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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-21487
CARVER BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3904174
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
75 West 125th Street, New York, New York 10027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 876-4747
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share American Stock Exchange
(Title of Class) (Name of Each Exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
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. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
As of May 31, 2001, there were 2,306,286 shares of common stock of the
registrant outstanding. The aggregate market value of the Registrant's common
stock held by non-affiliates (based on the closing sales price of $9.00 per
share of the registrant's common stock on May 31, 2001) was approximately $17.3
million.
DOCUMENTS INCORPORATED BY REFERENCE
None
CARVER BANCORP, INC.
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Part I Page
----
Item 1. Business......................................................... 1
Item 2. Properties....................................................... 32
Item 3. Legal Proceedings................................................ 32
Item 4. Submission of Matters to a Vote of Security-Holders.............. 34
Part II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters......................... 35
Item 6. Selected Financial Data.......................................... 36
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 37
Item 7A. Quantitative and Qualitative Disclosures about Market Risk....... 49
Item 8. Financial Statements and Supplementary Data...................... 49
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................ 47
Part III
Item 10. Directors and Executive Officers of the Registrant............... 50
Item 11. Executive Compensation........................................... 54
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................. 59
Item 13. Certain Relationships and Related Transactions................... 62
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K....................................................... 63
SIGNATURES................................................................ 64
CONSOLIDATED FINANCIAL STATEMENTS OF CARVER
BANCORP INC. AND SUBSIDIARIRES................................. F-1
EXHIBIT INDEX
i
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995, and
may be identified by the use of such words as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." These forward-looking
statements consist of estimates with respect to the financial condition, results
of operations and business of the Company (as defined below) that are subject to
various factors which could cause actual results to differ materially from these
estimates. These factors include, without limitation, the Company's success in
implementing its initiatives, changes in general, economic and market,
legislative and regulatory conditions, the development of an adverse interest
rate environment that adversely affects the interest rate spread or other income
anticipated from the Company's operations and investments, the ability of the
Company to originate and purchase loans with attractive terms and acceptable
credit quality and the ability of the Company to realize cost efficiencies. The
Company assumes no obligation to update the forward-looking statements to
reflect the actual results, changes in assumptions or changes in other factors
affecting such forward-looking statements.
ITEM 1. BUSINESS.
GENERAL
Carver Bancorp, Inc.
Carver Bancorp, Inc., a Delaware corporation (the "Holding Company"), is
the holding company for Carver Federal Savings Bank, a federally chartered
savings bank (the "Bank" or "Carver Federal"). Collectively, the Holding Company
and the Bank are referred to herein as the "Company" or "Carver." On October 17,
1996, the Bank completed its reorganization into a holding company structure
(the "Reorganization") and became the wholly owned subsidiary of the Holding
Company. Pursuant to an Agreement and Plan of Reorganization, dated May 21,
1996, each share of the Bank's outstanding common stock was exchanged for one
share of common stock of the Holding Company. At this time, the Holding Company
conducts business as a unitary savings and loan holding company and the
principal business of the Holding Company consists of the operation of its
wholly owned subsidiaries, the Bank and Alhambra Holding Corp., a Delaware
corporation ("Alhambra"). The Company formed Alhambra to hold the Company's
investment in a commercial office building which was subsequently sold in March
2000. Alhambra is currently inactive.
The Holding Company's executive offices are located at the home office of
the Bank at 75 West 125th Street, New York, New York 10027. The Holding
Company's telephone number is (212) 876-4747.
Carver Federal Savings Bank
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, at which time the Bank obtained federal deposit insurance and
became a member of the Federal Home Loan Bank of New York ("FHLB"). The Bank
converted to a federal savings bank in 1986 and changed its name at that time to
Carver Federal Savings Bank. On October 24, 1994, the Bank converted from mutual
to stock form and issued 2,314,275 shares of its common stock, par value $0.01
per share.
