10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2015
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 1-13007
CARVER BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 
13-3904174
(I.R.S. Employer Identification No.)
 
 
 
75 West 125th Street, New York, New York
(Address of Principal Executive Offices)
 
10027
(Zip Code)
Registrant’s telephone number, including area code: (718) 230-2900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes         o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ Yes        oNo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
o Large Accelerated Filer
o Accelerated Filer
o Non-accelerated Filer
þ  Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at February 9, 2016
Common Stock, par value $0.01
 
3,696,087



TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Exhibit 11
 
 Exhibit 31.1
 
 Exhibit 31.2
 
 Exhibit 32.1
 
 Exhibit 32.2
 
 Exhibit 101
 



PART I. FINANCIAL INFORMATION

CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
December 31, 2015
 
March 31, 2015
$ in thousands except per share data
(unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents:
 
 
 
Cash and due from banks
$
45,572

 
$
44,864

Money market investments
504

 
6,128

Total cash and cash equivalents
46,076

 
50,992

Restricted cash
211

 
6,354

Investment securities:
 
 
 
Available-for-sale, at fair value
68,192

 
101,185

Held-to-maturity, at amortized cost (fair value of $15,721 and $12,231 at December 31, 2015 and March 31, 2015, respectively)
15,731

 
11,922

Total investment securities
83,923

 
113,107

 
 
 
 
Loans held-for-sale (“HFS”)
2,404

 
2,576

 
 
 
 
Loans receivable:
 
 
 
Real estate mortgage loans
524,624

 
412,204

Commercial business loans
76,867

 
70,555

Consumer loans
85

 
434

Loans, net
601,576

 
483,193

Allowance for loan losses
(5,174
)
 
(4,477
)
Total loans receivable, net
596,402

 
478,716

Premises and equipment, net
6,455

 
7,075

Federal Home Loan Bank of New York (“FHLB-NY”) stock, at cost
3,783

 
3,519

Accrued interest receivable
3,677

 
2,781

Other assets
11,202

 
11,266

Total assets
$
754,133

 
$
676,386

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
LIABILITIES
 
 
 
Deposits:
 
 
 
Savings
$
93,302

 
$
95,009

Non-interest bearing checking
66,222

 
50,731

Interest-bearing checking
32,581

 
30,860

Money market
168,257

 
148,702

Certificates of deposit
235,594

 
200,123

Mortgagors deposits
1,656

 
2,336

Total deposits
597,612

 
527,761

Advances from the FHLB-NY and other borrowed money
88,403

 
83,403

Other liabilities
13,053

 
10,243

Total liabilities
699,068

 
621,407

 
 
 
 
EQUITY
 
 
 
Preferred stock, (par value $0.01 per share: 45,118 Series D shares, with a liquidation preference of $1,000 per share, issued and outstanding)
45,118

 
45,118

Common stock (par value $0.01 per share: 10,000,000 shares authorized; 3,698,031 shares issued; 3,696,087 shares outstanding at December 31, 2015 and March 31, 2015, respectively)
61

 
61

Additional paid-in capital
55,470

 
55,468

Accumulated deficit
(43,757
)
 
(44,206
)
Treasury stock, at cost (1,944 shares at December 31, 2015 and March 31, 2015)
(417
)
 
(417
)
Accumulated other comprehensive loss
(1,410
)
 
(1,045
)
Total equity
55,065

 
54,979

Total liabilities and equity
$
754,133

 
$
676,386

                
See accompanying notes to consolidated financial statements

1



CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended December 31,
 
Nine Months Ended
December 31,
$ in thousands
 
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
 
Loans
 
$
6,467

 
$
4,677

 
$
18,283

 
$
14,838

Mortgage-backed securities
 
192

 
197

 
579

 
595

Investment securities
 
317

 
345

 
999

 
998

Money market investments
 
33

 
46

 
87

 
181

Total interest income
 
7,009

 
5,265

 
19,948

 
16,612

 
 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
841

 
741

 
2,399

 
2,182

Advances and other borrowed money
 
330

 
272

 
924

 
815

Total interest expense
 
1,171

 
1,013

 
3,323

 
2,997

 
 
 
 
 
 
 
 
 
Net interest income
 
5,838

 
4,252

 
16,625

 
13,615

Provision for (recovery) loan losses
 
728

 
(1,151
)
 
1,489

 
(2,645
)
Net interest income after provision for loan losses
 
5,110

 
5,403

 
15,136

 
16,260

 
 
 
 
 
 
 
 
 
Non-interest income:
 
 
 
 
 
 
 
 
Depository fees and charges
 
820

 
887

 
2,297

 
2,707

Loan fees and service charges
 
114

 
282

 
457

 
495

Gain on sale of securities
 

 
3

 
1

 
8

Gain (loss) on sale of loans, net
 
305

 

 
499

 
(2
)
Gain on real estate owned
 
146

 
41

 
164

 
44

Gain on sale of building
 
1,203

 

 
1,203

 

Lower of cost or market adjustment on loans held-for-sale
 
1

 
1

 
1

 
2

Other
 
152

 
194

 
444

 
919

Total non-interest income
 
2,741

 
1,408

 
5,066

 
4,173

 
 
 
 
 
 
 
 
 
Non-interest expense:
 
 
 
 
 
 
 
 
Employee compensation and benefits
 
2,921

 
2,997

 
8,430

 
8,784

Net occupancy expense
 
1,199

 
919

 
3,320

 
2,763

Equipment, net
 
150

 
229

 
475

 
656

Data processing
 
455

 
77

 
1,036

 
398

Consulting fees
 
245

 
369

 
558

 
767

Federal deposit insurance premiums
 
135

 
189

 
390

 
542

Other
 
2,242

 
2,009

 
5,382

 
6,178

Total non-interest expense
 
7,347

 
6,789

 
19,591

 
20,088

 
 
 
 
 
 
 
 
 
Income before income taxes
 
504

 
22

 
611

 
345

   Income tax expense
 
67

 
62

 
160

 
135

Consolidated net income (loss)
 
437

 
(40
)
 
451

 
210

Less: Net loss attributable to non-controlling interest
 

 
(151
)
 

 
(281
)
Net income attributable to Carver Bancorp, Inc.
 
$
437

 
$
111

 
$
451

 
$
491

 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.12

 
$
0.03

 
$
0.12

 
$
0.13

Diluted
 
0.12

 
0.03

 
0.12

 
0.13

                
See accompanying notes to consolidated financial statements









2


CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
$ in thousands
 
2015
 
2014
 
2015
 
2014
Net income attributable to Carver Bancorp, Inc.
 
$
437

 
$
111

 
$
451

 
$
491

 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
Change in unrealized loss of securities available-for-sale
 
(592
)
 
1,103

 
(364
)
 
2,817

Less: Reclassification adjustment for sales of available-for-sale securities, net of tax
 

 
3

 
1

 
8

Total other comprehensive income (loss), net of tax
 
(592
)
 
1,100

 
(365
)
 
2,809

 
 
 
 
 
 
 
 
 
Total comprehensive income (loss), net of tax attributable to Carver Bancorp, Inc.
 
$
(155
)
 
$
1,211

 
$
86

 
$
3,300


See accompanying notes to consolidated financial statements


3


CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the nine months ended December 31, 2015
(Unaudited)
($ in thousands)
 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated deficit
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Total Equity
Balance — March 31, 2015
 
$
45,118

 
$
61

 
$
55,468

 
$
(44,206
)
 
$
(417
)
 
$
(1,045
)
 
$
54,979

Net income attributable to Carver Bancorp, Inc.
 

 

 

 
451

 

 

 
451

Other comprehensive loss, net of taxes
 

 

 

 

 

 
(365
)
 
(365
)
Stock based compensation expense
 

 

 
2

 
(2
)
 

 

 

Balance — December 31, 2015
 
$
45,118

 
$
61

 
$
55,470

 
$
(43,757
)
 
$
(417
)
 
$
(1,410
)
 
$
55,065


See accompanying notes to consolidated financial statements

4



CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended December 31,
($ in thousands)
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income before attribution to noncontrolling interest
 
451

 
210

Net loss attributable to noncontrolling interest, net of taxes
 

 
(281
)
Net income attributable to Carver Bancorp, Inc.
 
451

 
491

 
 
 
 
 
Adjustments to reconcile net income to net cash provided (used in) by operating activities:
 
 
 
 
Provision for (recovery of) loan losses
 
1,489

 
(2,645
)
Stock based compensation expense
 
2

 
2

Depreciation and amortization expense
 
511

 
779

Gain on real estate owned
 
(164
)
 
(44
)
Gain on sale of securities, net
 
(1
)
 
(8
)
(Gain) loss on sale of loans, net
 
(499
)
 
2

Gain on sale of building
 
(1,203
)
 

Amortization and accretion of loan premiums and discounts and deferred charges
 
(1,029
)
 
(1,042
)
Amortization and accretion of premiums and discounts — securities
 
96

 
141

Market adjustment on held-for-sale loans
 
(1
)
 
(2
)
Proceeds from sale of loans held-for-sale
 
730

 

Assets repurchased from third parties
 

 
(174
)
Increase in accrued interest receivable
 
(896
)
 
(102
)
Decrease in other assets
 
(684
)
 
650

Increase in other liabilities
 
3,241

 
553

Net cash provided by (used in) operating activities
 
2,043

 
(1,399
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Purchases of investments: Available-for-sale
 

 
(17,534
)
Purchases of securities: Held-to-maturity
 
(5,118
)
 
(3,667
)
Proceeds from principal payments, maturities, calls and sales of investments: Available-for-sale
 
32,475

 
9,057

Proceeds from principal payments, maturities and calls of investments: Held-to-maturity
 
1,367

 
571

Originations of loans held-for-investment
 
(84,300
)
 
(41,558
)
Loans purchased from third parties
 
(105,445
)
 
(49,966
)
Principal collections on loans
 
52,090

 
45,561

Proceeds on sale of loans
 
17,620

 

Decrease in restricted cash
 
6,144

 

Redemption of FHLB-NY stock
 
(264
)
 
662

Purchases of premises and equipment
 
(363
)
 
(278
)
Proceeds from sale of real estate owned
 
3,983

 
229

Net cash used in investing activities
 
(81,811
)
 
(56,923
)
CASH FLOW FROM FINANCING ACTIVITIES
 
 
 
 
Net increase in deposits
 
69,852

 
11,679

Net increase (decrease) in FHLB-NY advances and other borrowings
 
5,000

 
(11,000
)
Net cash provided by financing activities
 
74,852

 
679

Net decrease in cash and cash equivalents
 
(4,916
)
 
(57,643
)
Cash and cash equivalents at beginning of period
 
50,992

 
122,554

Cash and cash equivalents at end of period
 
$
46,076

 
$
64,911

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Noncash financing and investing activities
 
 
 
 
Transfers to real estate owned
 
$
438

 
$
2,434

 
 
 
 
 
Cash paid for:
 
 
 
 
Interest
 
$
2,609

 
$
2,637

Income taxes
 
$
143

 
$
124

See accompanying notes to consolidated financial statements

5


CARVER BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1. ORGANIZATION

Nature of operations

Carver Bancorp, Inc. (on a stand-alone basis, the “Company” or “Registrant”), was incorporated in May 1996 and its principal wholly owned subsidiary is Carver Federal Savings Bank (the “Bank” or “Carver Federal”). Carver Federal's wholly owned subsidiaries are CFSB Realty Corp., Carver Community Development Corporation (“CCDC”) and CFSB Credit Corp., which is currently inactive. The Bank has a majority-owned interest in Carver Asset Corporation, a real estate investment trust formed in February 2004.

“Carver,” the “Company,” “we,” “us” or “our” refers to the Company along with its consolidated subsidiaries. The Bank was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally-chartered mutual savings and loan association. The Bank converted to a federal savings bank in 1986. On October 24, 1994, the Bank converted from a mutual holding company structure to stock form and issued 2,314,375 shares of its common stock, par value 0.01 per share. On October 17, 1996, the Bank completed its reorganization into a holding company structure (the “Reorganization”) and became a wholly owned subsidiary of the Company.

In September 2003, the Company formed Carver Statutory Trust I (the “Trust”) for the sole purpose of issuing trust preferred securities and investing the proceeds in an equivalent amount of floating rate junior subordinated debentures of the Company. In accordance with Accounting Standards Codification (“ASC”) 810, “Consolidations,” Carver Statutory Trust I is unconsolidated for financial reporting purposes.

Carver Federal’s principal business consists of attracting deposit accounts through its branches and investing those funds in mortgage loans and other investments permitted by federal savings banks. The Bank has nine branches located throughout the City of New York that primarily serve the communities in which they operate.

On February 7, 2011, Carver Federal Savings Bank and Carver Bancorp, Inc. consented to enter into Cease and Desist Orders (the “Bank Order” and the "Company Order," respectively, and together the "Orders") with the Office of Thrift Supervision (“OTS”). The OTS issued these Orders based upon its findings that the Company was operating with an inadequate level of capital for the volume, type and quality of assets held by the Company, that it was operating with an excessive level of adversely classified assets, and earnings inadequate to augment its capital. Effective July 21, 2011, supervisory authority for the Company Order passed to the Board of Governors of the Federal Reserve System (the "Federal Reserve") and supervisory authority for the Bank Order passed to the Office of the Comptroller of the Currency (“OCC”). On November 3, 2014, the OCC notified the Bank that the OCC had determined that the Bank had satisfied all of the requirements of the Bank Order and directed that the Bank Order be terminated. In addition, the OCC notified the Bank that the OCC had determined that the Bank was no longer in “troubled condition” and was relieved of all prior conditions imposed on the Bank by the OTS as a result of its troubled condition designation. On September 24, 2015, the Federal Reserve notified the Company that the Company Order had been terminated and that the Company was no longer in "troubled condition."

On October 23, 2015, the Board of Directors of the Company adopted resolutions requiring, among other things, written approval from the Federal Reserve Bank of Philadelphia prior to the declaration or payment of dividends, any increase in debt by the Company, or the redemption of Company common stock.

On June 29, 2011, the Company raised $55 million of capital by issuing 55,000 shares of mandatorily convertible non-voting participating preferred stock, Series C (the “Series C preferred stock”). The issuance resulted in a $51.4 million increase in equity after considering the effect of various expenses associated with the capital raise. The capital raise enabled the Company to make a capital injection of $37 million in the Bank on June 30, 2011. In December 2011, another $7 million capital injection was made in the Bank. The remainder of the net capital raised is retained by the Company for future strategic purposes or to downstream into the Bank, if necessary. No assurances can be given that the amount of capital raised is sufficient to absorb the expected losses in the Bank's loan portfolio. Should the losses be greater than expected, additional capital may be necessary in the future.

