Is Carver Bancorp Stock A Buy?

Carver Bancorp Inc (NASDAQ:CARV) is the holding company for Carver Federal Savings Bank, which is the largest black-run financial institution in the United States. It’s a Community Development Financial Institution (CDFI) founded in Harlem, New York in 1948 and named after George Washington Carver.

Over the years, the company grew through a series of mergers and acquisitions. For example, the company merged with Allied Federal Bank in 1982 and acquired Independence Federal Savings Bank in 1999.

In February 2021, JPMorgan Chase (NYSE:JPM) invested in the company by purchasing about $6 million worth of common and preferred shares in the bank. This represents about 3.4 percent of the company’s outstanding shares and has investors wondering if they should follow suit. Is Carver Bancorp stock a buy?

The company provides a full range of financial services to underserved communities, and its ballpark $30 million valuation is a deal compared to what the company was worth in the lead-up to the 2007 subprime mortgage crisis.

Unlike larger multinational banks, Carver struggled to regain its pre-crisis valuation in the decade leading into the pandemic. But the coronavirus changed the global economy for several years, and it’s unclear how anybody will move forward.

Financial institutions were hit just as hard as other businesses, as municipal quarantines and other social distancing orders crippled commerce.

Carver Bancorp could represent a savvy investment with a 10x growth potential if it can navigate the upcoming financial problems. Government stimulus money has been pouring into the economy through the entire pandemic, and it’s eventually going to either stop or run out completely. When it does, it could trigger another financial crisis, but the world is a much different place now.

Digital finance companies like Paypal Holdings Inc (NASDAQ:PYPL), Redfin Corp (NASDAQ:RDFN), and Square Inc (NYSE:SQ) use technology to compete. Even digital currencies, like Bitcoin ($BTC) and Dogecoin ($DOGE) are gaining traction.

Will Carver Bancorp return 10x profits to investors or leave their portfolios disappointed?

Carver Bancorp Market Share

If you were to consider investing in Carver Bancorp as a retail investor, you’ll quickly find there’s not much information available. The company’s most recent annual report published online is from 2016, and this shows how little attention it pays to the internet and technology.

However, you can dig into the SEC to find its earnings reports filed, and in 2020 the company held $109.34 million in investment securities and $463.45 million in net loans receivable (including mortgage, business, and consumer lending).  It manages $569.74 million in deposit accounts too, which is a small fraction of JPMorgan’s $3.4 trillion in deposit assets in the same year.

Because JPMorgan represents just over 10 percent of the domestic banking market, we can deduce that Carver holds around 0.0001 percent of the overall country’s banking market. But it also only operates within seven branches in New York City, where it has closer to 0.005 percent of the market.

It may seem inconsequential, but JPMorgan Chase grew to its current size through mergers and acquisitions with regional banks. It’s based out of Manhattan itself, so investing in the smaller hometown bank is a sign it’s reaching out to markets that are underserved by the company’s own large footprint.

And an investment from one of the largest financial institutions in the world is a sign that there’s profit to be made. But it’s unclear how the company can protect its interests.

Does Carver Bancorp Stock Have a Moat?

Unlike other smaller banks, Carver Bancorp isn’t relying on technology to compete with the big conglomerates. Instead, it focuses on the underserved populations within the community, creating a personal relationship with human-to-human contact.

In an age when digital finance options are everywhere, there’s still a notable portion of the population that prefers to do business with trusted people in the community. That’s still true with some financial institutions too.

And because it’s so established, the bank’s branches are in communities underserved by legacy banks. Real estate prices remain elevated in NYC, and that means there’s a high barrier to entry for even larger enterprise banks looking for a foothold in those communities.

Beyond this physical retail presence, the company does have a mobile app and use Zelle. It’s also in good financial condition, according to the most recent stress test.

This FDA-approved institution has overall great online reviews from both customers and employees. Brand loyalty is an underrated moat that could protect this bank well beyond its 100-year anniversary.

Of course, survival alone isn’t enough. Investors want to know if the bank will continue to grow revenues.

Is Carver Bancorp Growing Revenues?

Carver’s revenue is derived from deposit accounts at its branches. This money is then used to fund mortgage loans and other investments federal savings banks are legally allowed. The company’s cash on hand grew through 2020, rising from $47.54 million in March to $79.55 million by year end.

However, income went down during the first year of the pandemic when compared to the prior year.

In the nine months that ended December 31, the company earned $15.09 million of income from its loans. This compares to $16.36 million in the same period of 2019.

The fourth quarter net results did go up, though. Net interest income of $4.13 million in the December 2020 quarter is an increase from the $4.02 million earned the same quarter of the prior year.

Of course, every bank around the globe was ultimately impacted by the coronavirus pandemic. According to KPMG, big banks like JPMorgan Chase, Bank of America (BAC), Citigroup, and Wells Fargo still haven’t reached pre-pandemic revenues.

The big question is at what rate Carver Bancorp’s earnings are growing since the COVID-19 outbreak and if it can continue in a post-pandemic society.

What Rate Are Carver Bancorp Earnings Growing?

Carver Bancorp operated at a net loss for the past two years, but that loss is shrinking.

By the end of the 2020 calendar year, the company’s net loss of -$2.93 million is about a 20 percent increase from -$3.62 million in the same period of 2019.

However, the company’s cash and cash equivalents more than doubled from $37.73 million to $79.55 million during that same timeframe. This is because of an increase in deposits, which shows the company will continue growing earnings.

But this depends on the bank’s management quality.

Carver Bancorp Management Quality

Michael T. Pugh is Carver Bancorp’s president, CEO, and director.

He’s joined in the c-suite by Chief Financial Officer Christina L. Maier, Chief Revenue Officer Richard A. Muskus, and Chief Credit Officer Sophia Haliotis.

These executives have no known scandals, and there’s not much public information available about them. This is typical of very small cap stocks like Carver.

Headwinds Facing Carver Bancorp

The bank should benefit from the economic recovery. As the Federal Reserve raises rates, all banks have an opportunity to make more money. Bancorp also has a fresh infusion of cash from JPMorgan.

Beyond that, it’s a tiny regional bank that’s likely looking to position itself as an acquisition target.

Is Carver Bancorp Stock a Buy? Conclusion

Carver Bancorp received a big cash investment from JPMorgan, which says it’s a long-term investment. This regional federal savings firm has seven retail locations located entirely in NYC. Unless you’re a fellow New Yorker with a personal connection to the bank, it’s a speculative gamble to follow suit.

The bank has no moat against major fintech solutions like Stripe, Square, Paypal, and countless others. This means it’s likely to face a bumpy ride moving forward. The best case scenario is it’s bought out by a larger bank for more money than you’re paying today.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.