Carver Federal was founded to provide an African-American operated
institution where residents of under-served communities could invest their
savings and obtain credit. Carver Federal's principal business consists of
attracting passbook and other savings accounts through its branch offices and
investing those funds in mortgage loans and other investments permitted to
federal savings banks. During the fiscal year ended March 31, 1997 ("fiscal
1997"), Carver adopted a business plan to shift its emphasis to direct lending
and restructure its balance sheet to shift from mortgage-backed and other
investment securities to higher yielding whole loans. In the fourth quarter of
fiscal 1997 and the first quarter of the fiscal year ended March 31, 1998
("fiscal 1998"), Carver restructured its balance sheet by purchasing whole loans
and decreasing its investment in mortgage-backed and other investment
securities. Since fiscal 1998, Carver has continued following this strategy and
has expanded its origination of multi-family and commercial real estate mortgage
loans. As a result of this effort, Carver's loan portfolio has substantially
increased as a percentage of total assets, and Carver's earnings are derived
more from direct lending and loan purchase activities than from investing in
securities. Based on asset size as of March 31, 2001, Carver Federal is the
largest African-American operated financial institution in the United States.
Changes in Executive Management
Deborah C. Wright was appointed President, Chief Executive Officer and
Director of the Holding Company and the Bank as of June 1, 1999. For a
description of Ms. Wright's business experience, see "Executive Officers of the
Holding Company--Deborah C. Wright." Ms. Wright succeeded Thomas L. Clark, Jr.,
who was removed from his position as President and Chief Executive Officer of
the Holding Company, and President, Chief Executive Officer and Director of the
Bank on January 25, 1999. Mr. Clark subsequently resigned from his position as
Director of the Holding Company as of June 1, 1999. During the period from
January 25, 1999 to June 1, 1999, the duties of the President and Chief
Executive Officer were performed by an Operating Committee comprised of
directors and officers of Carver.
Judith Taylor was appointed Acting Senior Vice President and Chief of
Retail Banking in November 1999, Margaret D. Peterson was appointed Senior Vice
President and Chief Administrative Officer in November 1999, James Boyle was
appointed Senior Vice President and Chief Financial Officer in January 2000, J.
Kevin Ryan was appointed Senior Vice President and Chief Lending Officer in June
2000, replacing Benny A. Joseph who had served in such position since November
1999, and William Schult was appointed Vice President and Controller in
September 2000. In January 2000, Walter Bond was appointed Senior Vice President
and Special Assistant to the President and Chief Executive Officer. Devon
Woolcock was appointed Senior Vice President and Chief of Retail Banking in July
2000, replacing Ms. Taylor who left the bank in September 2000. For a
description of the business experience of the executive officers, see "Executive
Officers of the Holding Company."
In May 2001, Mr. Boyle resigned as Chief Financial Officer. William Schult
is currently serving as Acting Chief Financial Officer.
Frank Deaton joined Carver as Senior Vice President and Chief Auditor in
May, 2001. Mr. Deaton was previously Vice President & Risk Review Manager with
the KeyCorp Risk Management Group in Cleveland, Ohio, where he was responsible
for developing the scope and overseeing completion of risk reviews to ensure
that critical credit, operational, and regulatory compliance risks were
mitigated through effective internal controls.
Linda J. Dunn was appointed Senior Vice President, General Counsel and
Secretary in June 2001. Ms. Dunn had been a corporate associate at the law firm
Paul, Weiss, Rifkin, Wharton & Garrison since 1994. Her prior work experience
includes financial positions at Chemical Bank and American/National Can Company.
LENDING ACTIVITIES
General. Carver's principal lending activity is the origination of mortgage
loans for the purpose of purchasing or refinancing one- to four-family
residential, multi-family residential, and commercial properties. Carver also
originates or participates in loans for the construction or renovation of
commercial property and residential housing developments and occasionally
originates permanent financing upon completion. In addition, Carver originates
home equity loans and consumer loans secured by deposits.