On October 25, 2011, Carver's stockholders voted to approve a 1-for-15 reverse stock split. A separate vote of approval was given to convert the Series C preferred stock to non-cumulative non-voting participating preferred stock, Series D (“the Series D preferred stock”) and to common stock and to exchange the U.S. Treasury's (“Treasury”) Community Development Capital Initiative (“CDCI”) Series B preferred stock for common stock.

6



On October 27, 2011, the 1-for-15 reverse stock split was effected, which reduced the number of outstanding shares of common stock from 2,492,415 to 166,161.

On October 28, 2011, the Treasury exchanged the CDCI Series B preferred stock for 2,321,286 shares of Carver common stock and the Series C preferred stock converted into 1,208,039 shares of Carver common stock and 45,118 shares of Series D preferred stock.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidated financial statement presentation

The consolidated financial statements include the accounts of the Company, the Bank and the Bank’s wholly owned or majority-owned subsidiaries, Carver Asset Corporation, CFSB Realty Corp., CCDC, and CFSB Credit Corp. All significant intercompany accounts and transactions have been eliminated in consolidation.

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month period ended December 31, 2015 are not necessarily indicative of the results that may be expected for the year ended March 31, 2016. The consolidated balance sheet at December 31, 2015 has been derived from the unaudited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the period then ended. These unaudited consolidated financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended March 31, 2015. Amounts subject to significant estimates and assumptions are items such as the allowance for loan losses, valuation of real estate owned, realization of deferred tax assets, and the fair value of financial instruments. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses or future writedowns of real estate owned may be necessary based on changes in economic conditions in the areas where Carver Federal has extended mortgages and other credit instruments. Actual results could differ significantly from those assumptions. Current market conditions increase the risk and complexity of the judgments in these estimates.

In addition, the OCC, Carver Federal's regulator, as an integral part of its examination process, periodically reviews Carver Federal's allowance for loan losses and, if applicable, real estate owned valuations. The OCC may require Carver Federal to recognize additions to the allowance for loan losses or additional writedowns of real estate owned based on their judgments about information available to them at the time of their examination.

NOTE 3. EARNINGS PER COMMON SHARE

The following table reconciles the earnings available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted earnings per share for the following periods:
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
$ in thousands except per share data
 
2015
 
2014
 
2015
 
2014
Earnings per common share
 
 
 
 
 
 
 
 
Net income available to common shareholders of Carver Bancorp, Inc.
 
$
437

 
$
111

 
451

 
491

Weighted average common shares outstanding
 
3,696,420

 
3,696,420

 
3,696,420

 
3,696,338

Basic earnings per common share
 
$
0.12

 
$
0.03

 
$
0.12

 
$
0.13

Diluted earnings per common share
 
0.12

 
0.03

 
0.12

 
0.13


NOTE 4. COMMON STOCK DIVIDENDS


7


On October 23, 2015, the Board of Directors of the Company adopted resolutions requiring, among other things, written approval from the Federal Reserve Bank of Philadelphia prior to the declaration or payment of dividends, any increase in debt by the Company, or the redemption of Company common stock.

Debenture interest payments which had previously been deferred in March 2011 and June 2011 on the Carver Statutory Trust I trust preferred securities (“TruPS”) were brought current in September 2011. The Company is prohibited from making future payments without prior approval. The expense continues to be accrued and the payments remain on deferral status. The Company has requested approval from the Federal Reserve to reinstate the debenture interest payment. This request remains pending.
 
On October 28, 2011, the Treasury exchanged the CDCI Series B preferred stock for 2,321,286 shares of Carver common stock and the Series C preferred stock converted into 1,208,039 shares of Carver common stock and 45,118 shares of Series D preferred stock. Series C stock was previously reported as mezzanine equity, and upon conversion to common and Series D preferred stock is now reported as equity attributable to Carver Bancorp, Inc. The holders of the Series D Preferred Stock are entitled to receive dividends, on an as-converted basis, simultaneously to the payment of any dividends on the common stock.

NOTE 5. OTHER COMPREHENSIVE INCOME (LOSS)

The following tables set forth changes in each component of accumulated other comprehensive loss, net of tax for the nine months ended December 31, 2015 and 2014:
 
 
 
 
Other
 
 
Nine months ended December 31, 2015
 
At
 
Comprehensive
 
At
$ in thousands
 
March 31, 2015
 
Loss, net of tax
 
December 31, 2015
Net unrealized loss on securities available-for-sale
 
$
(1,045
)
 
$
(365
)
 
$
(1,410
)
Accumulated other comprehensive loss, net of tax
 
$
(1,045
)
 
$
(365
)
 
$
(1,410
)

 
 
 
 
Other
 
 
Nine months ended December 31, 2014
 
At
 
Comprehensive
 
At
$ in thousands
 
March 31, 2014
 
Income, net of tax
 
December 31, 2014
Net unrealized loss on securities available-for-sale
 
$
(4,768
)
 
$
2,809

 
$
(1,959
)
Accumulated other comprehensive loss, net of tax
 
$
(4,768
)
 
$
2,809

 
$
(1,959
)

The following table sets forth information about amounts reclassified from accumulated other comprehensive loss to the consolidated statement of income and the affected line item in the statement where net income is presented.
 
 
For the Three Months Ended December 31,
 
For the Nine Months Ended December 31,
 
Affected Line Item in the Consolidated Statement of Income
$ in thousands
 
2015
 
2014
 
2015
 
2014
 
Reclassification adjustment for sales of available-for-sale securities, net of tax
 

 
3

 
1

 
8

 
Gain on sale of securities
Total reclassifications for the period
 
$

 
$
3

 
$
1

 
$
8

 
 
 
 
 
 
 
 
 
 
 
 
 

NOTE 6. INVESTMENT SECURITIES

The Bank utilizes mortgage-backed and other investment securities in its asset/liability management strategy. In making investment decisions, the Bank considers, among other things, its yield and interest rate objectives, its interest rate and credit risk position, and its liquidity and cash flow.

Generally, the investment policy of the Bank is to invest funds among categories of investments and maturities based upon the Bank’s asset/liability management policies, investment quality, loan and deposit volume and collateral requirements, liquidity needs and performance objectives. ASC Subtopic 320-10-25 requires that securities be classified into three categories: trading, held-to-maturity, and available-for-sale. At December 31, 2015, $68.2 million, or 81.3%, of the Bank’s total securities

8


were classified as available-for-sale, and the remaining $15.7 million, or 18.7%, were classified as held-to-maturity. The Bank had no securities classified as trading at December 31, 2015 and March 31, 2015.

The following table sets forth the amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at December 31, 2015:
 
 
Amortized
 
Gross Unrealized
 
Estimated
$ in thousands
 
Cost
 
Gains
 
Losses
 
Fair-Value
Available-for-Sale:
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
Government National Mortgage Association
 
$
4,959

 
$

 
$
46

 
4,913

Federal Home Loan Mortgage Corporation
 
8,079

 

 
212

 
7,867

Federal National Mortgage Association
 
8,149

 

 
168

 
7,981

Other
 
46

 

 

 
46

Total mortgage-backed securities
 
21,233

 

 
426

 
20,807

U.S. Government Agency Securities
 
37,385

 

 
641

 
36,744

Other investments
 
10,984

 

 
343

 
10,641

Total available-for-sale
 
69,602

 

 
1,410

 
68,192

Held-to-Maturity*:
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
Government National Mortgage Association
 
2,543

 
149

 

 
2,692

Federal National Mortgage Association and Other
 
12,188

 

 
149

 
12,039

Total held-to-maturity mortgage-backed securities
 
14,731

 
149

 
149

 
14,731

Corporate Bonds
 
1,000

 

 
10

 
990

Total held-to maturity
 
15,731

 
149

 
159

 
15,721

Total securities
 
$
85,333

 
$
149

 
$
1,569

 
$
83,913

* The carrying amount and amortized cost are the same for all held-to-maturity securities, as no OTTI has been recorded.

The following table sets forth the amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at March 31, 2015:
 
 
Amortized
 
Gross Unrealized
 
Estimated
$ in thousands
 
Cost
 
Gains
 
Losses
 
Fair Value
Available-for-Sale:
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
Government National Mortgage Association
 
$
5,575

 
$
9

 
$
57

 
$
5,527

Federal Home Loan Mortgage Corporation
 
10,705

 
10

 
127

 
10,588

Federal National Mortgage Association
 
10,925

 
35

 
103

 
10,857

Other
 
47

 

 

 
47

Total mortgage-backed securities
 
27,252

 
54

 
287

 
27,019

U.S. Government Agency Securities
 
58,464

 
48

 
662

 
57,850

Other investments
 
16,514

 

 
198

 
16,316

Total available-for-sale
 
102,230

 
102

 
1,147

 
101,185

Held-to-Maturity*:
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
Government National Mortgage Association
 
3,100

 
232

 

 
3,332

Federal National Mortgage Association and Other
 
8,822

 
77

 

 
8,899

Total held-to-maturity mortgage-backed securities
 
11,922

 
309

 

 
12,231

Total held-to-maturity
 
11,922

 
309

 

 
12,231

Total securities
 
$
114,152

 
$
411

 
$
1,147

 
$
113,416

* The carrying amount and amortized cost are the same for all held-to-maturity securities, as no OTTI has been recorded.

The following table sets forth the unrealized losses and fair value of securities in an unrealized loss position at December 31, 2015 for less than 12 months and 12 months or longer:

9


 
 
Less than 12 months
 
12 months or longer
 
Total
$ in thousands
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
29

 
$
3,887

 
$
397

 
$
16,873

 
$
426

 
$
20,760

U.S. Government Agency Securities
 
93

 
10,907

 
548

 
25,837

 
641

 
36,744

Other investments (1)
 

 

 
343

 
9,657

 
343

 
9,657

Total available-for-sale securities
 
122

 
14,794

 
1,288

 
52,367

 
1,410

 
67,161

 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
149

 
11,889

 

 

 
149

 
11,889

Other
 
10

 
990

 

 

 
10

 
990

  Total held-to-maturity securities
 
159

 
12,879

 

 

 
159

 
12,879

  Total securities
 
$
281

 
$
27,673

 
$
1,288

 
$
52,367

 
$
1,569

 
$
80,040

(1) CRA fund comprised of over 95% agency securities.

The following table sets forth the unrealized losses and fair value of securities in an unrealized loss position at March 31, 2015 for less than 12 months and 12 months or longer:
 
 
Less than 12 months
 
12 months or longer
 
Total
$ in thousands
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$

 
$

 
$
287

 
$
22,297

 
$
287

 
$
22,297

U.S. Government Agency Securities
 
57

 
12,943

 
605

 
26,400

 
662

 
39,343

Other investments (1)
 

 

 
198

 
9,802

 
198

 
9,802

Total available-for-sale securities
 
$
57

 
$
12,943

 
$
1,090

 
$
58,499

 
$
1,147

 
$
71,442

(1) CRA fund comprised of over 95% agency securities.

A total of 30 securities had an unrealized loss at December 31, 2015 compared to 23 at March 31, 2015. U.S. Government Agency securities and mortgage-backed securities, represented 54.7% and 30.9%, respectively, of total available-for-sale securities in an unrealized loss position at December 31, 2015. There were ten U.S. Government Agency securities, seven mortgage-backed securities, and one investment in a CRA fund that had an unrealized loss position for more than 12 months at December 31, 2015. Given the high credit quality of the securities which are backed by the U.S. government's guarantees, the risk of credit loss is minimal. Management believes that these unrealized losses are a direct result of the current rate environment and has the ability and intent to hold the securities until maturity or the valuation recovers.

The amount of an other-than-temporary impairment when there are credit and non-credit losses on a debt security which management does not intend to sell, and for which it is more likely than not that the Company will not be required to sell the security prior to the recovery of the non-credit impairment, the portion of the total impairment that is attributable to the credit loss would be recognized in earnings. The remaining difference between the debt security’s amortized cost basis and its fair value would be included in other comprehensive income (loss). At December 31, 2015, the Bank does not have any securities that are classified as having other-than-temporary impairment in its investment portfolio.

The following is a summary of the carrying value (amortized cost) and fair value of securities at December 31, 2015, by remaining period to contractual maturity (ignoring earlier call dates, if any).  Actual maturities may differ from contractual maturities because certain security issuers have the right to call or prepay their obligations.  The table below does not consider the effects of possible prepayments or unscheduled repayments.

10


$ in thousands
Amortized Cost
 
Fair Value
 
Weighted
Average Yield
Available-for-Sale:
 
 
 
 
 
One through five years
5,983

 
5,911

 
1.37
%
Five through ten years
17,183

 
16,814

 
2.03
%
After ten years
46,436

 
45,467

 
1.60
%
Total
$
69,602

 
$
68,192

 
1.69
%
 
 
 
 
 
 
Held-to-maturity:
 
 
 
 
 
Five through ten years
$
7,023

 
$
7,006

 
3.06
%
After ten years
8,708

 
8,715

 
2.55
%
Total
$
15,731


$
15,721

 
2.78
%

NOTE 7. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN AND LEASE LOSSES

The loans receivable portfolio is segmented into one-to-four family, multifamily, commercial real estate, construction, business (including Small Business Administration loans), and consumer loans.

The allowance for loan and lease losses ("ALLL") reflects management’s judgment in the evaluation of probable loan losses inherent in the portfolio at the balance sheet date. Management uses a disciplined process and methodology to calculate the ALLL each quarter. To determine the total ALLL, management estimates the reserves needed for each segment of the loan portfolio, including loans analyzed individually and loans analyzed on a pooled basis.

From time to time, events or economic factors may affect the loan portfolio, causing management to provide additional amounts or release balances from the ALLL. The ALLL is sensitive to risk ratings assigned to individually evaluated loans and economic assumptions and delinquency trends. Individual loan risk ratings are evaluated based on the specific facts related to that loan. Additions to the ALLL are made by charges to the provision for loan losses. Credit exposures deemed to be uncollectible are charged against the ALLL, while recoveries of previously charged off amounts are credited to the ALLL.

