a private placement during the second quarter.

Current wording

Total equity decreased $2.4 million, or 5.7%, to $39.9 million at June 30, 2024, compared to $42.3 million at March 31, 2024. The decrease was due to a net loss of $2.2 million, coupled with an increase of $0.3 million in unrealized losses on securities available-for-sale for the three month period ended June 30, 2024.

Previous wording

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and in connection with its overall investment strategy. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are not recorded in the consolidated financial statements. Such instruments primarily include lending obligations, including commitments to originate mortgage and consumer loans and to fund unused lines of credit. At December 31, 2023, the Company had $8.5 million in outstanding commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated statements of condition when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless such commitments are unconditionally cancellable, through the provision for credit losses expense. The allowance for credit losses on off-balance sheet credit exposures as of December 31, 2023 was $9 thousand and is included in Other Liabilities in the consolidated statements of financial condition.

Current wording

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and in connection with its overall investment strategy. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are not recorded in the consolidated financial statements. Such instruments primarily include lending obligations, including commitments to originate mortgage and consumer loans and to fund unused lines of credit. At June 30, 2024, the Company had $5.5 million in outstanding commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated statements of condition when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless such commitments are unconditionally cancellable, through the provision for credit losses expense. The allowance for credit losses on off-balance sheet credit exposures as of June 30, 2024 was $12 thousand and is included in Other Liabilities in the consolidated statements of financial condition.

Previous wording

Comparison of Operating Results for the Three and Nine Months Ended December 31, 2023 and 2022

Current wording

Comparison of Operating Results for the Three Months Ended June 30, 2024 and 2023

Previous wording

The Company reported net income of $19 thousand for the three months ended December 31, 2023, compared to a net loss of $1.1 million for the comparable prior year quarter. The change in our results was primarily driven by an increase in non-interest income and a recovery of credit loss in the current quarter compared to a provision for loan loss in the prior year quarter. This was offset by a decrease in net interest income and increase in non-interest expense. For the nine months ended December 31, 2023, the Company reported a net loss of $3.0 million, compared to a net loss of $2.9 million for the prior year period. The change in our results was primarily driven by a decrease in net interest income after provision for credit losses and an increase in non-interest expense, partially offset by an increase in non-interest income compared to the prior year periods.

Current wording

The Company reported net loss of $2.2 million for the three months ended June 30, 2024, compared to a net loss of $1.4 million for the comparable prior year quarter. The change in our results was primarily driven by increases in interest expense, non-interest expense and provision for credit losses, partially offset by an increase in interest income compared to the prior year period.

Previous wording

The following table reflects selected operating ratios for the three and nine months ended December 31, 2023 and 2022 (unaudited):

Current wording

The following table reflects selected operating ratios for the three months ended June 30, 2024 and 2023 (unaudited):

Previous wording

The Company’s profitability is primarily dependent upon net interest income and is also affected by the provision for credit losses, non-interest income, non-interest expense and income taxes. Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned and paid. The Company’s net interest income is significantly impacted by changes in interest rate and market yield curves. Net interest income decreased $0.2 million, or 3.5%, to $5.5 million for the three months ended December 31, 2023, compared to $5.7 million for the same quarter last year. Net interest income decreased $0.7 million, or 4.1%, to $16.4 million for the nine months ended December 31, 2023, compared to $17.1 million for the prior year period.

Current wording

The Company’s profitability is primarily dependent upon net interest income and is also affected by the provision for credit losses, non-interest income, non-interest expense and income taxes. Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned and paid. The Company’s net interest income is significantly impacted by changes in interest rate and market yield curves. Net interest income remained flat at $5.5 million for the three months ended June 30, 2024, compared to the same quarter last year.

Previous wording

The following tables set forth certain information relating to the Company’s average interest-earning assets and average interest-bearing liabilities, and their related average yields and costs for the three and nine months ended December 31, 2023 and 2022. Average yields are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods shown. Average balances are derived from daily or month-end balances as available and applicable. Management does not believe that the use of average monthly balances instead of average daily balances represents a material difference in information presented. The average balance of loans includes loans on which the Company has discontinued accruing interest. The yield includes fees, which are considered adjustment to yield.