Carver originates one- to four-family mortgage loans to service its retail
customers. Carver continued to engage in first-mortgage loan purchases during
the fiscal year ended March 31, 2001 ("fiscal 2001"), which accounted for 50.5%
of loan additions. Loan purchases complement retail originations, which increase
the loan portfolio as a percentage of total assets. At March 31, 2001, one- to
four-family mortgage loans totaled $157.6 million, or 54.6%, of Carver's total
gross loan portfolio, multi-family loans totaled $83.6 million, or 29.0%, of
total gross loans, commercial real estate loans (including church loans) totaled
$36.1 million, or 12.5%, of total gross loans, and construction loans totaled
$7.1 million, or 2.5%, of total gross loans. Consumer (credit card loans,
personal loans, automobile loans and home equity loans) and business loans
totaled $4.0 million, or 1.4%, of total gross loans. Gross loans receivable
increased by $13.9 million, or 5.1%, to $288.4 million at March 31, 2001,
compared to $274.5 million at March 31, 2000. Carver's net loan portfolio as a
percentage of total assets increased to 66.8% at March 31, 2001, compared to
64.3% at March 31, 2000.
2
Loan Portfolio Composition. One- to four-family mortgage loans increased by
$5.1 million, or 3.4%, to $157.6 million at March 31, 2001, compared to $152.5
million at March 31, 2000. During fiscal 2001, multi-family real estate loans
decreased by $2.6 million, or 3.0%, to $83.6 million at March 31, 2001, compared
to $86.2 million at March 31, 2000. Commercial real estate loans (including
church loans) increased by $13.4 million, or 59.0%, to $36.1 million at March
31, 2001, compared to $22.7 million at March 31, 2000. Construction loans
increased by $708,000, or 11.1%, to $7.1 million at March 31, 2001, compared to
$6.4 million at March 31, 2000. Consumer loans (credit card loans, personal
loans, automobile loans and home equity loans) and business loans decreased by
$2.7 million, or 40.3%, to $4.0 million at March 31, 2001 compared to $6.7
million at March 31, 2000. The decrease reflects the Company's continued
de-emphasis of consumer lending resulting from its decision during the fiscal
year ended March 31, 1999 ("fiscal 1999") to discontinue the origination of
unsecured consumer loans.
Premium on loans increased by $123,000, or 21.1%, to $705,000 at March 31,
2001, compared to $582,000 at March 31, 2000 primarily reflecting increased
premium paid on loans purchased somewhat offset by the repayment of loans
purchased at a premium. Loans in process increased by $218,000, or 18.2%, to
$1.3 million at March 31, 2001, compared to $1.1 million at March 31, 2000.
Allowance for loan losses increased by $616,000, or 21.0%, to $3.6 million at
March 31, 2001, compared to $2.9 million at March 31, 2000, reflecting a
revision in the allowance schedule. See "Asset Quality--Asset Classification and
Allowance for Losses."
The following table sets forth selected data relating to the composition of
Carver's loan portfolio by type of loan at the dates indicated.
AT MARCH 31,
--------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------ ------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
(Dollars in thousands)
Real estate loans:
One- to four-family ....... $ 157,582 54.64% $ 152,458 55.54% $ 181,320 65.39% $ 188,761 66.85% $ 139,961 67.94%
Multi-family .............. 83,620 29.00% 86,184 31.40% 52,365 18.89% 49,289 17.46% 19,936 9.68%
Commercial real estate .... 36,113 12.52% 22,721 8.28% 23,092 8.33% 12,789 4.53% 22,415 10.88%
Construction .................. 7,101 2.46% 6,393 2.33% 11,047 3.98% 15,993 5.66% 14,386 6.98%
Consumer and
business loans (1) ........ 3,966 1.38% 6,725 2.45% 9,450 3.41% 15,536 5.50% 9,310 4.52%
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
Total gross loans ............. $ 288,382 100.00% $ 274,481 100.00% $ 277,274 100.00% $ 282,368 100.00% $ 206,008 100.00%
========= ======= ========= ======= ========= ======= ========= ======= ========= =======
Add:
Premium on loans .......... $ 705 $ 582 $ 1,014 $ 1,555 $ 1,805
Less:
Loans in process (2) ...... (1,280) (1,062) (2,636) (4,752) (6,854)
Deferred fees and
loan discounts ........ (819) (918) (1,110) (1,080) (795)
Allowance for loan losses.. (3,551) (2,935) (4,020) (3,137) (2,246)
--------- --------- --------- --------- ---------
Net loan portfolio ...... $ 283,437 $ 270,148 $ 270,522 $ 274,954 $ 197,918
========= ========= ========= ========= =========
(1) Includes automobile loans, personal loans, credit card loans, home equity,
home improvement loans and business loans.