The following is a summary of loans receivable, net of allowance for loan losses, and loans held-for-sale at December 31, 2015 and March 31, 2015:
 
 
December 31, 2015
 
March 31, 2015
$ in thousands
 
Amount
 
Percent
 
Amount
 
Percent
Gross loans receivable:
 
 
 
 
 
 
 
 
One-to-four family
 
$
144,186

 
24
%
 
$
125,020

 
26
%
Multifamily
 
105,259

 
18
%
 
93,780

 
19
%
Commercial real estate
 
266,657

 
45
%
 
186,443

 
39
%
Construction
 
5,045

 
1
%
 
5,107

 
1
%
Business (1)
 
76,962

 
13
%
 
70,679

 
15
%
Consumer (2)
 
85

 
%
 
434

 
%
Total loans receivable
 
$
598,194

 
100
%
 
$
481,463

 
100
%
 
 
 
 
 
 
 
 
 
Add:
 
 
 
 
 
 
 
 
Premium on loans
 
3,842

 
 
 
2,233

 
 
Less:
 
 
 
 
 
 
 
 
Deferred fees and loan discounts,net
 
(460
)
 
 
 
(503
)
 
 
Allowance for loan losses
 
(5,174
)
 
 
 
(4,477
)
 
 
Total loans receivable, net
 
$
596,402

 
 
 
$
478,716

 
 
 
 
 
 
 
 
 
 
 
Loans HFS
 
$
2,404

 
 
 
$
2,576

 
 
(1) Includes business overdrafts
(2) Includes personal loans and consumer overdrafts




11


The following is an analysis of the allowance for loan losses based upon the method of evaluating loan impairment for the three and nine month periods ended December 31, 2015 and 2014, and the fiscal year ended March 31, 2015.
Three months ended December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
$ in thousands
 
One-to-four
family
 
Multifamily
 
Commercial Real Estate
 
Construction
 
Business
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
1,595

 
$
573

 
$
1,436

 
99

 
$
843

 
$
26

 
$
4,572

Charge-offs
 
77

 
64

 

 

 
43

 
28

 
212

Recoveries
 

 

 
1

 

 
59

 
26

 
86

Provision for (Recovery of) Loan Losses
 
113

 
104

 
470

 
(1
)
 
26

 
16

 
728

Ending Balance
 
$
1,631

 
$
613

 
$
1,907

 
$
98

 
$
885

 
$
40

 
$
5,174


Nine months ended December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
$ in thousands
 
One-to-four
family
 
Multifamily
 
Commercial Real Estate
 
Construction
 
Business
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
1,989

 
$
534

 
$
1,029

 
99

 
$
813

 
$
13

 
$
4,477

Charge-offs
 
320

 
305

 

 

 
163

 
288

 
1,076

Recoveries
 
1

 

 
4

 

 
247

 
32

 
284

Provision for (Recovery of) Loan Losses
 
(39
)
 
384

 
874

 
(1
)
 
(12
)
 
283

 
1,489

Ending Balance
 
$
1,631

 
$
613

 
$
1,907

 
$
98

 
$
885

 
$
40

 
$
5,174

Allowance for Loan Losses Ending Balance: collectively evaluated for impairment
 
1,533

 
612

 
1,895

 
98

 
820

 
40

 
4,998

Allowance for Loan Losses Ending Balance: individually evaluated for impairment
 
97

 

 
12

 
 
67

 

 
176

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan Receivables Ending Balance:
 
$
145,980

 
$
106,184

 
$
267,448

 
$
5,012

 
$
76,867

 
$
85

 
$
601,576

Ending Balance: collectively evaluated for impairment
 
141,284

 
104,955

 
262,162

 
5,012

 
71,359

 
85

 
584,857

Ending Balance: individually evaluated for impairment
 
4,696

 
1,229

 
5,286

 

 
5,508

 

 
16,719


Fiscal year ended March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ in thousands
 
One-to-four family
 
Multifamily
 
Commercial Real Estate
 
Construction
 
Business
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
3,377

 
$
308

 
$
1,835

 
$

 
$
1,705

 
$
8

 
$
7,233

Charge-offs
 
687

 

 

 

 
320

 
279

 
1,286

Recoveries
 
380

 
83

 
256

 

 
816

 
5

 
1,540

Provision for (Recovery of) Loan Losses
 
(1,081
)
 
143

 
(1,062
)
 
99

 
(1,388
)
 
279

 
(3,010
)
Ending Balance
 
$
1,989

 
$
534

 
$
1,029

 
$
99

 
$
813

 
$
13

 
$
4,477

Allowance for Loan Losses Ending Balance: collectively evaluated for impairment
 
1,702

 
353

 
953

 
99

 
801

 
13

 
3,921

Allowance for Loan Losses Ending Balance: individually evaluated for impairment
 
287

 
181

 
76

 

 
12

 

 
556

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan Receivables Ending Balance:
 
$
126,527

 
$
94,706

 
$
185,851

 
$
5,076

 
$
70,599

 
$
434

 
483,193

Ending Balance: collectively evaluated for impairment
 
119,480

 
93,218

 
183,230

 
5,076

 
65,243

 
434

 
466,681

Ending Balance: individually evaluated for impairment
 
7,047

 
1,488

 
2,621

 

 
5,356

 

 
16,512



12


Three months ended December 31, 2014
 
 
 
 
 
 
 
 
 
 
$ in thousands
 
One-to-four family
 
Multifamily
 
Commercial Real Estate
 
Construction
 
Business
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
3,301

 
$
372

 
$
1,154

 
$
214

 
$
1,535

 
$
21

 
$
6,597

Charge-offs
 
112

 

 

 

 

 

 
112

Recoveries
 

 

 
2

 

 
540

 
4

 
546

Provision for (Recovery of) Loan Losses
 
225

 
(19
)
 
(291
)
 
(53
)
 
(1,004
)
 
(9
)
 
(1,151
)
Ending Balance
 
$
3,414

 
$
353

 
$
865

 
$
161

 
$
1,071

 
$
16

 
$
5,880


Nine months ended December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
$ in thousands
 
One-to-four
family
 
Multifamily
 
Commercial Real Estate
 
Construction
 
Business
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
3,377

 
$
308

 
$
1,835

 
$

 
$
1,705

 
$
8

 
$
7,233

Charge-offs
 
195

 

 

 

 

 

 
195

Recoveries
 
379

 
82

 
256

 

 
763

 
7

 
1,487

Provision for (Recovery of) Loan Losses
 
(147
)
 
(37
)
 
(1,226
)
 
161

 
(1,397
)
 
1

 
(2,645
)
Ending Balance
 
$
3,414

 
$
353

 
$
865

 
$
161

 
$
1,071

 
$
16

 
$
5,880

Allowance for Loan Losses Ending Balance: collectively evaluated for impairment
 
2,515

 
172

 
832

 
161

 
828

 
15

 
4,523

Allowance for Loan Losses Ending Balance: individually evaluated for impairment
 
899

 
181

 
32

 

 
244

 
1

 
1,357

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan Receivables Ending Balance:
 
$
127,417

 
$
64,138

 
$
200,334

 
$
5,074

 
$
38,244

 
$
327

 
$
435,534

Ending Balance: collectively evaluated for impairment
 
120,367

 
62,648

 
196,229

 
5,074

 
33,638

 
320

 
418,276

Ending Balance: individually evaluated for impairment
 
7,050

 
1,490

 
4,105

 

 
4,606

 
7

 
17,258


The following is a summary of nonaccrual loans at December 31, 2015 and March 31, 2015.
$ in thousands
December 31, 2015
 
March 31, 2015
Gross loans receivable:
 
 
 
One-to-four family
$
2,997

 
$
3,664

Multifamily
1,229

 
1,053

Commercial real estate
3,427

 
2,817

Business
2,494

 
861

Total nonaccrual loans
$
10,147

 
$
8,395


Nonaccrual loans increased $1.8 million, or 20.9%, to $10.1 million at December 31, 2015 from $8.4 million at March 31, 2015, primarily due to one commercial real estate loan that is experiencing delays in required approvals to allow onset of tenancy.

Non-performing loans at December 31, 2015, were comprised of $5.3 million of loans that were classified as nonperforming troubled debt restructures and impaired loans that are 90 days or more past due. Non performing troubled debt restructures are those that either have not consistently performed in accordance with their modified terms or were not performing in accordance with their modified terms for at least six months.  Impaired loans that are not delinquent total $4.8 million and will remain on nonaccrual status until they are upgraded.

Non-performing loans at March 31, 2015, were comprised of $5.9 million of loans that were classified as nonperforming troubled debt restructures and impaired loans that are 90 days or more past due. Trouble debt restructured loans that are not delinquent total $3.6 million. Non performing troubled debt restructures are those that either have not consistently performed in accordance with their modified terms or were not performing in accordance with their modified terms for at least six months.


13


At December 31, 2015, other non-performing assets totaled $3.4 million which consisted of other real estate owned and held-for-sale loans. At December 31, 2015, other real estate owned valued at $1.0 million comprised of eight foreclosed properties, compared to $4.3 million comprised of ten properties at March 31, 2015. At December 31, 2015, held-for-sale loans totaled $2.4 million, compared to $2.6 million at March 31, 2015

The Bank utilizes an internal loan classification system as a means of reporting problem loans within its loan categories. Loans may be classified as "Pass," “Special Mention,” “Substandard,” “Doubtful,” and “Loss.” Loans rated Pass have demonstrated satisfactory asset quality, earning history, liquidity, and other adequate margins of creditor protection. They represent a moderate credit risk and some degree of financial stability. Loans are considered collectible in full, but perhaps require greater than average amount of loan officer attention. Borrowers are capable of absorbing normal setbacks without failure. Loans rated Special Mention have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank's credit position at some future date. Loans rated Substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans rated Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable. Loans classified as Loss are those considered uncollectible with insignificant value and are charged off immediately to the allowance for loan losses.

One-to-four family residential loans and consumer and other loans are rated non-performing if they are delinquent in payments ninety or more days, a troubled debt restructuring with less than six months contractual performance or past maturity. All other one-to-four family residential loans and consumer and other loans are performing loans.

As of December 31, 2015, the risk category by class of loans is as follows:
$ in thousands
 
Multifamily
 
Commercial
Real Estate
 
Construction
 
Business
Credit Risk Profile by Internally Assigned Grade:
 
 
 
 
 
 
 
 
Pass
 
$
103,986

 
$
253,186

 
$
5,012

 
$
69,110

Special Mention
 

 
3,864

 

 
1,295

Substandard
 
2,198

 
10,398

 

 
6,462

Doubtful
 

 

 

 

Loss
 

 

 

 

Total
 
$
106,184

 
$
267,448

 
$
5,012

 
$
76,867

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
 
Consumer
Credit Risk Profile Based on Payment Activity:
 
 
 
 
 
 
 
 
Performing
 
 
 
 
 
$
142,983

 
$
85

Non-Performing
 
 
 
 
 
2,997

 

Total
 
 
 
 
 
$
145,980

 
$
85



As of March 31, 2015, and based on the most recent analysis performed, the risk category by class of loans is as follows:

14


$ in thousands
 
Multifamily
 
Commercial Real Estate
 
Construction
 
Business
Credit Risk Profile by Internally Assigned Grade:
 
 
 
 
 
 
 
 
Pass
 
$
93,218

 
$
181,340

 
$
5,076

 
$
62,419

Special Mention
 

 
1,890

 

 
1,065

Substandard
 
1,488

 
2,621

 

 
7,115

Doubtful
 

 

 

 

Loss
 

 

 

 

Total
 
$
94,706

 
$
185,851

 
$
5,076

 
$
70,599

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
 
Consumer
Credit Risk Profile Based on Payment Activity:
 
 
 
 
 
 
 
 
Performing
 
 
 
 
 
$
122,689

 
$
434

Non-Performing
 
 
 
 
 
3,838

 

Total
 
 
 
 
 
$
126,527

 
$
434



The following table presents an aging analysis of the recorded investment of past due financing receivable as of December 31, 2015 and March 31, 2015.
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
$ in thousands
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 or More Days Past Due
 
Total Past
Due
 
Current
 
Total Financing
Receivables
One-to-four family
 
$

 
$
291

 
$
2,737

 
$
3,028

 
$
142,952

 
$
145,980

Multifamily
 
969

 
422

 
807

 
2,198

 
103,986

 
106,184

Commercial real estate
 
3,427

 

 

 
3,427

 
264,021

 
267,448

Construction
 

 

 

 

 
5,012

 
5,012

Business
 
640

 
337

 
1,805

 
2,782

 
74,085

 
76,867

Consumer
 
3

 

 

 
3

 
82

 
85

Total
 
$
5,039

 
$
1,050

 
$
5,349

 
$
11,438

 
$
590,138

 
$
601,576


March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
$ in thousands
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater Than 90 Days
 
Total Past
Due
 
Current
 
Total Financing Receivables
One-to-four family
 
$
464

 
$

 
$
3,574

 
$
4,038

 
$
122,489

 
126,527

Multifamily
 

 
434

 
1,054

 
1,488

 
93,218

 
94,706

Commercial real estate
 
1,150

 
936

 
1,102

 
3,188

 
182,663

 
185,851

Construction
 

 

 

 

 
5,076

 
5,076

Business
 

 

 
123

 
123

 
70,476

 
70,599

Consumer
 

 
1

 

 
1

 
433

 
434

Total
 
$
1,614

 
$
1,371

 
$
5,853

 
$
8,838

 
$
474,355

 
$
483,193



The following table presents information on impaired loans with the associated allowance amount, if applicable, at December 31, 2015 and March 31, 2015.

15


 
 
At December 31, 2015
 
At March 31, 2015
$ in thousands
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Associated
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Associated
Allowance
With no specific allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
 
$
3,046

 
$
4,172

 
$

 
$
2,752

 
$
3,007

 

Multifamily
 
1,229

 
1,578

 

 
237

 
237

 

Commercial real estate
 
1,859

 
2,028

 

 
1,880

 
1,880

 

Business
 
2,687

 
2,887

 

 
4,568

 
4,652

 

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
 
1,650

 
1,650

 
97

 
4,295

 
4,541

 
286

Multifamily
 

 

 

 
1,251

 
1,349

 
181

Commercial real estate
 
3,427

 
3,427

 
12

 
741

 
741

 
76

Business
 
2,821

 
2,821

 
67

 
788

 
788

 
13

Total
 
$
16,719

 
$
18,563

 
$
176

 
$
16,512

 
$
17,195

 
$
556

    
The following tables presents information on average balances on impaired loans and the interest income recognized on a cash basis for the three and nine month period ended December 31, 2015 and 2014.

