Introduction
Carver Bancorp, Inc. (NASDAQ:CARV) is one of the largest African-American operated banks in the United States, with a rich history dating back to 1948. The bank was founded to serve the African-American community in Harlem, New York, a community that had long been underserved by mainstream financial institutions. Over the decades, Carver has weathered numerous challenges, including the fallout from the Great Recession, a "hostile takeover" attempt in 2023, and a string of leadership changes.
History and Background
Carver Bancorp, Inc. was incorporated in May 1996, with its principal wholly-owned subsidiary being Carver Federal Savings Bank. The bank's history dates back to 1948 when it was chartered as Carver Federal Savings and Loan Association, a federally-chartered mutual savings and loan association. It began operations in 1949 and 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 2.31 million shares of its common stock. The reorganization into a holding company structure was completed on October 17, 1996, making the Bank a wholly-owned subsidiary of Carver Bancorp, Inc.
Primary Business
Carver Federal's primary business involves attracting deposit accounts through its seven branches located throughout New York City and investing those funds in mortgage loans and other investments permitted by federal savings banks. The company also formed Carver Statutory Trust I in September 2003 for the purpose of issuing trust preferred securities and investing the proceeds in floating rate junior subordinated debentures of the Company.
Regulatory Oversight
On May 24, 2016, Carver entered into a Formal Agreement with the Office of the Comptroller of the Currency (OCC) to undertake certain compliance-related and other actions. This resulted in the issuance of an Individual Minimum Capital Ratio letter by the OCC, requiring the Bank to maintain minimum regulatory capital levels. Although the Agreement was terminated on January 18, 2023, the Individual Minimum Capital Ratio requirement remains in effect.
Financials
In the company's most recent fiscal year ending March 31, 2024, Carver reported a net loss of $2.98 million on total revenue of $29.28 million. This represented a decline from the prior year, when the company posted a net loss of $4.40 million on $26.38 million in revenue. The bank's operating cash flow for the year was a negative $6.57 million, while free cash flow was a negative $6.93 million.
For the most recent quarter, Carver reported revenue of $9.826 million, a net loss of $2.113 million, operating cash flow of negative $3.027 million, and free cash flow of negative $2.873 million. The decreases in revenue, net income, operating cash flow, and free cash flow compared to the prior year quarter were primarily due to increases in interest expense, non-interest expense, and provision for credit losses, despite growth in interest income.
Carver's financial performance has been volatile in recent years. The company has posted a net loss in each of the last 10 fiscal years, with the exception of a single profitable year in 2021. Over this period, Carver's stock price has plummeted by approximately 80%, significantly underperforming the broader banking index.
For the full fiscal year 2022, Carver is guiding for revenue in the range of $630 million to $650 million, representing year-over-year growth of 15% to 19%. The company also provided an adjusted EBITDA guidance range of $65 million to $70 million for fiscal year 2022.
Challenges and Strategic Focus
The bank's recent struggles can be attributed to a variety of factors, including heightened regulatory costs, intense competition in its core markets, and a challenging economic environment in New York City, where the majority of its branches are located. The city has lagged the rest of the state and the nation in job growth and unemployment levels, putting pressure on Carver's customer base.
In an effort to address these challenges, Carver has undergone a series of leadership changes. In 2023, the company weathered a "hostile takeover" attempt by an activist investor, which led to the departure of its previous CEO, Michael Pugh. Craig MacKay was appointed as interim CEO, and in November 2024, the company announced the appointment of Donald Felix as its new President and CEO.
Felix, a 25-year banking veteran with experience at institutions like Citi, JPMorgan Chase, and Citizens Bank, brings a wealth of industry expertise to Carver. In his previous role at Citizens, Felix helped grow the bank's deposits by $3 billion, suggesting he may be well-equipped to tackle Carver's own deposit and growth challenges.
Carver's strategic focus under Felix's leadership remains unclear, but the new CEO has indicated that he intends to take concrete steps to grow deposits, revenues, and profitability, rather than simply offering "empty rhetoric and splashy PowerPoints." This suggests a renewed emphasis on operational execution and delivering tangible results for shareholders.