(2) Represents undisbursed portion of outstanding construction loans.
One- to Four-Family Residential Lending. Traditionally, Carver's lending
activity has been the origination of loans secured by first mortgages on
existing one- to four-family residences in Carver's market area. During fiscal
2001, the Company continued its practice of purchasing portfolios of first
mortgage loans on existing one- to four-family residences to augment
originations.
Carver originates and purchases one- to four-family residential mortgage
loans in amounts that range between $35,000 and $750,000. Approximately 85% of
Carver's one-to-four-family residential mortgage loans at March 31, 2001 had
adjustable rates and approximately 15% had fixed rates.
3
Carver's one- to four-family residential mortgage loans are generally for
terms of 30 years, amortized on a monthly basis, with principal and interest due
each month. Residential mortgage loans often remain outstanding for
significantly shorter periods than their contractual terms. These loans
customarily contain "due-on-sale" clauses which permit the Bank to accelerate
repayment of a loan upon transfer of ownership of the mortgaged property. Also,
borrowers may refinance or prepay one- to four-family residential loans at their
option without penalty.
The Bank's lending policies generally limit the maximum loan-to-value ratio
("LTV") on one- to four-family residential mortgage loans secured by
owner-occupied properties to 95% of the lesser of the appraised value or
purchase price, with private mortgage insurance required on loans with LTV
ratios in excess of 80%. Under a special loan program, the LTV ratio may go to
97%. This special loan program consists of loans originated and sold to the
State of New York Mortgage Agency ("SONYMA") or General Motors Acceptance
Corporation ("GMAC") secured by single-family homes purchased by first time home
buyers.
Carver's fixed-rate, one- to four-family residential mortgage loans are
underwritten in accordance with applicable guidelines and requirements for sale
to the Federal National Mortgage Association ("Fannie Mae") or SONYMA in the
secondary market. The Bank originates fixed-rate loans that qualify for sale,
and from time to time has sold such loans to Fannie Mae since 1993 and to SONYMA
since 1984. The Bank also originates, to a limited extent, loans underwritten
according to Federal Home Loan Mortgage Corporation ("FHLMC") standards. Loans
are sold with limited recourse on a servicing retained basis to Fannie Mae and
on a servicing released basis to SONYMA and GMAC. Carver uses several
sub-servicing firms to service mortgage loans, whether held in portfolio or sold
with the servicing retained. At March 31, 2001, the Company, through its
sub-servicers, was servicing $2.2 million of loans for Fannie Mae and FHLMC.
Carver offers one-year, three-year, five/one-year and five/three-year
adjustable-rate one- to four-family residential mortgage loans. These loans are
retained in Carver's portfolio and are not sold on the secondary market. They
are indexed to the weekly average rate on the one-year, three-year and five-year
U.S. Treasury securities, respectively, adjusted to a constant maturity (usually
one year), plus a margin of 275 basis points. The rates at which interest
accrues on these loans are adjustable every one or three years, generally with
limitations on adjustments of two percentage points per adjustment period and
six percentage points over the life of the one-year adjustable-rate mortgage and
five percentage points over the life of a three-year adjustable-rate mortgage.
The retention of adjustable-rate loans in the Company's portfolio helps
reduce the Bank's exposure to increases in prevailing market interest rates.
However, there are unquantifiable credit risks resulting from potential
increases in costs to borrowers in the event of upward repricing of
adjustable-rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable-rate loans may increase due to
increases in interest costs to borrowers. Although adjustable-rate loans allow
the Bank to increase the sensitivity of its interest-earning assets to changes
in interest rates, the extent of this interest rate sensitivity is limited by
the periodic and lifetime interest rate adjustment limitations. Accordingly,
there can be no assurance that yields on the Bank's adjustable-rate loans will
fully adjust to compensate for increases in the Bank's cost of funds.