 
For the Three Months Ended December 31,
 
For the Nine Months Ended December 31,
 
 
2015
 
2014
 
2015
 
2014
$ in thousands
 
Average Balance
 
Interest Income Recognized
 
Average Balance
 
Interest Income Recognized
 
Average Balance
 
Interest Income Recognized
 
Average Balance
 
Interest Income Recognized
With no specific allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
 
$
3,062

 
$
9

 
$
736

 
$
2

 
$
2,863

 
$
14

 
$
731

 
$
11

Multifamily
 
1,236

 
6

 
157

 

 
1,296

 
13

 
137

 

Commercial real estate
 
1,860

 
14

 
2,945

 
22

 
1,865

 
31

 
2,660

 
136

Construction
 

 

 

 

 

 

 

 

Business
 
2,723

 
21

 
1,014

 
11

 
2,772

 
64

 
1,032

 
89

Consumer and other
 

 

 

 

 

 

 

 


With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
 
1,652

 
19

 
6,299

 
14

 
1,660

 
23

 
6,106

 
101

Multifamily
 

 

 
1,334

 
2

 

 

 
1,336

 
17

Commercial real estate
 
3,427

 

 
1,171

 
(15
)
 
1,142

 

 
684

 
24

Business
 
2,838

 
32

 
3,678

 
28

 
2,909

 
67

 
3,466

 
106

Consumer and other
 

 

 
7

 

 

 

 
7

 

Total
 
$
16,798

 
$
101

 
$
17,341

 
$
64

 
$
14,507

 
$
212

 
$
16,159

 
$
484


In certain circumstances, the Bank will modify a loan as part of a troubled debt restructure ("TDR") under ASC Subtopic 310-40 and the related allowance under ASC Subtopic 310-10-35. Situations around these modifications may include extension of maturity date, reduction in the stated interest rate, rescheduling of future cash flows, reduction in the face amount of the debt or reduction of past accrued interest. Loans modified in TDRs are placed on nonaccrual status until the Company determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate performance according to the restructured terms for a period of at least six months.

There were no TDR modifications made during the three month period ended December 31, 2015. The following table presents an analysis of those loan modifications that were classified as TDRs during the nine month period ended December 31, 2015.
 
 
Modifications to loans during the nine month period ended
December 31, 2015
$ in thousands
 
Number of loans
 
Pre-modification outstanding recorded investment
 
Post-modification recorded investment
 
Pre-Modification rate
 
Post-Modification rate
One-to-four family
 
1

 
$
96

 
$
96

 
2.63
%
 
2.63
%

16



The following table presents an analysis of those loan modifications that were classified as TDRs during the three and nine month period ended December 31, 2014.
 
 
Modifications to loans during the three month period ended
December 31, 2014
 
Modifications to loans during the nine month period ended
December 31, 2014
$ in thousands
 
Number of loans
 
Pre-modification outstanding recorded investment
 
Post- modification recorded investment
 
Pre-Modification rate
 
Post-Modification rate
 
Number of loans
 
Pre-modification outstanding recorded investment
 
Post- modification recorded investment
 
Pre-Modification rate
 
Post-Modification rate
One-to-four family
 
1

 
$
43

 
$
43

 
12.00
%
 
12.00
%
 
1

 
$
43

 
$
43

 
12.00
%
 
12.00
%
Commercial real estate
 

 

 

 
%
 
%
 
1

 
873

 
856

 
6.60
%
 
6.60
%
Business
 
1

 
50

 
50

 
10.50
%
 
10.50
%
 
1

 
50

 
50

 
10.50
%
 
10.50
%
Total
 
2

 
$
93

 
$
93

 
 
 
 
 
3

 
$
966

 
$
949

 
 
 
 

In an effort to proactively resolve delinquent loans, Carver has selectively extended to certain borrowers concessions such as extensions, rate reductions or forbearance agreements. For the periods ended December 31, 2015 and 2014, there were no modified loans that subsequently defaulted within the last 12 months. For the nine month period ended December 31, 2015, one loan of $96 thousand was modified. For the three month period ended December 31, 2014, one loan of $43 thousand was modified and one loan of $50 thousand was extended. The nine month period ended December 31, 2014 also included one loan of $856 thousand that was extended.

At December 31, 2015, there were 11 loans in the TDR portfolio totaling $5.7 million that were on accrual status as the Company has determined that future collection of the principal and interest is reasonably assured. These have generally performed according to restructured terms for a period of at least six months. At March 31, 2015, there were 12 loans in the performing TDR portfolio totaling $4.6 million.

At December 31, 2015, the Bank had one Regulation O loan of $1.5 million to a director. This loan was made on the same terms as other loans and in accordance with underwriting procedures used for other loans, and does not involve more than the normal risk of repayment, and does not present other unfavorable terms. There were no loans to officers or directors of the Company at December 31, 2014.

NOTE 8. FAIR VALUE MEASUREMENTS

ASC 820 clarifies that fair value is an “exit” price, representing the amount that would be received when selling an asset, or paid when transferring a liability, in an orderly transaction between market participants. Fair value is thus a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1— Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2— Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3— Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

A financial instrument’s categorization within this valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following table presents, by valuation hierarchy, assets that are measured at fair value on a recurring basis as of December 31, 2015 and March 31, 2015, and that are included in the Company’s Consolidated Statements of Financial Condition at these dates:

17


 
 
Fair Value Measurements at December 31, 2015, Using
$ in thousands
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Total Fair
Value
Assets:
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$

 
$

 
$
205

 
205

Investment securities
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
Government National Mortgage Association
 

 
4,913

 

 
4,913

Federal Home Loan Mortgage Corporation
 

 
7,867

 

 
7,867

Federal National Mortgage Association
 

 
7,981

 

 
7,981

Other
 

 

 
46

 
46

U.S. Government Agency Securities
 

 
36,744

 

 
36,744

Other investments
 

 
10,641

 

 
10,641

Total available-for-sale securities
 

 
68,146

 
46

 
68,192

Total
 
$

 
$
68,146

 
$
251

 
$
68,397


 
 
Fair Value Measurements at March 31, 2015, Using
$ in thousands
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Fair
Value
Assets:
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$

 
$

 
$
210

 
210

Investment securities
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
Government National Mortgage Association
 

 
5,527

 

 
5,527

Federal Home Loan Mortgage Corporation
 

 
10,588

 

 
10,588

Federal National Mortgage Association
 

 
10,857

 

 
10,857

Other
 

 

 
47

 
47

U.S. Government Agency securities
 

 
57,850

 

 
57,850

Other investments
 

 
16,316

 

 
16,316

Total available-for-sale securities
 

 
101,138

 
47

 
101,185

Total
 
$

 
$
101,138

 
$
257

 
$
101,395


Instruments for which unobservable inputs are significant to their fair value measurement (i.e., Level 3) include mortgage servicing rights (“MSR”) and certain mortgage-backed securities. Level 3 assets accounted for 0.03% of the Company’s total assets measured at fair value at December 31, 2015 and at March 31, 2015.

The Company reviews and updates the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next that are related to the observable inputs to a fair value measurement may result in a reclassification from one hierarchy level to another.

Below is a description of the methods and significant assumptions utilized in estimating the fair value of available-for-sale securities and MSR:

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.

If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to market information, models also incorporate transaction details, such as maturity

18


and cash flow assumptions. Securities valued in this manner would generally be classified within Level 2 of the valuation hierarchy and primarily include such instruments as mortgage-related securities and corporate debt.

In the three and nine month period ended December 31, 2015, there were not any transfers of investments into or out of each level of the fair value hierarchy.

In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. In valuing certain securities, the determination of fair value may require benchmarking to similar instruments or analyzing default and recovery rates. Quoted price information for the MSRs is not available. Therefore, MSRs are valued using market-standard models to model the specific cash flow structure. Key inputs to the model consist of principal balance of loans being serviced, servicing fees and prepayment rates.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The following table includes a rollforward of assets classified by the Company within Level 3 of the valuation hierarchy for the nine months ended December 31, 2015 and 2014:
$ in thousands
Beginning balance, April 1, 2015
 
Total Realized/Unrealized Gains/(Losses) Recorded in Income (1)
 
Issuances / (Settlements)
 
Transfers to/(from) Level 3
 
Ending balance, December 31, 2015
 
Unrealized Gains and (Losses) Related to Instruments Held at December 31, 2015
Securities Available-for-Sale
$
47

 
$

 
$
1

 
$

 
$
46

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing rights
210

 
(5
)
 

 

 
205

 
(4
)

$ in thousands
Beginning balance, April 1, 2014
 
Total Realized/Unrealized Gains/(Losses) Recorded in Income (1)
 
Issuances / (Settlements)
 
Transfers to/(from) Level 3
 
Ending balance, December 31, 2014
 
Unrealized Gains and (Losses) Related to Instruments Held at December 31, 2014
Securities Available-for-Sale
$
49

 
$

 
$
2

 
$

 
$
47

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing rights
265

 
(54
)
 
 
 
211

 
(52
)
(1) Includes net servicing cash flows and the passage of time.

Certain assets are measured at fair value on a non-recurring basis. Such instruments are subject to fair value adjustments under certain circumstances (e.g. when there is evidence of impairment). The following table presents assets and liabilities that were measured at fair value on a non-recurring basis as of December 31, 2015 and March 31, 2015, and that are included in the Company’s Consolidated Statements of Financial Condition at these dates:
 
 
Fair Value Measurements at December 31, 2015, Using
 
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
Total Fair Value
$ in thousands
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Loans held-for-sale
 
$

 
$
2,404

 
$

 
$
2,404

Impaired loans with a specific reserve allocated
 
$

 
$

 
$
7,722

 
$
7,722

Other real estate owned
 
$

 
$
960

 
$

 
$
960



19


 
 
Fair Value Measurements at March 31, 2015, Using
 
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
Total Fair Value
$ in thousands
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Loans held-for-sale
 
$

 
$
2,576

 
$

 
$
2,576

Impaired loans with a specific reserve allocated
 
$

 
$

 
$
6,519

 
$
6,519

Other real estate owned
 
$

 
$
4,341

 
$

 
$
4,341


Loans held-for-sale are carried at the lower of cost or market value. The valuation methodology for loans held-for-sale for the period ended December 31, 2015 was based upon amounts offered, or other acceptable valuation methods and, in some instances, prior loan loss experience of the Bank in connection with recent note sales.

The fair values of collateral dependent impaired loans are determined using various valuation techniques, including consideration of appraised values and other pertinent real estate market data.

Other real estate owned represents property acquired by the Bank in settlement of loans less costs to sell (i.e., through foreclosure, repossession or as an in-substance foreclosure).  These assets are recorded at the lower of their cost or fair value. At the time of acquisition of the real estate owned, the real property value is adjusted to its current fair value. Any subsequent adjustments will be to the lower of cost or market.

NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS

Disclosures regarding the fair value of financial instruments are required to include, in addition to the carrying value, the fair value of certain financial instruments, both assets and liabilities recorded on and off-balance sheet, for which it is practicable to estimate fair value. Accounting guidance defines financial instruments as cash, evidence of ownership of an entity, or a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument. The fair value of a financial instrument is discussed below. In cases where quoted market prices are not available, estimated fair values have been determined by the Bank using the best available data and estimation methodology suitable for each such category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate their recorded carrying value. The Bank's primary component of market risk is interest rate volatility.  Fluctuations in interest rates will ultimately impact the Bank's fair value of all interest-earning assets and interest-bearing liabilities, other than those which are short-term in maturity.

The carrying amounts and estimated fair values of the Bank’s financial instruments and estimation methodologies at December 31, 2015 and March 31, 2015 are as follows:

20


 
 
December 31, 2015
$ in thousands
 
Carrying
Amount
 
Estimated
Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Financial Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
46,076

 
$
46,076

 
$
46,076

 
$

 
$

Restricted cash
 
211

 
211

 

 
211

 

Securities available-for-sale
 
68,192

 
68,192

 

 
68,146

 
46

FHLB Stock
 
3,783

 
3,783

 

 
3,783

 

Securities held-to-maturity
 
15,731

 
15,721

 

 
15,721

 

Loans receivable
 
596,402

 
604,546

 

 

 
604,546

Loans held-for-sale
 
2,404

 
2,404

 

 
2,404

 

Accrued interest receivable
 
3,677

 
3,677

 

 
3,677

 

Mortgage servicing rights
 
205

 
205

 

 

 
205

Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
597,612

 
565,960

 
331,742

 
234,218

 

Advances from FHLB of New York
 
65,000

 
69,829

 

 
69,829

 

Other borrowed money
 
18,403

 
17,579

 

 
17,579

 


 
 
March 31, 2015
$ in thousands
 
Carrying
Amount
 
Estimated
Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Financial Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
50,992

 
$
50,992

 
$
50,992

 
$

 
$

Restricted cash
 
6,354

 
6,354

 

 
6,354

 

Securities available-for-sale
 
101,185

 
101,185

 

 
101,138

 
47

FHLB Stock
 
3,519

 
3,519

 

 
3,519

 

Securities held-to-maturity
 
11,922

 
12,231

 

 
12,231

 

Loans receivable
 
478,716

 
485,458

 

 

 
485,458

Loans held-for-sale
 
2,576

 
2,576

 

 
2,576

 

Accrued interest receivable
 
2,781

 
2,781

 

 
2,781

 

Mortgage servicing rights
 
210

 
210

 

 

 
210

Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
527,761

 
511,160

 
309,897

 
201,263

 

Advances from FHLB of New York
 
65,000

 
65,827

 

 
65,827

 

Other borrowed money
 
18,403

 
18,931

 

 
18,931

 



Cash and Cash Equivalents

The carrying amounts for cash and cash equivalents approximate fair value and are classified as Level 1 because they mature in three months or less.

Restricted Cash

The carrying amounts for restricted cash approximates fair value and are classified as Level 2 because they represent short-term interest-bearing deposits.



21


Securities

The fair values for securities available-for-sale and securities held-to-maturity are based on quoted market or dealer prices, if available. If quoted market or dealer prices are not available, fair value is estimated using quoted market or dealer prices for similar securities. Available-for-sale securities are classified across Levels 2 and 3. Held-to-maturity securities are classified as Level 2.

FHLB-NY Stock

Ownership in equity securities of the FHLB-NY is restricted and there is no established market for resale. The carrying amount is at cost, which is the estimated fair value, and is classified as Level 2.

Loans Receivable

The fair value of loans receivable is estimated by discounting future cash flows, using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities of such loans. The method used to estimate the fair value of loans is extremely sensitive to the assumptions and estimates used. While management has attempted to use assumptions and estimates that best reflect the Company's loan portfolio and current market conditions, a greater degree of objectivity is inherent in these values than in those determined in active markets. The loan valuations thus determined do not necessarily represent an “exit” price that would be achieved in an active market. Loans receivable are classified as Level 3.

Loans Held-for-Sale

Loans held-for-sale are carried at the lower of cost or market value and are classified as Level 2. The valuation methodology for loans held-for-sale are based upon amounts offered or other acceptable valuation methods and, in some instances, prior loan loss experience of Carver in connection with recent note sales.