Current wording

The following table sets forth certain information relating to the Company’s average interest-earning assets and average interest-bearing liabilities, and their related average yields and costs for the three months ended June 30, 2024 and 2023. Average yields are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods shown. Average balances are derived from daily or month-end balances as available and applicable. Management does not believe that the use of average monthly balances instead of average daily balances represents a material difference in information presented. The average balance of loans includes loans on which the Company has discontinued accruing interest. The yield includes fees, which are considered adjustment to yield.

Previous wording

Interest income increased $1.3 million, or 18.1%, to $8.5 million for the three months ended December 31, 2023, compared to $7.2 million for the prior year quarter. For the nine months ended December 31, 2023, interest income increased $4.0 million, or 19.7%, to $24.3 million, compared to $20.3 million for the prior year period. Interest income on loans increased $0.9 million and $2.8 million for the three and nine months ended December 31, 2023, respectively, primarily due to an increase in the average yield on the portfolio, coupled with a $33.8 million, or 5.8%, and $32.1 million, or 5.6% increase in average loan balances for the two comparative periods, respectively. Interest income on money market investments increased $0.3 million and $1.0 million for the three and nine months ended December 31, 2023, respectively, due to an increase in interest rates on the Bank's interest-bearing account at the Federal Reserve Bank. Interest income on investment securities was also higher for the three and nine months ended December 31, 2023, despite a decrease in average balances, due to an increase in yields compared to the prior year periods.

Current wording

Interest income increased $1.4 million, or 17.9%, to $9.2 million for the three months ended June 30, 2024, compared to $7.8 million for the prior year quarter. Interest income on loans increased $1.3 million, or 19.1%, for the three months ended June 30, 2024, primarily due to an increase in the average yield on the portfolio of 61 basis points, coupled with a $27.2 million, or 4.6%, increase in average loan balances for the current period. Interest income on money market investments increased $0.2 million, or 40.0%, for the three months ended June 30, 2024, due to an increase in average interest rates on the Bank's interest-bearing account at the Federal Reserve Bank, combined with an $8.9 million increase in the average balance on deposit.

Previous wording

Interest expense increased $1.5 million to $3.0 million for the three months ended December 31, 2023, compared to $1.5 million for the prior year quarter. For the nine months ended December 31, 2023, interest expense increased $4.7 million, to $7.9 million, compared to $3.2 million for the prior year period. The higher interest rate environment is reflected in the average cost of interest-bearing deposits and borrowing costs for the comparative periods. Interest expense on deposits increased $1.3 million and $3.7 million for the three and nine months ended December 31, 2023, respectively, primarily due to an increase in the average balance of higher-cost certificate of deposits and an increase in the average rates paid on money market and certificate of deposit accounts. Interest expense on borrowings increased $0.3 million and $0.9 million for the three and nine months ended December 31, 2023, respectively, due to increases in both the average outstanding balances and average borrowing rates compared to the prior year periods.

Current wording

Interest expense increased $1.4 million, or 60.9% to $3.7 million for the three months ended June 30, 2024, compared to $2.3 million for the prior year quarter. The higher interest rate environment is reflected in the average cost of interest-bearing deposits for the current period. Interest expense on deposits increased $1.4 million for the three months ended June 30, 2024, primarily due to an increase in the average balance of higher-cost certificate of deposits as well as increases in the average rates paid on interest-bearing checking, savings and money market accounts.

Previous wording

The following table summarizes the activity in the ACL for the nine months ended December 31, 2023 and 2022 and the fiscal year ended March 31, 2023:

Current wording

The following table summarizes the activity in the ACL for the three months ended June 30, 2024 and 2023 and the fiscal year ended March 31, 2024:

Previous wording

The Company recorded a $97 thousand recovery of credit loss for the three months ended December 31, 2023, compared to a $305 thousand provision for loan loss for the prior year quarter. The current period reflects further adjustments to the qualitative factors incorporated in the expected loss model the Company converted to upon the Bank's adoption of CECL. Net charge-offs of $13 thousand were recognized during the third quarter, compared to net charge-offs of $660 thousand for the prior year quarter. For the nine months ended December 31, 2023, the Company recorded a $77 thousand provision for credit loss, compared to a $89 thousand provision for loan loss for the prior year period. Net charge-offs of $77 thousand were recognized for the nine months ended December 31, 2023, compared to net charge-offs of $559 thousand in the prior year period.