Adjustable-rate loans increase the Bank's exposure to decreases in prevailing
market interest rates, although decreases in the Bank's cost of funds would tend
to offset this effect.
Multi-Family Real Estate Lending. At March 31, 2001, multi-family loans
comprised 29.0% of Carver's gross loan portfolio. The largest of these loans
outstanding was a $1.9 million loan on a 72 unit, multi-family apartment
building located in the New York City borough of Brooklyn. This loan was
performing at March 31, 2001. The Bank intends to continue to emphasize its
multi-family mortgage loan program which has enabled the Bank to expand its
presence in the multi-family lending market in the New York City area. Carver
believes that it offers competitive rates with flexible terms which make the
product attractive to borrowers. Multi-family property lending entails
additional risks compared with one- to four-family residential lending. For
example, such loans are dependent on the successful operation of the real estate
project and can be significantly impacted by supply and demand conditions in the
market for multi-family residential units.
Carver's multi-family product guidelines generally require that the maximum
LTV not exceed 75%, and "cash out" refinances are limited to 65% LTV of the
appraised value. The Bank generally requires a debt coverage ratio ("DCR") of at
least 1.3, which requires the properties to generate cash flow after expenses
and allowances in excess of the principal and interest payment. Currently, the
Bank limits its maximum amount
4
for an individual loan to $2.0 million pursuant to OTS restriction. The
regulatory maximum is $4.5 million without this limitation. Carver originates
multi-family mortgage loans that generally amortize on the basis of a 15-, 20-,
25- or 30-year period but require a balloon payment after the first five years,
or the borrower may have an option to extend the loan for two additional
five-year periods. The Bank, on a case-by-case basis, originates ten-year fixed
rate loans.
To help ensure continued collateral protection and asset quality for the
term of multi-family real estate loans, Carver employs (with the assistance of
an independent consulting firm) a risk-rating system. Under the risk-rating
system, all multi-family real estate loans with balances over $250,000 are risk
rated. Separate multi-family real estate loan portfolio reviews are performed
annually resulting in written management summary reports.
Commercial Real Estate Lending. At March 31, 2001, commercial real estate
mortgage loans (including loans to churches) totaled $36.1 million, or 12.5%, of
the gross loan portfolio. Carver originates commercial real estate first
mortgage loans in its service area. At March 31, 2001, the largest commercial
loan outstanding was a $4.0 million loan secured by a retail/office building
located in Manhattan, New York. This loan was performing at March 31, 2001.
Carver's commercial real estate lending activity consists predominantly of loans
for the purpose of purchasing or refinancing office, retail and church buildings
in its service area. Commercial real estate lending entails additional risks
compared with one- to four-family residential lending. For example, such loans
typically involve large loan balances to single borrowers or groups of related
borrowers, and the payment experience on such loans typically is dependent on
the successful operation of the real estate project. Carver's maximum LTV on
commercial real estate mortgage loans is 75%, and "cash out" refinances are
limited to 65% LTV of the appraised value. The Bank generally requires a DCR of
at least 1.3. Assignment of rents of all tenants leasing in the subject property
is a Bank requirement.
To help ensure continued collateral protection and asset quality for the
term of the commercial real estate loans, Carver employs (with the assistance of
an independent consulting firm) a risk-rating system. Under the risk-rating
system, all commercial real estate loans with balances over $250,000 are risk
rated. Independent third party commercial loan portfolio reviews are performed
annually resulting in written management summary reports.
Historically Carver has been a New York City area leader in the origination
of loans to churches. At March 31, 2001, loans to churches totaled $10.7
million, or 3.7%, of the Bank's gross loan portfolio. These loans generally have
5-, 7- or ten-year terms with 15-, 20- or 25-year amortization periods and a
balloon payment due at the end of the term, and generally have no greater than a
60% LTV ratio. At March 31, 2001, the largest permanent church loan was a $2.0
million loan secured by a building located in Manhattan, New York. This loan was
performing at March 31, 2001. The Bank provides construction financing for
churches and generally provides permanent financing upon completion. Under the
Bank's current loan policy, the maximum loan amount for such lending is $1.0
million, but larger loan amounts are considered on a case-by-case basis. There
are currently 17 church loans in the portfolio.