Accrued Interest Receivable

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 classification.

Mortgage Servicing Rights

The fair value of mortgage servicing rights is determined by discounting the present value of estimated future servicing cash flows using current market assumptions for prepayments, servicing costs and other factors and are classified as Level 3.

Deposits

The fair value of demand, savings and club accounts is equal to the amount payable on demand at the reporting date. These deposits are classified as Level 1. The fair value of certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities resulting in a Level 2 classification. The fair value estimates do not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market.

FHLB-NY Advances and Other Borrowed Money

The fair values of advances from the FHLB-NY and other borrowed money are estimated using the rates currently available to the Bank for debt with similar terms and remaining maturities and are classified as Level 2.

Commitments to Extend Credits, Commercial, and Standby Letters of Credit

The fair value of the commitments to extend credit was estimated to be immaterial as of December 31, 2015 and March 31, 2015. The fair value of commitments to extend credit and standby letters of credit was evaluated using fees currently charged to enter into similar agreements, taking into account the risk characteristics of the borrower, and estimated to be insignificant as of the reporting date.

NOTE 10. IMPACT OF RECENT ACCOUNTING STANDARDS NOT YET ADOPTED


22


In January 2014, the FASB issued ASU No. 2014-04, "Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40), Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." The amendments clarify when an in-substance repossession or foreclosure occurs, and require disclosure of both the amount of foreclosed residential real estate property held by a creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for annual periods, and interim periods within annual periods beginning after December 15, 2015. The adoption of ASU 2014-04 is not expected to have a material impact on the Company's consolidated statement of financial condition or results of operations. At December 31, 2015, Carver had 14 loans secured by one-to-four family residential real estate in the process of foreclosure for a total outstanding balance of $2.2 million.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.”  The amendments are intended to clarify consolidation guidance for legal entities such as limited partnerships and limited liability companies and simplify consolidation accounting by reducing the number of consolidation models.  ASU No. 2015-02 is effective for periods beginning after December 15, 2015.  The adoption of the standard is not expected to have a material impact on the Company’s consolidated statement of financial condition or results of operations. 

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 which may be identified by the use of such words as “may,” “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate,” “predict,” “continue,” and “potential” or the negative of these terms or other comparable terminology. Examples of forward-looking statements include, but are not limited to, estimates with respect to the Company's financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates. These factors include but are not limited to the following:

the limitations imposed on the Company by board resolutions which require, among other things, written approval of 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, and the effect on operations resulting from such limitations;

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

restrictions set forth in the terms of the Series D preferred stock and in the exchange agreement with the United States Department of the Treasury (the "Treasury") that may limit our ability to raise additional capital;

national and/or local changes in economic conditions, which could occur from numerous causes, including political changes, domestic and international policy changes, unrest, war and weather, or conditions in the real estate, securities markets or the banking industry, which could affect liquidity in the capital markets, the volume of loan originations, deposit flows, real estate values, the levels of non-interest income and the amount of loan losses;

adverse changes in the financial industry and the securities, credit, national and local real estate markets (including real estate values);

changes in our existing loan portfolio composition (including increases in commercial lending) and credit quality or changes in loan loss requirements;

changes in the level of trends of delinquencies and write-offs and in our allowance and provision for loan losses;

legislative or regulatory changes that may adversely affect the Company’s business, including but not limited to the impact of the Dodd-Frank Wall Street Reform, the JOBS Act, the Consumer Protection Act and new capital regulations, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements, regulatory fees and compliance costs, and the resources we have available to address such changes;

changes in the level of government support of housing finance;

23



the Company’s success in implementing new business initiatives, including expanding its product line, adding new branches and ATM centers and successfully building its brand image;

our ability to control costs and expenses;

risks related to a high concentration of loans to borrowers secured by property located in our market area;

changes in interest rates, which may reduce net interest margin and net interest income;

increases in competitive pressure among financial institutions or non-financial institutions;

changes in consumer spending, borrowing and savings habits;

technological changes that may be more difficult to implement or more costly than anticipated;

changes in deposit flows, loan demand, real estate values, borrowing facilities, capital markets and investment opportunities, which may adversely affect our business;

changes in accounting standards, policies and practices, as may be adopted or established by the regulatory agencies or the Financial Accounting Standards Board could negatively impact the Company's financial results;

litigation or regulatory actions, whether currently existing or commencing in the future, which may restrict our operations or strategic business plan;

the ability to originate and purchase loans with attractive terms and acceptable credit quality; and

the ability to attract and retain key members of management, and to address staffing needs in response to product demand or to implement business initiatives.

Because forward-looking statements are subject to numerous assumptions, risks and uncertainties, actual results or future events could differ possibly materially from those that the company anticipated in its forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and the Company assumes no obligation to, and expressly disclaims any obligation to, update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements, except as legally required. For a discussion of additional factors that could adversely affect the Company’s future performance, see “(Part I. Financial Information) Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “(Part II. Other information) Item 1A — Risk Factors."

Overview

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

Carver Federal is among the largest African-American operated bank 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 third consecutive "Outstanding" rating, issued by the OCC following its most recent Community Reinvestment Act (“CRA”) examination in December 2012. As of December 2012, approximately 78% of newly originated loans were within Carver's assessment area, and the Bank has demonstrated excellent responsiveness to its assessment

24


area's needs through its community development lending, investing and service activities. The Bank had approximately $754.1 million in assets and 128 employees as of December 31, 2015.

Carver Federal engages in a wide range of consumer and commercial banking services.  Carver Federal provides deposit products, including demand, savings and time deposits for consumers, businesses, and governmental and quasi-governmental agencies in its local market area within New York City.  In addition to deposit products, Carver Federal offers a number of other consumer and commercial banking products and services, including debit cards, online banking, online bill pay and telephone banking. Carver Federal also offers a suite of products and services for unbanked and underbanked consumers, branded as Carver Community Cash. This includes check cashing, wire transfers, bill payment, reloadable prepaid cards and money orders.

Carver Federal offers loan products covering a variety of asset classes, including commercial, multifamily and residential mortgages, construction loans 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 nine 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 65 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.

New Markets Tax Credit Award

The New Markets Tax Credit ("NMTC") award is used to stimulate economic development in low- to moderate-income communities.  The NMTC award enables the Bank to invest with community and development partners in economic development projects with attractive terms including, in some cases, below market interest rates, which may have the effect of attracting capital to underserved communities and facilitating revitalization of the community, pursuant to the goals of the NMTC program. NMTC awards provide a credit to Carver Federal against Federal income taxes when the Bank makes qualified investments. The credits are allocated over seven years from the time of the qualified investment. Alternatively, the Bank can utilize the award in projects where another investor entity provides funding and receives the tax benefits of the award in exchange for the Bank receiving fee income.

In June 2006, CCDC was selected by the U.S. Department of Treasury, in a highly competitive process, to receive an award of $59 million in NMTC. CCDC won a second NMTC award of $65 million in May 2009, and a third award of $25 million in August 2011.  In December 2010, the Bank divested its interest in the remaining $7.8 million NMTC tax credits that it would have received through the period ending March 31, 2014, by exchanging its equity interests in the special purpose entity that

25


acquired the equity interest. In March 2015, the investor exercised its option to sell the equity interest in the entities back to Carver. CCDC provides funding to the underlying projects. While providing funding to investments in the NMTC eligible projects, CCDC has retained a 0.01% interest in other special purpose entities created to facilitate the investments, with the investors owning the remaining 99.99%.  CCDC also provides certain administrative services to these entities and receives servicing fee income during the term of the qualifying projects.  The Bank has determined that it and CCDC do not have the sole power to direct activities of these special purpose entities that significantly impact the entities' performance, and therefore are not the primary beneficiaries of these entities.  The Bank has a contingent obligation to reimburse the investors for any loss or shortfall incurred as a result of the NMTC project not being in compliance with certain regulations that would void the investors' ability to otherwise utilize tax credits stemming from the award.  As of December 31, 2015, all three award allocations have been fully utilized in qualifying projects.

The Bank's variable interest entities ("VIEs"), consolidated and unconsolidated, in which the Company holds significant variable interests or has continuing involvement through servicing a majority of assets in a VIE, are presented below.
 Involvement with SPE (000's)
Funded Exposure
Unfunded Exposure
Total
$ in thousands
 Recognized Gain (Loss) (000's)
 Total Rights transferred
 Consolidated assets
 Significant unconsolidated VIE assets
 Total Involvement with SPE asset
Debt Investments
Equity Investments (1)
Funding Commitments
Maximum exposure to loss
 
Carver Statutory Trust 1



13,400

13,400

13,000

400



$
13,400

CDE 1-9, CDE 11-12

40,000

5,067


5,067


 


7,800

7,800

CDE 10 (2)
1,700

19,000







7,410

7,410

CDE 13
500

10,500


10,568

10,568


1


4,095

4,096

CDE 14
400

10,000


10,004

10,004


1


3,900

3,901

CDE 15, CDE 16, CDE 17
900

20,500


20,689

20,689


2


7,995

7,997

CDE 18
600

13,254


13,282

13,282


1


5,169

5,170

CDE 19
500

10,746


10,941

10,941


1


4,191

4,192

CDE 20
625

12,500


12,152

12,152


1


4,875

4,876

CDE 21
625

12,500


12,204

12,204


1


4,875

4,876

Total
$
5,850

$
149,000

$
5,067

$
103,240

$
108,307

$
13,000

$
408

$

$
50,310

$
63,718

(1) Excludes any proceeds realized from exchange of equity interest in CDEs as detailed above.
(2) Entity dissolved May 2015.

Critical Accounting Policies

Note 2 to the Company’s audited Consolidated Financial Statements for the year ended March 31, 2015 included in its 2015 Form 10-K, as supplemented by this report, contains a summary of significant accounting policies. The Company believes its policies, with respect to the methodologies used to determine the allowance for loan and lease losses, securities impairment, and assessment of the recoverability of the deferred tax asset involve a high degree of complexity and require management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. The following description of these policies should be read in conjunction with the corresponding section of the Company’s fiscal 2015 Form 10-K.

Allowance for Loan and Lease Losses

The adequacy of the Bank's ALLL is determined, in accordance with the Interagency Policy Statement on the Allowance for Loan and Lease Losses (the “Interagency Policy Statement”) released by the OCC on December 13, 2006 and in accordance with ASC Subtopics 450-20 "Loss Contingencies" and 310-10 "Accounting by Creditors for Impairment of a Loan." Compliance with the Interagency Policy Statement includes management's review of the Bank's loan portfolio, including the identification and review of individual problem situations that may affect a borrower's ability to repay.  In addition, management reviews the overall portfolio quality through an analysis of delinquency and non-performing loan data, estimates of the value of underlying collateral, current charge-offs and other factors that may affect the portfolio, including a review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and composition of the loan portfolio. 


26


The ALLL reflects management's evaluation of the loans presenting identified loss potential, as well as the risk inherent in various components of the portfolio.  There is significant judgment applied in estimating the ALLL.  These assumptions and estimates are susceptible to significant changes based on the current environment. Further, any change in the size of the loan portfolio or any of its components could necessitate an increase in the ALLL even though there may not be a decline in credit quality or an increase in potential problem loans. As such, there can never be assurance that the ALLL accurately reflects the actual loss potential inherent in a loan portfolio. 

General Reserve Allowance

Carver's maintenance of a general reserve allowance in accordance with ASC Subtopic 450-20 includes the Bank's evaluating the risk to loss potential of homogeneous pools of loans based upon historical loss factors and a review of nine different environmental factors that are then applied to each pool.  The pools of loans (“Loan Type”) are:

1-4 Family
Multifamily
Commercial Real Estate
Construction
Business Loans
SBA Loans
Other (Consumer and Overdraft Accounts)

The pools are further segregated into the following risk rating classes:

Pass
Special Mention
Substandard
Doubtful

The Bank next applies to each pool a risk factor that determines the level of general reserves for that specific pool. The Bank estimates its historical charge-offs via a lookback analysis. The actual historical loss experience by major loan category is expressed as a percentage of the outstanding balance of all loans within the category. As the loss experience for a particular loan category increases or decreases, the level of reserves required for that particular loan category also increases or decreases. The Bank’s historical charge-off rate reflects the period over which the charge-offs were confirmed and recognized, not the period over which the earlier losses occurred. That is, the charge-off rate measures the confirmation of losses over a period that occurs after the earlier actual losses. During the period between the loss-causing events and the eventual confirmations of losses, conditions may have changed. There is always a time lag between the period over which average charge-off rates are calculated and the date of the financial statements. During that period, conditions may have changed. Another factor influencing the General Reserve is the Bank’s loss emergence period ("LEP") assumptions which represent the Bank’s estimate of the average amount of time from the point at which a loss is incurred to the point at which the loss is confirmed, either through the identification of the loss or a charge-off. The Bank generally considers coverage of one year’s losses an appropriate benchmark for most pools of loans because the probable loss on any given pool should ordinarily become apparent in that time frame. While in some instances, the Bank may be able to demonstrate a reliance on an LEP less than 12 months coverage, based upon adequate management information systems and effective methodologies for estimating losses, management has decided to put a floor of one year on all LEP. In some segments such as in its Commercial Real Estate, Multifamily and Business the Bank demonstrates an LEP in excess of 12 months. The Bank also recognizes losses in accordance with regulatory charge-off criteria.

Because actual loss experience may not adequately predict the level of losses inherent in a portfolio, the Bank reviews nine qualitative factors to determine if reserves should be adjusted based upon any of those factors.  As the risk ratings worsen, some of the qualitative factors tend to increase.  The nine qualitative factors the Bank considers and may utilize are:

1.
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses (Policy & Procedures).
2.
Changes in relevant economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments (Economy).
3.
Changes in the nature or volume of the loan portfolio and in the terms of loans (Nature & Volume).
4.
Changes in the experience, ability, and depth of lending management and other relevant staff (Management).
5.
Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans (Problem Assets).
6.
Changes in the quality of the loan review system (Loan Review).

27


7.
Changes in the value of underlying collateral for collateral dependent loans (Collateral Values).
8.
The existence and effect of any concentrations of credit and changes in the level of such concentrations (Concentrations).
9.
The effect of other external forces such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio (External Forces).

Specific Reserve Allowance

Carver also maintains a specific reserve allowance for criticized and classified loans individually reviewed for impairment in accordance with ASC Subtopic 310-10 guidelines. The amount assigned to the specific reserve allowance is individually determined based upon the loan. The ASC Subtopic 310-10 guidelines require the use of one of three approved methods to estimate the amount to be reserved and/or charged off for such credits. The three methods are as follows:

1.The present value of expected future cash flows discounted at the loan's effective interest rate;
2.The loan's observable market price; or
3.The fair value of the collateral if the loan is collateral dependent.