Current wording

The Company recorded a $260 thousand provision for credit losses for the three months ended June 30, 2024, compared to a $6 thousand provision for credit losses for the prior year quarter. The increase in the provision was attributed to a $128 thousand reversal of a previous recovery, increase in the loan portfolio and some minor adjustments to the qualitative factors incorporated in the expected loss model for the current period. Net charge-offs of $176 thousand were recognized during the first quarter, compared to net charge-offs of $45 thousand for the prior year quarter.

Previous wording

At December 31, 2023, nonaccrual loans totaled $26.9 million, or 3.5% of total assets, compared to $12.3 million, or 1.7% of total assets at March 31, 2023. Of the total nonaccrual loans reported at March 31, 2023, approximately $4.0 million were successfully resolved prior to December 31, 2023, through either payment in full or improved borrower performance. However, in December 2023, two owner occupied loans totaling approximately $11.0 million were placed into nonaccrual status due to operating issues related to the individual owner occupants. The increase in nonaccrual loans related to these two loans did not impact the reserves due to excess collateral coverage. The ACL was $5.9 million at December 31, 2023, which represents a ratio of the ACL to nonaccrual loans of 21.9% compared to a ratio of 42.6% at March 31, 2023. The ratio of the ACL to total loans was 0.94% at December 31, 2023, compared to 0.87% at March 31, 2023.

Current wording

At June 30, 2024, nonaccrual loans totaled $10.3 million, or 1.4% of total assets, compared to $11.8 million, or 1.6% of total assets at March 31, 2024. The ACL was $6.0 million at June 30, 2024, which represents a ratio of the ACL to nonaccrual loans of 57.8% compared to a ratio of 49.9% at March 31, 2024. The ratio of the ACL to total loans was 0.95% at June 30, 2024, compared to 0.94% at March 31, 2024.

Previous wording

The Bank may from time to time agree to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the 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 December 31, 2023, modified loans to a borrower experiencing financial difficulty totaled $6.8 million, of which $5.8 million were classified as performing.

Current wording

The Bank may from time to time agree to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the 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 June 30, 2024, modified loans to a borrower experiencing financial difficulty totaled $6.4 million, of which $5.7 million were classified as performing.

Previous wording

At December 31, 2023, non-performing assets totaled $27.0 million, or 3.5% of total assets compared to $15.7 million, or 1.7% of total assets at March 31, 2023. The following table sets forth information with respect to the Bank’s non-performing assets at the dates indicated:

Current wording

At June 30, 2024, non-performing assets totaled $10.4 million, or 1.4% of total assets compared to $11.8 million, or 1.6% of total assets at March 31, 2024. The following table sets forth information with respect to the Bank’s non-performing assets at the dates indicated:

Previous wording

In the past, the Bank originated or purchased a limited amount of subprime loans (which are defined by the Bank as those loans where the borrowers have FICO scores of 660 or less at origination). At December 31, 2023, the Bank had $2.7 million in subprime loans, or 0.4% of its total loan portfolio, of which $0.8 million are non-performing loans.

Current wording

In the past, the Bank originated or purchased a limited amount of subprime loans (which are defined by the Bank as those loans where the borrowers have FICO scores of 660 or less at origination). At June 30, 2024, the Bank had $2.6 million in subprime loans, or 0.4% of its total loan portfolio, of which $0.7 million are non-performing loans.

Previous wording

Non-interest expense increased $0.6 million, or 8.0%, to $8.1 million for the three months ended December 31, 2023, compared to $7.5 million for the prior year quarter. For the nine months ended December 31, 2023, non-interest expense increased $1.3 million, or 5.7%, to $24.0 million, compared to $22.7 million for the prior year period. Employee compensation and benefits increased compared to the prior year periods due to the Company's transition to a new payroll and benefits administrator during the first quarter of the current fiscal year, and new permanent staff hired to replace temporary consultants. Data processing expense was higher due to upgraded cybersecurity systems and the implementation of service contracts for new consumer loan and deposit products. Other non-interest expense increased due to higher legal expense and operating charge-offs compared to the prior year periods.

Current wording

Non-interest expense increased $0.5 million, or 6.5%, to $8.2 million for the three months ended June 30, 2024, compared to $7.7 million for the prior year quarter. Employee compensation and benefits increased compared to the prior year period due to merit increases and recruiting fees. Net equipment expense was higher due to upgraded cybersecurity systems and the implementation of service contracts for new consumer loan and deposit products. Other non-interest expense increased due to higher legal expense compared to the prior year period.