Loans secured by real estate owned by religious organizations generally are
larger and involve greater risks than one- to four-family residential mortgage
loans. Because payments on loans secured by such properties are often dependent
on voluntary contributions by members of the church's congregation, repayment of
such loans may be subject to a greater extent to adverse conditions in the
economy. The Bank seeks to minimize these risks in a variety of ways, including
reviewing the church's financial condition, limiting the size of such loans and
establishing the quality of the collateral securing such loans. The Bank
determines the appropriate amount and type of security for such loans based in
part upon the governance structure of the particular organization, the length of
time the church has been established in the community and a cash flow analysis
of the church to determine its ability to service the proposed loan. Carver will
obtain a first mortgage on the underlying real property and usually requires
personal guarantees of key members of the congregation and/or key person life
insurance on the pastor of the congregation and may also require the church to
obtain key person life insurance on specific members of the church's leadership.
Asset quality in the church loan category has been exceptional throughout
Carver's history. Management believes that Carver remains a leading lender to
churches in its market area.
Construction Lending. The Bank originates construction loans for the new
construction and renovation of churches, multi-family buildings, residential
developments, community service facilities and
5
affordable housing programs. Carver also offers construction loans to qualified
individuals and developers for new construction and renovation of one- to
four-family residences in the Bank's market area. The Bank's construction loans
generally have adjustable interest rates and are underwritten in accordance with
the same standards as the Bank's mortgage loans on existing properties. The
loans provide for disbursement in stages as construction is completed.
Construction terms are usually from 12 to 24 months, during which period the
borrower is required to make monthly payments of accrued interest on the
outstanding loan balance. Borrowers must satisfy all credit requirements that
apply to the Bank's permanent mortgage loan financing for the subject property.
Carver has established additional criteria for construction loans to include an
engineer's review on all construction budgets in excess of $500,000 and
appropriate interest reserves for loans in excess of $250,000.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value which is insufficient to assure full repayment.
The ability of a developer to sell developed lots or completed dwelling units
will depend on, among other things, demand, pricing, availability of comparable
properties and economic conditions. The Bank has sought to minimize this risk by
limiting construction lending to qualified borrowers in the Bank's market areas,
limiting the aggregate amount of outstanding construction loans and imposing a
stricter LTV ratio requirement than that required for one- to four-family
mortgage loans.
At March 31, 2001, the Bank had $7.1 million (excluding $1.5 million of
committed but undisbursed funds) in construction loans outstanding, comprising
2.5% of the Bank's total gross loan portfolio. The largest construction loan was
on a retail building for $2.0 million located in the New York City borough of
Manhattan. At March 31, 2001, this loan was performing.
Consumer and Business Loans. At March 31, 2001, the Bank had approximately
$4.0 million in consumer and business loans, or 1.4% of the Bank's gross loan
portfolio. The secured loans in this portfolio were either secured by deposits
at the Bank, homes or automobiles. As of March 31, 2001, $1.3 million or 32.4%,
of all consumer and business loans were secured and $2.7 million, or 67.6%, were
unsecured.
Consumer loans generally involve more risk than first mortgage loans. Loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered. These loans may also give rise to claims and defenses by
a borrower against Carver, and a borrower may be able to assert claims and
defenses against Carver which it has against the seller of the underlying
collateral. In underwriting consumer loans, Carver considers the borrower's
credit history, an analysis of the borrower's income, expenses and ability to
repay the loan and the value of the collateral. In addition, with respect to
defaulted automobile loans, repossessed collateral may not provide an adequate
source of repayment of the outstanding loan balance as a result of damage, loss
or depreciation, and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. See "Asset
Quality--Non-performing Assets."