The Bank may choose the appropriate ASC Subtopic 310-10 measurement on a loan-by-loan basis for an individually impaired loan, except for an impaired collateral dependent loan.  Guidance requires impairment of a collateral dependent loan to be measured using the fair value of collateral method. A loan is considered "collateral dependent" when the repayment of the debt will be provided solely by the underlying collateral, and there are no other available and reliable sources of repayment.

Criticized and classified loans with at risk balances of $500,000 or more and loans below $500,000 that the Chief Credit Officer deems appropriate for review, are identified and reviewed for individual evaluation for impairment in accordance with ASC Subtopic 310-10. Carver also performs impairment analysis for all troubled debt restructurings (“TDRs”).  If it is determined that it is probable the Bank will be unable to collect all amounts due according with the contractual terms of the loan agreement, the loan is categorized as impaired. 

If the loan is determined to be not impaired, it is then placed in the appropriate pool of criticized and classified loans to be evaluated collectively for impairment.  Loans determined to be impaired are evaluated to determine the amount of impairment based on one of the three measurement methods noted above.  The Bank then determines whether the impairment amount is permanent, in which case the loan is written down by the amount of the impairment, or if it is other than permanent, in which case the Bank establishes a specific valuation reserve that is included in the total ALLL.  In accordance with guidance, if there is no impairment amount, no reserve is established for the loan.

Troubled Debt Restructured Loans

TDRs are those loans whose terms have been modified because of deterioration in the financial condition of the borrower and a concession is made. Modifications could include extension of the terms of the loan, reduced interest rates, capitalization of interest and forgiveness of accrued interest and/or principal. Once an obligation has been restructured because of such credit problems, it continues to be considered restructured until paid in full. For cash flow dependent loans, the Bank records a specific valuation allowance reserve equal to the difference between the present value of estimated future cash flows under the restructured terms discounted at the loan's original effective interest rate, and the loan's original carrying value. For a collateral dependent loan, the Bank records an impairment charge when the current estimated fair value of the property that collateralizes the impaired loan, if any, is less than the recorded investment in the loan. TDR loans remain on nonaccrual status until they have performed in accordance with the restructured terms for a period of at least six months.

Securities Impairment

The Bank’s available-for-sale securities portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive (loss) income. Securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. The fair values of securities in portfolio are based on published or securities dealers’ market values and are affected by changes in interest rates. On a quarterly basis, the Bank reviews and evaluates the securities portfolio to determine if the decline in the fair value of any security below its cost basis is other-than-temporary. The Bank generally views changes in fair value caused by changes in interest rates as temporary, which is consistent with its experience. The amount of an other-than-temporary impairment, when there are credit and non-credit losses on a debt security which management does not intend to sell, and for which it is more likely than not that the Bank will not be required to sell the security prior to the recovery of the non-credit impairment, the portion of the total impairment that is attributable to the credit loss would be recognized in earnings, and the remaining difference between the debt security’s amortized cost basis and its fair value would be included in other comprehensive (loss) income. This guidance also requires additional

28


disclosures about investments in an unrealized loss position and the methodology and significant inputs used in determining the recognition of other-than-temporary impairment. At December 31, 2015, the Bank does not have any securities that are classified as having other-than-temporary impairment in its investment portfolio.

Deferred Tax Assets

The Company records income taxes in accordance with ASC 740 Topic “Income Taxes,” as amended, using the asset and liability method. Income tax expense (benefit) consists of income taxes currently payable/(receivable) and deferred income taxes.  Temporary differences between the basis of assets and liabilities for financial reporting and tax purposes are measured as of the balance sheet date.  Deferred tax liabilities or recognizable deferred tax assets are calculated on such differences, using current statutory rates, which result in future taxable or deductible amounts.  The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Where applicable, deferred tax assets are reduced by a valuation allowance for any portion determined not likely to be realized. This valuation allowance would subsequently be adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant.

On June 29, 2011, the Company raised $55 million of capital, which resulted in a $51.4 million increase in equity after considering the effect of various expenses associated with the capital raise. The capital raise triggered a change in control under Section 382 of the Internal Revenue Code. Generally, Section 382 limits the utilization of an entity's net operating loss carryforwards, general business credits, and recognized built-in losses, upon a change in ownership. The Company expects to be subject to an annual limitation of approximately $900 thousand. The Company has a net deferred tax asset (“DTA”) of $0 since it has recorded a full valuation allowance on its DTA.

Stock Repurchase Program

On August 6, 2002, the Company announced a stock repurchase program to repurchase up to 15,442 shares of its outstanding common stock. As of December 31, 2015, 11,744 shares of its common stock have been repurchased in open market transactions at an average price of $235.80 per share (as adjusted for 1-for-15 reverse stock split that occurred on October 27, 2011). The Company intends to use repurchased shares to fund its stock-based benefit and compensation plans and for any other purpose the Board deems advisable in compliance with applicable law. No shares were repurchased during the three months and nine months ended December 31, 2015. As a result of the Company's participation in the TARP CDCI, the U.S. Treasury's prior approval is required to make further repurchases. As discussed below, the U.S. Treasury converted its preferred stock into common stock, which the U.S. Treasury continues to hold. The Company continues to be bound by the TARP CDCI restrictions so long as the U.S. Treasury is a common stockholder.

Liquidity and Capital Resources

Liquidity is a measure of the Bank's ability to generate adequate cash to meet its financial obligations.  The principal cash requirements of a financial institution are to cover potential deposit outflows, fund increases in its loan and investment portfolios and ongoing operating expenses.  The Bank's primary sources of funds are deposits, borrowed funds and principal and interest payments on loans, mortgage-backed securities and investment securities.  While maturities and scheduled amortization of loans, mortgage-backed securities and investment securities are predictable sources of funds, deposit flows and loan and mortgage-backed securities prepayments are strongly influenced by changes in general interest rates, economic conditions and competition. Carver Federal monitors its liquidity utilizing guidelines that are contained in a policy developed by its management and approved by its Board of Directors.  Carver Federal's several liquidity measurements are evaluated on a frequent basis.  The Bank was in compliance with this policy as of December 31, 2015.

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. 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 $5.0 million, or 6.0%, to $88.4 million at December 31, 2015, compared to $83.4 million at March 31, 2015. The Bank increased its borrowings to fund loan growth during the quarter. At December 31, 2015, $70.0 million of the Bank's borrowings with a weighted average rate of 0.92% was scheduled to mature over the next three years. The continued disruption in the credit markets has not materially impacted the Company's ability to access borrowings. At December 31, 2015, based on available collateral held at the FHLB-NY, Carver Federal had the ability to borrow from the FHLB-NY an additional $23.0 million on a secured basis, utilizing mortgage-related loans and securities as collateral.


29


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, 2015 and March 31, 2015, assets qualifying for short-term liquidity, including cash and cash equivalents, totaled $46.1 million and $51.0 million, respectively.

The most significant potential liquidity challenge the Bank faces is variability in its cash flows as a result of mortgage refinance activity. When mortgage interest rates decline, customers’ refinance activities tend to accelerate, causing the cash flow from both the mortgage loan portfolio and the mortgage-backed securities portfolio to accelerate. In contrast, when mortgage interest rates increase, refinance activities tend to slow, causing a reduction of liquidity. However, in a rising rate environment, customers generally tend to prefer fixed rate mortgage loan products over variable rate products. Carver Federal is also at risk to deposit outflows.

The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During the nine months ended December 31, 2015, total cash and cash equivalents decreased $4.9 million to $46.1 million at December 31, 2015, compared to $51.0 million at March 31, 2015, reflecting cash used in investing activities of $81.8 million, cash provided by financing activities of $74.9 million, and cash provided by operating activities of $2.0 million.

Net cash used in investing activities of $81.8 million was primarily attributed to loan originations and purchases of $189.7 million, offset by loan principal repayments of $52.1 million, proceeds from loan sales of $17.6 million, and investment calls and maturities of $32.5 million. Net cash provided by financing activities of $74.9 million resulted from net increases in deposits of $69.9 million, and FHLB-NY advances and other borrowings of $5.0 million. Net cash provided by operating activities totaled $2.0 million during the quarter.

The OCC requires that the Bank meet minimum capital requirements. Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system.

The table below presents the capital position of the Bank at December 31, 2015 (dollars in thousands):
 
 
Tier 1 Leverage
 
Common Tier 1
 
Tier 1 Risk-Based Capital
 
Total Risk-Based Capital
$ in thousands
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Regulatory capital
 
$
68,354

 
10.15
%
 
$
68,354

 
12.72
%
 
$
68,354

 
12.72
%
 
$
75,544

 
14.06
%
Minimum capital requirement
 
26,947

 
4.00
%
 
24,175

 
4.50
%
 
32,234

 
6.00
%
 
42,978

 
8.00
%
Excess
 
41,407

 
6.15
%
 
44,179

 
8.22
%
 
36,120

 
6.72
%
 
32,566

 
6.06
%

Bank Regulatory Matters

On February 7, 2011, the Bank and the Company consented to enter into the Bank Order and the Company Order with the OTS. The OTS issued these Orders based upon its findings that the Bank and the Company were operating with an inadequate level of capital for the volume, type and quality of assets held by the Bank and the Company, that they were operating with an excessive level of adversely classified assets, and that their earnings were inadequate to augment its capital. The Bank Order included a capital directive requiring the Bank to achieve and maintain minimum regulatory capital levels. On November 3, 2014, the OCC notified the Bank that the OCC had determined that the Bank had satisfied all of the requirements of the Bank Order and directed that the Bank Order be terminated. In addition, the OCC notified the Bank that the OCC had determined that the Bank was no longer in “troubled condition” and was relieved of all prior conditions imposed on the Bank by the OTS as a result of its troubled condition designation. On September 24, 2015, the Federal Reserve notified the Company that the Company Order had been terminated and that the Company was no longer in troubled condition.

On October 23, 2015, the Board of Directors of the Company adopted resolutions requiring, among other things, written approval from the Federal Reserve Bank of Philadelphia prior to the declaration or payment of dividends, any increase in debt by the Company, or the redemption of Company common stock.

At December 31, 2015, the Bank's capital level exceeded the regulatory requirements with a Tier 1 leverage capital ratio of 10.15%, Common Tier 1 capital ratio of 12.72%, Tier 1 risk-based capital ratio of 12.72%, and a total risk-based capital ratio of 14.06%.

Mortgage Representation and Warranty Liabilities

During the period 2004 through 2009, the Bank originated 1-4 family residential mortgage loans and sold the loans to the Federal National Mortgage Association (“FNMA”). The loans were sold to FNMA with the standard representations and

30


warranties for loans sold to the Government Sponsored Entities (GSEs).  The Bank may be required to repurchase these loans in the event of breaches of these representations and warranties. In the event of a repurchase, the Bank is typically required to pay the unpaid principal balance as well as outstanding interest and fees. The Bank then recovers the loan or, if the loan has been foreclosed, the underlying collateral. The Bank is exposed to any losses on repurchased loans after giving effect to any recoveries on the collateral.

Through fiscal 2011 none of the loans sold to FNMA were repurchased by the Bank.  During fiscal 2012, 2013, 2014 and 2015 three, ten, six and one loan, respectively, that had been sold to FNMA were repurchased by the Bank.  There were no repurchases during the first nine months of fiscal 2016. At December 31, 2015, the Bank continues to service 141 loans with a principal balance of $25.9 million for FNMA that had been sold with standard representations and warranties.

The following table presents information on open requests from FNMA. The amounts presented are based on outstanding loan principal balances.
$ in thousands
 
Loans sold to FNMA
Open claims as of March 31, 2015 (1)
 
$
2,045

Gross new demands received
 

Loans repurchased/made whole
 

Demands rescinded
 

Principal payments received on open claims
 
(25
)
Open claims as of December 31, 2015 (1)
 
$
2,020

(1) The open claims include all open requests received by the Bank where either FNMA has requested loan files for review, where FNMA has not formally rescinded the repurchase request or where the Bank has not agreed to repurchase the loan. The amounts reflected in this table are the unpaid principal balance and do not incorporate any losses the Bank would incur upon the repurchase of these loans.

Management has established a representation and warranty reserve for losses associated with the repurchase of mortgage loans sold by the Bank to FNMA that we consider to be both probable and reasonably estimable. These reserves are reported in the consolidated statement of financial condition as a component of other liabilities. The reserves totaled $429 thousand as of December 31, 2015.

The table below summarizes changes in our representation and warranty reserves during the nine months ended December 31, 2015:
$ in thousands
 
December 31, 2015
Representation and warranty repurchase reserve, March 31, 2015 (1)
 
$
406

Net provision for repurchase losses (2)
 
23

Net realized losses (2)
 

Representation and warranty repurchase reserve, December 31, 2015(1)
 
$
429

(1) Reported in our consolidated statements of financial condition as a component of other liabilities.
(2) Component of other non-interest expense.

31


Comparison of Financial Condition at December 31, 2015 and March 31, 2015

Assets

At December 31, 2015, total assets were $754.1 million, reflecting an increase of $77.7 million, or 11.5%, from total assets of $676.4 million at March 31, 2015. This change was primarily driven by an increase of $117.7 million in the loan portfolio net of the allowance for loan losses, partially offset by a decrease of $29.2 million in the investment portfolio.

Restricted cash decreased $6.1 million, or 96.7%, to $211 thousand at December 31, 2015, compared to $6.4 million at March 31, 2015. The Federal Home Loan Bank released its restriction on the $6.1 million resulting largely from the release of the Cease and Desist Order and the Bank's improved position.

Total investment securities decreased $29.2 million, or 25.8%, to $83.9 million at December 31, 2015, compared to $113.1 million at March 31, 2015, as cash generated from calls and sales of securities was redeployed into higher yielding loans.

Loans, net increased $118.4 million, or 24.5%, to $601.6 million at December 31, 2015, compared to $483.2 million at March 31, 2015, following growth in mortgage and business loans from loan purchases and originations.

Loans held-for-sale ("HFS") decreased $172 thousand, or 6.7%, to $2.4 million at December 31, 2015, following the transfer of one loan into Real Estate Owned.
 

Liabilities and Equity

Total liabilities increased $77.7 million, or 12.5%, to $699.1 million at December 31, 2015, compared to $621.4 million at March 31, 2015, following growth in deposits.

Deposits increased $69.9 million, or 13.2%, to $597.6 million at December 31, 2015, compared to $527.8 million at March 31, 2015, due primarily to increases in certificates of deposits, money market and non-interest bearing checking accounts.