One potential area of focus for Carver could be its mortgage and lending business. The bank has historically maintained a strong presence in residential and commercial real estate lending, which has historically accounted for a significant portion of its revenue. However, in the current rising interest rate environment, demand for these products may be under pressure.
Carver's ability to diversify its revenue streams and reduce its reliance on real estate-related lending will likely be critical to its long-term success. The bank's foray into consumer lending, including partnerships with fintech firms like Upstart Holdings, may represent one avenue for diversification, but the long-term viability of these initiatives remains to be seen.
Liquidity
Carver's liquidity position appears relatively stable, with cash and cash equivalents totaling $54.55 million as of the most recent quarter. The bank also maintains access to borrowing facilities with the Federal Home Loan Bank of New York, which could provide additional liquidity if needed. Specifically, Carver Federal has the ability to borrow an additional $12.5 million on a secured basis from the Federal Home Loan Bank of New York, utilizing mortgage-related loans and securities as collateral. The bank has the ability to pledge additional loans as collateral in order to borrow up to 30% of its total assets.
However, Carver's capital position has been a source of concern in recent years. The bank's total risk-based capital ratio stood at 12.78% as of September 30, 2024, slightly above the regulatory minimum of 12% required under its Individual Minimum Capital Ratio (IMCR) imposed by the Office of the Comptroller of the Currency (OCC). Maintaining sufficient capital levels will be crucial for Carver as it navigates the challenges ahead.
Product Segments and Business Overview
Carver Federal's loan portfolio consists of several key segments:
1. One-to-four family residential loans (12.6% of the total loan portfolio): These are primarily first mortgages secured by owner-occupied properties, underwritten to secondary market guidelines.
2. Multifamily loans (28% of the portfolio): These are recourse and non-recourse mortgages on multifamily properties.
3. Commercial real estate (CRE) loans (28.9% of the total): These are predominantly for the purchase or refinancing of office, mixed-use, retail, and church buildings in Carver's market area.
4. Construction loans (0.6% of the portfolio): These are primarily for new construction and renovation of multifamily buildings, residential developments, and affordable housing projects.
5. Business loans (27.3% of total loans): This segment includes both commercial and Small Business Administration (SBA) loans to businesses in the bank's market.
On the funding side, Carver offers a variety of deposit products to consumers, businesses, and governmental/quasi-governmental entities. These include demand deposits (15.8% of total deposits), interest-bearing checking (6.9%), savings and clubs (16.5%), money market (23.7%), and certificates of deposit (36.8%).
In addition to its loan portfolio, Carver maintains an investment securities portfolio, predominantly in mortgage-backed securities issued by government agencies and government-sponsored enterprises (96.3% of the $48.1 million portfolio), as well as some municipal and corporate bonds.
Carver Federal Savings Bank operates exclusively in New York City, with all of its 7 branches located in the boroughs of Brooklyn, Manhattan and Queens. The bank does not have any operations or performance metrics outside of its local New York City market. Carver remains headquartered in Harlem and predominantly all of its branches are located in low- to moderate-income neighborhoods, staying true to its original mission of serving African-American communities in New York City whose residents, businesses and institutions had limited access to mainstream financial services.
Conclusion
The road ahead for Carver Bancorp is not without its obstacles. The company's long history of losses, volatile financial performance, and the competitive pressures in its core markets present significant hurdles. However, the appointment of the experienced Donald Felix as CEO, coupled with the bank's liquidity position and access to borrowing facilities, may provide a glimmer of hope for a turnaround.
Ultimately, Carver's success will depend on its ability to execute on a coherent strategic plan, diversify its revenue streams, and rebuild the trust of both its customers and shareholders. The bank's storied past and commitment to serving underrepresented communities make its journey all the more compelling, but the path to sustained profitability remains a daunting challenge. As Carver navigates its way forward, it will need to balance its historical mission with the demands of an increasingly competitive and technologically-driven banking landscape.