At March 31, 2001, the Bank had $390,000 in business loans and business
lines of credit; $100,000 was secured by deposits and $290,000 was unsecured.
During the fourth quarter of fiscal 1999, the Bank discontinued the origination
of unsecured commercial business loans. The Bank continues to make a limited
number of commercial business loans which are secured in full by passbook and/or
certificate of deposit accounts.
Loan Processing. Carver's loan originations are derived from a number of
sources, including referrals by realtors, builders, depositors, borrowers and
mortgage brokers, as well as walk-in customers. Loans are originated by the
Bank's personnel who receive a salary. Loan application forms are available at
each of the Bank's offices.
6
All applications are forwarded to the Lending Department located in the
main office. Applications for all fixed-rate one- to four-family real estate
loans are underwritten in accordance with Fannie Mae and SONYMA guidelines. All
loan applications for other types of loans are underwritten in accordance with
the Bank's guidelines.
Carver has established underwriting standards for multi-family and
commercial real estate. A commercial real estate loan application is completed
for all multi-family and commercial properties which the Bank finances. Prior to
loan approval, the property is inspected by a commercial loan officer, who will
prepare a property inspection report. As part of the loan approval process,
consideration is given to the appraisal, location, accessibility, stability of
neighborhood, environmental assessment, personal credit history of the
applicant(s), and financial capacity.
Upon receipt of a completed loan application from a prospective borrower, a
credit report and verifications are ordered to verify specific information
relating to the loan applicant's income and credit standing. It is the Bank's
policy to obtain an appraisal of the real estate intended to secure a proposed
mortgage loan from a independent fee appraiser approved by the Bank.
It is Carver's policy to record a lien on the real estate securing the loan
and to obtain a title insurance policy which insures that the property is free
of prior encumbrances. Borrowers must also obtain hazard insurance policies
prior to closing and, when the property is in a flood plain as designated by the
Department of Housing and Urban Development, paid flood insurance policies. Most
borrowers are also required to advance funds on a monthly basis together with
each payment of principal and interest to a mortgage escrow account from which
the Bank makes disbursements for items such as real estate taxes and hazard
insurance.
Loan Approval. The Board of Directors (the "Board") has the overall
responsibility and authority for general supervision of Carver's loan policies.
The Board has established written lending policies for the Bank. The Bank's
Chief Lending Officer has authority to approve all loans up to and equal to
$500,000, the Management Loan Committee of the Bank approves loans above
$500,000 to $1,000,000. The Bank's Asset Liability and Interest Rate Committee
must approve all loans above $1,000,000 to $2,000,000. All one-to four-family
loans mortgage loans that conform to Fannie Mae standards and limits can be
approved by the Vice President, Residential Mortgage Loan Underwriter. The
Management Loan Committee is composed of the President or President's designee,
the Chief Lending Officer, and the Chief Financial Officer. Loans above $2.0
million must be approved by the full Board.
Loans to One Borrower. Under the loans-to-one-borrower limits of the Office
of Thrift Supervision ("OTS"), with certain limited exceptions, loans and
extensions of credit to a single or related group of borrowers outstanding at
one time generally shall not exceed 15% of the unimpaired capital and surplus of
a savings bank. At March 31, 2001, the maximum loan under this test would be
$4.5 million. The Bank currently limits its maximum loan to one borrower to $2.0
million. There are three loan relationships which exceed $2.0 million and none
that exceed the $4.5 million limit. All of the loans are performing.
Loan Sales. Originations of one- to four-family real estate loans are
generally within the New York City metropolitan area, although Carver does
occasionally fund loans in other areas. All such loans, however, satisfy the
Company's underwriting criteria regardless of location. The Bank continues to
offer one-to four-family fixed-rate mortgage loans in response to consumer
demand but requires that such loans satisfy guidelines of either Fannie Mae or
SONYMA to ensure subsequent sale in the secondary market as required to manage
interest rate risk exposure.
Loan Purchases. Carver purchased a total of $30.9 million of mortgage loans
consisting of performing one-family adjustable-rate mortgage loans to supplement
its origination of one- to four-family first mortgage loans during fiscal 2001.