Advances from the Federal Home Loan Bank of New York and other borrowed money increased $5.0 million, or 6.0%, to $88.4 million at December 31, 2015, compared to $83.4 million at March 31, 2015. The Bank increased its borrowings to fund loan growth during the quarter.

Total equity increased $86 thousand, or 0.2%, to $55.1 million at December 31, 2015, compared to $55.0 million at March 31, 2015. The increase was primarily driven by net income for the nine month period, offset by a $365 thousand increase in unrealized losses on investments.

Asset/Liability Management

The Company's primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between the rates on interest-earning assets and interest-bearing liabilities, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and assets, and the credit quality of earning assets.  Management's asset/liability objectives are to maintain a strong, stable net interest margin, to utilize the Company's capital effectively without taking undue risks, to maintain adequate liquidity and to manage its exposure to changes in interest rates.

The economic environment is uncertain regarding future interest rate trends.  Management monitors the Company's cumulative gap position, which is the difference between the sensitivity to rate changes of the Company's interest-earning assets and interest-bearing liabilities.  In addition, the Company uses various tools to monitor and manage interest rate risk, such as a model that projects net interest income based on increasing or decreasing interest rates.

Off-Balance Sheet Arrangements and Contractual Obligations

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and in connection with its overall investment strategy. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are not recorded in the consolidated financial statements. Such instruments primarily include lending obligations, including commitments to originate mortgage and consumer loans and to fund unused lines of credit.

32


The Bank has contractual obligations related to operating leases as well as a contingent liability related to a standby letter of credit as discussed in our Form 10-K for the year ended March 31, 2015.
The following table reflects the Bank's outstanding lending commitments and contractual obligations as of December 31, 2015:
$ in thousands
 
Commitments to fund mortgage loans
$
24,252

Commitments to fund commercial and consumer loans
3,250

Lines of credit
8,424

Letters of credit
234

Total
$
36,160



Comparison of Operating Results for the Three and Nine Months Ended December 31, 2015 and 2014

Overview

The Company reported net income of $437 thousand for the three months ended December 31, 2015, compared to net income of $111 thousand for the prior year quarter. For the nine months ended December 31, 2015, the Company reported net income of $451 thousand, compared to net income of $491 thousand for the prior year period. In both periods, the change in our results was driven by higher net interest income and non-interest income, partially offset by provisions for loan losses in the current periods compared to recoveries of loan losses in the prior year periods. Our provision for loan losses increased in both periods as a result of the increase in our loan portfolio.

The following table reflects selected operating ratios for the three and nine months ended December 31, 2015 and 2014 (unaudited):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
Selected Financial Data:
 
2015
 
2014
 
2015
 
2014
 
Return on average assets (1)
 
0.23
%
 
0.07
%
 
0.08
%
 
0.10
%
 
Return on average stockholders' equity (2) (8)
 
3.18
%
 
0.82
%
 
1.09
%
 
1.21
%
 
Return on average stockholders' equity, excluding AOCI (2) (8)
 
3.10
%
 
0.79
%
 
1.07
%
 
1.15
%
 
Net interest margin (3)
 
3.25
%
 
2.82
%
 
3.25
%
 
2.99
%
 
Interest rate spread (4)
 
3.16
%
 
2.71
%
 
3.15
%
 
2.87
%
 
Efficiency ratio (5) (8)
 
85.64
%
 
119.95
%
 
90.32
%
 
112.93
%
 
Operating expenses to average assets (6)
 
3.90
%
 
4.33
%
 
3.67
%
 
4.29
%
 
Average stockholders' equity to average assets (7) (8)
 
7.28
%
 
8.67
%
 
7.73
%
 
8.65
%
 
Average stockholders' equity, excluding AOCI, to average assets (7) (8)
 
7.49
%
 
8.99
%
 
7.93
%
 
9.10
%
 
Average interest-earning assets to average interest-bearing liabilities
 
1.15
x
1.17
x
1.16
x
1.19
x
 
 
 
 
 
 
 
 
 
 
(1)Net income, annualized, divided by average total assets.
(2)Net income, annualized, divided by average total stockholders' equity.
(3)Net interest income, annualized, divided by average interest-earning assets.
(4)Combined weighted average interest rate earned less combined weighted average interest rate cost.
(5)Operating expense divided by sum of net interest income and non-interest income.
(6)Non-interest expense, annualized, divided by average total assets.
(7)Total average stockholders' equity divided by total average assets for the period.
(8)See Non-GAAP Financial Measures disclosure for comparable GAAP measures.

Non-GAAP Financial Measures

In addition to evaluating the Company's results of operations in accordance with U.S. generally accepted accounting principles (“GAAP”), management routinely supplements their evaluation with an analysis of certain non-GAAP financial

33


measures, such as the efficiency ratio, return on average stockholders' equity excluding average accumulated other comprehensive income (loss) ("AOCI"), and average stockholders' equity excluding AOCI to average assets. Management believes these non-GAAP financial measures provide information that is useful to investors in understanding the Company's underlying operating performance and trends, and facilitates comparisons with the performance of other banks and thrifts. Further, the efficiency ratio is used by management in its assessment of financial performance, including non-interest expense control.

Return on equity measures how efficiently we generate profits from the resources provided by our net assets. Return on average stockholders' equity is calculated by dividing annualized net income (loss) attributable to Carver by average stockholders' equity, excluding AOCI. Management believes that this performance measure explains the results of the Company's ongoing businesses in a manner that allows for a better understanding of the underlying trends in the Company's current businesses. For purposes of the Company's presentation, AOCI includes the changes in the market or fair value of its investment portfolio and the former pension plan. These fluctuations have been excluded due to the unpredictable nature of this item and is not necessarily indicative of current operating or future performance.
 
 
Three Months Ended December 31,
 
Nine Months Ended
December 31,
$ in thousands
 
2015
 
2014
 
2015
 
2014
Average Stockholders' Equity
 
 
 
 
 
 
 
 
Average Stockholders' Equity
 
$
54,903

 
$
54,395

 
$
55,041

 
$
53,985

Average AOCI
 
(1,568
)
 
(2,023
)
 
(1,415
)
 
(2,813
)
Average Stockholders' Equity, excluding AOCI
 
$
56,471

 
$
56,418

 
$
56,456

 
$
56,798

 
 
 
 
 
 
 
 
 
Return on Average Stockholders' Equity
 
3.18
%
 
0.82
%
 
1.09
%
 
1.21
%
Return on Average Stockholders' Equity, excluding AOCI
 
3.10
%
 
0.79
%
 
1.07
%
 
1.15
%
 
 
 
 
 
 
 
 
 
Average Stockholders' Equity to Average Assets
 
7.28
%
 
8.67
%
 
7.73
%
 
8.65
%
Average Stockholders' Equity, excluding AOCI, to Average Assets
 
7.49
%
 
8.99
%
 
7.93
%
 
9.10
%
 
 
 
 
 
 
 
 
 

Analysis of Net Interest Income

The Company’s profitability is primarily dependent upon net interest income and is also affected by the provision for loan losses, non-interest income, non-interest expense and income taxes. Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned and paid. The Company’s net interest income is significantly impacted by changes in interest rate and market yield curves.

Net interest income increased $1.6 million, or 37.3%, to $5.8 million for the quarter, compared to $4.3 million for the prior year quarter. Net interest income increased $3.0 million, or 22.1%, to $16.6 million for the nine months ended December 31, 2015, compared to $13.6 million for the prior year period. Increases in each period were driven primarily by loan portfolio growth.

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 months and nine months ended December 31, 2015 and 2014. 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 and cost include fees, which are considered adjustments to yields.









34





CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCES
(Unaudited)
 
 
For the Three Months Ended December 31,
 
 
2015
 
2014
$ in thousands
 
Average
Balance
 
Interest
 
Average
Yield/Cost
 
Average
Balance
 
Interest
 
Average
Yield/Cost
Interest-Earning Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1)
 
$
583,963

 
$
6,467

 
4.43
%
 
$
414,547

 
$
4,677

 
4.51
%
Mortgage-backed securities
 
36,266

 
192

 
2.12
%
 
35,354

 
197

 
2.23
%
Investment securities
 
39,050

 
221

 
2.26
%
 
54,471

 
263

 
1.93
%
Restricted cash deposit
 
154

 

 
0.03
%
 
6,354

 

 
0.03
%
Equity securities (2)
 
4,017

 
41

 
4.05
%
 
1,727

 
18

 
4.14
%
Other investments and federal funds sold
 
55,526

 
88

 
0.63
%
 
90,153

 
110

 
0.48
%
Total interest-earning assets
 
718,976

 
7,009

 
3.90
%
 
602,606

 
5,265

 
3.49
%
Non-interest-earning assets
 
34,863

 
 
 
 
 
24,909

 
 
 
 
Total assets
 
$
753,839

 
 
 
 
 
$
627,515

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-Bearing Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
 
$
31,635

 
$
12

 
0.15
%
 
$
29,018

 
$
12

 
0.16
%
Savings and clubs
 
92,673

 
63

 
0.27
%
 
94,338

 
63

 
0.26
%
Money market
 
166,178

 
213

 
0.51
%
 
148,778

 
185

 
0.49
%
Certificates of deposit
 
240,631

 
546

 
0.90
%
 
195,443

 
473

 
0.96
%
Mortgagors deposits
 
2,488

 
7

 
1.12
%
 
1,939

 
8

 
1.64
%
Total deposits
 
533,605

 
841

 
0.63
%
 
469,516

 
741

 
0.63
%
Borrowed money
 
93,655

 
330

 
1.40
%
 
43,577

 
272

 
2.48
%
Total interest-bearing liabilities
 
627,260

 
1,171

 
0.74
%
 
513,093

 
1,013

 
0.78
%
Non-interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Demand
 
56,867

 
 
 
 
 
53,350

 
 
 
 
Other liabilities
 
14,809

 
 
 
 
 
7,178

 
 
 
 
Total liabilities
 
698,936

 
 
 
 
 
573,621

 
 
 
 
Non-controlling interest
 

 
 
 
 
 
(501
)
 
 
 
 
Stockholders' equity
 
54,903

 
 
 
 
 
54,395

 
 
 
 
Total liabilities and equity
 
$
753,839

 
 
 
 
 
$
627,515

 
 
 
 
Net interest income
 
 
 
$
5,838

 
 
 
 
 
$
4,252

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average interest rate spread
 
 
 
 
 
3.16
%
 
 
 
 
 
2.71
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
 
 
 
 
 
3.25
%
 
 
 
 
 
2.82
%
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes nonaccrual loans
 
 
 
 
 
 
 
 
 
 
 
 
(2) Includes FHLB-NY stock
 
 
 
 
 
 
 
 
 
 
 
 



35


 
 
For the Nine Months Ended December 31,
 
 
2015
 
2014
$ in thousands
 
Average
Balance
 
Interest
 
Average
Yield/Cost
 
Average
Balance
 
Interest
 
Average
Yield/Cost
Interest-Earning Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1)
 
$
532,914

 
$
18,282

 
4.57
%
 
$
401,856

 
$
14,838

 
4.92
%
Mortgage-backed securities
 
38,138

 
579

 
2.02
%
 
36,070

 
595

 
2.20
%
Investment securities
 
47,472

 
726

 
2.04
%
 
53,468

 
762

 
1.90
%
Restricted cash deposit
 
3,652

 
1

 
0.03
%
 
6,354

 
1

 
0.03
%
Equity securities (2)
 
3,410

 
102

 
3.97
%
 
1,822

 
59

 
4.30
%
Other investments and federal funds sold
 
55,912

 
258

 
0.61
%
 
106,692

 
357

 
0.44
%
Total interest-earning assets
 
681,498

 
19,948

 
3.90
%
 
606,262

 
16,612

 
3.65
%
Non-interest-earning assets
 
30,201

 
 
 
 
 
17,721

 
 
 
 
Total assets
 
$
711,699

 
 
 
 
 
$
623,983

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-Bearing Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
 
$
31,829

 
$
39

 
0.16
%
 
$
26,744

 
$
33

 
0.16
%
Savings and clubs
 
93,834

 
190

 
0.27
%
 
96,385

 
193

 
0.27
%
Money market
 
158,822

 
602

 
0.50
%
 
141,159

 
517

 
0.49
%
Certificates of deposit
 
223,963

 
1,551

 
0.92
%
 
199,803

 
1,416

 
0.94
%
Mortgagors deposits
 
2,337

 
17

 
0.97
%
 
1,977

 
23

 
1.54
%
Total deposits
 
510,785

 
2,399

 
0.62
%
 
466,068

 
2,182

 
0.62
%
Borrowed money
 
78,557

 
924

 
1.56
%
 
43,599

 
815

 
2.48
%
Total interest-bearing liabilities
 
589,342

 
3,323

 
0.75
%
 
509,667

 
2,997

 
0.78
%
Non-interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Demand
 
53,273

 
 
 
 
 
53,432

 
 
 
 
Other liabilities
 
14,043

 
 
 
 
 
7,307

 
 
 
 
Total liabilities
 
656,658

 
 
 
 
 
570,406

 
 
 
 
Non-controlling interest
 

 
 
 
 
 
(408
)
 
 
 
 
Stockholders' equity
 
55,041

 
 
 
 
 
53,985

 
 
 
 
Total liabilities and equity
 
$
711,699

 
 
 
 
 
$
623,983

 
 
 
 
Net interest income
 
 
 
$
16,625

 
 
 
 
 
$
13,615

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average interest rate spread
 
 
 
 
 
3.15
%
 
 
 
 
 
2.87
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
 
 
 
 
 
3.25
%
 
 
 
 
 
2.99
%
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes nonaccrual loans
 
 
 
 
 
 
 
 
 
 
 
 
(2) Includes FHLB-NY stock
 
 
 
 
 
 
 
 
 
 
 
 

Interest Income

Interest income increased $1.7 million, or 33.1%, to $7.0 million for the quarter, compared to $5.3 million for the prior year quarter, driven by a $169.4 million, or 40.9%, increase in the Bank's average loan balances. For the nine months ended December 31, 2015, interest income increased $3.3 million, or 20.1%, to $19.9 million compared to $16.6 million for the prior year period, driven by a $131.1 million, or 32.6%, increase in the Bank's average loan balances.


36



Interest Expense

Interest expense increased $158 thousand, or 15.6%, to $1.2 million for the quarter, compared to $1.0 million for the prior year quarter. For the nine months ended December 31, 2015, interest expense increased $326 thousand, or 10.9%, to $3.3 million, compared to $3.0 million for the prior year period. The increase in each period was primarily due to the Bank's deposit growth. The cost of deposits remained flat at 0.63% for the quarter and 0.62% year to date.

Provision for Loan Losses and Asset Quality

The Bank maintains an ALLL that management believes is adequate to absorb inherent and probable losses in its loan portfolio. The adequacy of the ALLL is determined by management’s continuous review of the Bank’s loan portfolio, including the identification and review of individual problem situations that may affect a borrower’s ability to repay. Management reviews the overall portfolio quality through an analysis of delinquency and non-performing loan data, estimates of the value of underlying collateral, current charge-offs and other factors that may affect the portfolio, including a review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and composition of the loan portfolio. The ALLL reflects management’s evaluation of the loans presenting identified loss potential, as well as the risk inherent in various components of the portfolio. Any change in the size of the loan portfolio or any of its components could necessitate an increase in the ALLL even though there may not be a decline in credit quality or an increase in potential problem loans.

The Bank’s provision for loan loss methodology is consistent with the Interagency Policy Statement on the Allowance for Loan and Lease Losses (the “Interagency Policy Statement”) released by the OCC on December 13, 2006. For additional information regarding the Bank’s ALLL policy, refer to Note 2 of Notes to Consolidated Financial Statements, “Summary of Significant Accounting Policies” included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015.

The following table summarizes the activity in the ALLL for the nine month periods ended December 31, 2015 and 2014 and the fiscal year-end March 31, 2015:
$ in thousands
 
Nine Months Ended December 31, 2015
 
Fiscal Year Ended March 31, 2015
 
Nine Months Ended December 31, 2014
Beginning Balance
 
$
4,477

 
$
7,233

 
$
7,233

Less: Charge-offs
 
1,076

 
1,286

 
195

Add: Recoveries
 
284

 
1,540

 
1,487

Provision for (Recovery of) Loan Losses
 
1,489

 
(3,010
)
 
(2,645
)
Ending Balance
 
$
5,174

 
$
4,477

 
$
5,880

 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
Net charge-offs (recoveries) to average loans outstanding
 
0.15
%
 
(0.06
)%
 
(0.32
)%
Allowance to total loans
 
0.86
%
 
0.93
 %
 
1.35
 %
Allowance to non-performing loans
 
50.99
%
 
53.33
 %
 
68.78
 %

To reflect the robust growth in the Bank's loan portfolio, the Company recorded a $728 thousand provision for loan losses for the third quarter, compared to a $1.2 million recovery of loan losses for the prior year quarter. Net chargeoffs of $100 thousand were recognized for the third quarter, compared to net recoveries of $434 thousand for the prior year quarter. For the nine months ended December 31, 2015, the Company recorded a $1.5 million provision for loan losses, compared to a $2.6 million recovery of loan losses for the prior year period, due primarily to the robust loan growth during the period. Net chargeoffs of $793 thousand were recognized for the nine months ended December 31, 2015, compared to net recoveries of $1.3 million in the prior year period.

At December 31, 2015, nonaccrual loans totaled $10.1 million, or 1.3% of total assets compared to $8.4 million or 1.2% of total assets at March 31, 2015. The ALLL was $5.2 million at December 31, 2015, which represents a ratio of the ALLL to nonaccrual loans of 51.0% compared to $4.5 million at March 31, 2015 which represents a ratio of 53.3%. Non-performing loans have increased 20.9% during the nine month period, primarily due to one commercial real estate loan that is experiencing delays in securing approval to allow tenancy. Nonetheless, the ratio of the allowance for loan losses to total loans was 0.86% at December 31, 2015, compared to 0.93% at March 31, 2015.




37


Non-performing Assets

Non-performing assets consist of nonaccrual loans, loans held-for-sale and property acquired in settlement of loans, including foreclosure. When a borrower fails to make a payment on a loan, the Bank and/or its loan servicers take prompt steps to have the delinquency cured and the loan restored to current status. This includes a series of actions such as phone calls, letters, customer visits and, if necessary, legal action. In the event the loan has a guarantee, the Bank may seek to recover on the guarantee, including, where applicable, from the SBA. Loans that remain delinquent are reviewed for reserve provisions and charge-off. The Bank’s collection efforts continue after the loan is charged off, except when a determination is made that collection efforts have been exhausted or are not productive.

The Bank may from time to time agree to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). Loans modified in a TDR are placed on nonaccrual status until the Bank determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for a minimum of six months. At December 31, 2015, loans classified as TDR totaled $7.2 million, of which $5.7 million were classified as performing. At March 31, 2015, loans classified as TDR totaled $8.2 million, of which $4.6 million were classified as performing.

At December 31, 2015, non-performing assets totaled $13.5 million, or 1.8% of total assets compared to $15.3 million, or 2.3% of total assets at March 31, 2015.

The following table sets forth information with respect to the Bank’s non-performing assets at the dates indicated:
 
 
Non Performing Assets
 
 
 
 
 
 
 
 
 
 
 
$ in thousands
 
December 31, 2015
 
September 30, 2015
 
June 30, 2015
 
March 31, 2015
 
December 31, 2014
Loans accounted for on a nonaccrual basis (1):
 
 
 
 
 
 
 
 
 
 
Gross loans receivable:
 
 
 
 
 
 
 
 
 
 
One-to-four family
 
$
2,997

 
$
3,251

 
$
3,654

 
$
3,664

 
$
3,089

Multifamily
 
1,229

 
1,241

 
1,247

 
1,053

 
1,053

Commercial real estate
 
3,427

 

 
1,784

 
2,817

 
2,850

Business
 
2,494

 
1,992

 
1,883

 
861

 
1,550

Consumer
 

 

 

 

 
7

Total nonaccrual loans
 
10,147

 
6,484

 
8,568

 
8,395

 
8,549

Other non-performing assets (2):
 
 
 
 
 
 
 
 
 
 
Real estate owned
 
960

 
3,723

 
3,723

 
4,341

 
3,934

Loans held-for-sale
 
2,404

 
2,586

 
2,576

 
2,576

 
2,606

Total other non-performing assets
 
3,364

 
6,309

 
6,299

 
6,917

 
6,540

Total non-performing assets (3)
 
$
13,511

 
$
12,793

 
$
14,867

 
$
15,312

 
$
15,089

 
 
 
 
 
 
 
 
 
 
 
Accruing loans contractually past maturity > 90 days (4)
 

 

 

 

 
6

 
 
 
 
 
 
 
 
 
 
 
Non-performing loans to total loans
 
1.69
%
 
1.15
%
 
1.74
%
 
1.74
%
 
1.96
%
Non-performing assets to total assets
 
1.79
%
 
1.74
%
 
2.22
%
 
2.26
%
 
2.34
%
Allowance to total loans
 
0.86
%
 
0.81
%
 
0.83
%
 
0.93
%
 
1.35
%
Allowance to non-performing loans
 
50.99
%
 
70.51
%
 
47.93
%
 
53.33
%
 
68.78
%
(1) Nonaccrual status denotes any loan where the delinquency exceeds 90 days past due and 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 less cost to sell, or fair value.
(3) Troubled debt restructured loans performing in accordance with their modified terms for less than six months and those not performing in accordance with their modified terms are considered nonaccrual and are included in the nonaccrual category in the table above. At December 31, 2015, there were $5.7 million TDR loans that have performed in accordance with their modified terms for a period of at least six months. These loans are generally considered performing loans and are not presented in the table above.
(4) Loans 90 days or more past maturity and still accruing, which were not included in the non-performing category, are presented in the above table.


38


Subprime Loans

In the past, the Bank originated or purchased a limited amount of subprime loans (which are defined by the Bank as those loans where the borrowers have FICO scores of 660 or less at origination). At December 31, 2015, the Bank had $7.3 million in subprime loans, or 1.2% of its total loan portfolio, of which $778 thousand are non-performing loans.

Non-Interest Income

Non-interest income increased $1.3 million, or 94.7%, to $2.7 million for the three months ended December 31, 2015, compared to $1.4 million for the prior year quarter. For the nine months ended December 31, 2015, non-interest income increased $893 thousand, or 21.4%, to $5.1 million compared to $4.2 million for the prior year period. This increase was primarily attributed to a $1.2 million gain recognized on the sale and leaseback of one of the Bank’s branch locations.  This was conducted as part of Carver’s ongoing site rationalization efforts.  This transaction was a sale and normal leaseback with an unaffiliated third party.  Carver did not finance the purchase and the gain is calculated utilizing the profit on sale in excess of the present value of the minimum lease payments in accordance with ASC 840. The remaining amount of profit on the sale of the property has been deferred from gain recognition and will be accreted into income over the term of the leaseback. The increase was also attributable to gains on sales of loans and real estate owned during the quarter. Non-interest income in the prior year included a $323 thousand grant from the Community Development Financial Institutions Fund of the U.S. Treasury Department.

Non-Interest Expense

Non-interest expense increased $558 thousand, or 8.2%, to $7.3 million for the quarter, compared to $6.8 million for the prior year quarter due to higher other non-interest expense, including the acceleration of expenses due to the closing of a branch during the quarter. For the nine months ended December 31, 2015, non-interest expense decreased $497 thousand or 2.5%, to $19.6 million, compared to $20.1 million for the prior year period. The Bank had lower expenses associated with delinquent loans and loan workout, as well as a decrease in regulatory assessment charges compared to the prior year period.

Income Tax Expense

Income tax expense was $67 thousand for the three months ended December 31, 2015, compared to $62 thousand for the prior year quarter. For the nine months ended December 31, 2015, income tax expense was $160 thousand, compared to $135 thousand in the prior year period.

Item 3.
Quantitative and Qualitative Disclosure about Market Risk

Not applicable, as the Company is a smaller reporting company.

Item 4.
Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. As of December 31, 2015, the Company’s management, including the Company's Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Accounting Officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as amended.

Based on the foregoing evaluation, and in light of the identified material weaknesses disclosed in our Annual Report on Form 10-K for the year ended March 31, 2015 filed June 29, 2015, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2015. The material weaknesses in internal control over financial reporting related to the risk assessment process and controls in the credit risk management function, and controls over the accounting and disclosure for the allowance for loan losses and related accounts.

(b) Remediation Plan

With the oversight of senior management and the finance and audit committee, we have developed and implemented improved process activities and controls, documented procedures and training related to the preparation and handling of the allowance for loan losses.

39



Implementation of the remediation plan has been completed through the efforts of the Chief Credit Officer working in conjunction with the Accounting and Finance Department. Additional controls and procedures have been designed in response to this matter and have been placed into operation.

Currently, the testing of the effectiveness of these implemented controls is underway. The effectiveness of new or revised processes and procedures cannot be evaluated until we have operated under such processes and procedures for at least one full fiscal reporting period. We expect to conduct a complete evaluation of the effectiveness of our remediation plan as of the fiscal year ending March 31, 2016.

(c) Changes in Internal Control over Financial Reporting

Other than the remediation plan discussed above, there have not been any changes in the Company’s internal control over financial reporting during the fiscal quarter to which this report relates, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


40


PART II. OTHER INFORMATION

Item 1.
Legal Proceedings

From time to time, the Company and the Bank or one of its wholly owned subsidiaries are parties to various legal proceedings incident to their business.  Certain claims, suits, complaints and investigations (collectively “proceedings”) involving the Company and the Bank or a subsidiary, arising in the ordinary course of business, have been filed or are pending.  The Company is unable at this time to determine the ultimate outcome of each proceeding, but believes, after discussions with legal counsel representing the Company and the Bank or the subsidiary in these proceedings, that it has meritorious defenses to each proceeding and appropriate measures have been taken to defend the interests of the Company, Bank or subsidiary.  In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the financial condition or results of operations of the Company or the Bank.  Further, there have been no material developments or changes associated with any litigation matters previously reported by the Company or the Bank.  In accordance with ASC Topic 450, Carver has accrued $30,000 for these lawsuits.

Item 1A.
Risk Factors

The Company does not believe its risks have materially changed from those included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2015.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

(a) No unregistered securities were sold by the Company during the quarter ended December 31, 2015.

(b) Not applicable.

(c) The Company did not repurchase any of its securities during the quarter ended December 31, 2015.

Item 3.
Defaults Upon Senior Securities

None.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5.
Other Information

None.

Item 6.
Exhibits

The following exhibits are submitted with this report:

41


 
3.1
Certificate of Incorporation of Carver Bancorp, Inc. (1)
 
3.2
Certificate of Amendment to the Certificate of Incorporation of Carver Bancorp, Inc. (2)
 
3.3
Second Amended and Restated Bylaws of Carver Bancorp, Inc. (3)
 
4.1
Stock Certificate of Carver Bancorp, Inc. (1)
 
4.2
Certificate of Designations of Mandatorily Convertible Non-Voting Participating Preferred Stock, Series C, and Convertible Non-Cumulative Non-Voting Participating Preferred Stock, Series D (4)
 
4.3
Form of Stockholder Rights Agreement, dated June 29, 2011, by and between the Company and certain purchasers (4)
 
4.4
Exchange Agreement, dated June 29, 2011, by and between the Company and the United States Department of the Treasury (4)
 
10.1
Employment Agreement by and between Michael T. Pugh and Carver Federal Savings Bank, dated January 1, 2015 (5)
 
11
Statement Regarding Computation of Per Share Earnings
 
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
 
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
 
32.1
Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350
 
32.2
Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350
 
101
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2015, formatted in XBRL (Extensive Business Reporting Language): (i) Consolidated Statements of Financial Condition as of December 31, 2015 (unaudited) and March 31, 2015; (ii) Consolidated Statements of Income for the three and nine months ended December 31, 2015 and 2014 (unaudited); (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended December 31, 2015 and 2014 (unaudited); (iv) Consolidated Statements of Changes in Equity for the nine months ended December 31, 2015 (unaudited); (v) Consolidated Statements of Cash Flows for the nine months ended December 31, 2015 and 2014 (unaudited); and (vi) Notes to Consolidated Financial Statements.
 
 
 
 
(1) 
Incorporated herein by reference from the Exhibits to the Form S-4, Registration Statement and amendments thereto, initially filed on June 7, 1996, Registration No. 333-5559.
 
(2) 
Incorporated herein by reference from the Exhibits to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 1, 2011.
 
(3) 
Incorporated herein by reference from the Exhibits to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.
 
(4) 
Incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 6, 2011.
 
(5) 
Incorporated herein by reference to the Exhibits to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 22, 2015.

42


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
CARVER BANCORP, INC.
 
Date:
February 10, 2016
/s/ Michael T. Pugh
 
 
Michael T. Pugh
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)

Date:
February 10, 2016
/s/ David L. Toner
 
 
David L. Toner
 
 
First Senior Vice President and Chief Financial Officer
 
 
(Principal Accounting Officer and Principal Financial Officer)

43