This represented 50.5% of Carver's net addition to its loan production at March
31, 2001. The Company purchases loans in order to increase interest income and
to manage its interest rate risk. The Company continues to shift its loan
production emphasis to take advantage of the higher yields and better interest
rate risk characteristics available on multi-family and commercial real estate
mortgage loans as well as increase its participation in multi-family and
commercial real estate mortgage loans with New York area lenders. Loans
purchased in fiscal 2001 decreased $32.4 million, or 48.8%, from fiscal 2000
loan purchases of $63.3 million.
7
The following table sets forth certain information with respect to Carver's
loan originations, purchases and sales during the periods indicated.
For the Year Ended March 31,
--------------------------------------------------------------------
2001 2000 1999
---- ---- ----
Loans originated: Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
One- to four-family ........... $ 2,274 3.71% $ 2,082 3.07% $ 11,487 12.06%
Multi-family .................. 15,747 25.70 319 0.47 12,013 12.61
Commercial real estate ........ 12,182 19.88 988 1.46 6,213 6.52
Construction .................. -- -- 1,000 1.47 6,016 6.32
Consumer & business loans (1).. 320 0.52 232 0.34 3,801 3.99
-------- -------- -------- -------- -------- --------
Total loans originated ................ 30,523 49.81 4,621 6.81 39,530 41.50
Loans purchased (2) ................... 30,922 50.45 63,282 93.19 55,842 58.62
Loans sold (3) ........................ (160) (0.26) -- -- (107) (0.12)
-------- -------- -------- -------- -------- --------
Net additions to loan portfolio ...... $ 61,285 100.00% $ 67,903 100.00% $ 95,265 100.00%
======== ======== ======== ======== ======== ========
- ----------
(1) Comprised of auto, credit card, personal and home equity.
(2) Comprised primarily of one-family mortgage loans and multi-family mortgage
loans.
(3) Comprised primarily of one-family loans and student loans.
Loan originations increased $25.9 million in fiscal 2001 to $30.5 million
compared to $4.6 million in fiscal 2000 as a result of a renewed focus in
lending.
Loans purchased by the Bank entail certain risks not necessarily associated
with loans the Bank originates. The Bank's purchased loans are generally
acquired without recourse and in accordance with the Bank's underwriting
criteria for originations. In addition, the purchased loans have a variety of
terms, including maturities, interest rate caps and indices for adjustment of
interest rates that may differ from those offered at the time by the Bank in
connection with the loans the Bank originates. Finally, the market areas in
which the properties which secure the purchased loans are located are subject to
economic and real estate market conditions that may significantly differ from
those experienced in Carver's market area. There can be no assurance that
economic conditions in these out-of-state areas will not deteriorate in the
future resulting in increased loan delinquencies and loan losses among the loans
secured by property in these areas.
In an effort to reduce these risks, with its existing personnel and through
the use of a quality control/loan review firm, the Bank has sought to ensure
that purchased loans satisfy the Bank's underwriting standards and do not
otherwise have a higher risk of collection or loss than loans originated by the
Bank although specific rates and terms may differ from those offered by the
Bank. A Lending Department officer monitors the inspection and confirms the
review of each purchased loan. Carver also requires appropriate documentation
and further seeks to reduce its risk by requiring, in each buy/sell agreement, a
series of warranties and representations as to the underwriting standards and
the enforceability of the related legal documents. These warranties and
representations remain in effect for the life of the loan. Any misrepresentation
must be cured within ninety (90) days of discovery or trigger certain repurchase
provisions in the buy/sell agreement.
Interest Rates and Loan Fees. Interest rates charged by Carver on mortgage
loans are primarily determined by competitive loan rates offered in its market
area and minimum yield requirements for loans purchased by Fannie Mae and
SONYMA. Mortgage loan rates reflect factors such as prevailing market interest
rate levels, the supply of money available to the savings industry and the
demand for such loans. These factors are in turn affected by general economic
conditions, the monetary policies of the federal government, including the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board"), the
general supply of money in the economy, tax policies and governmental budget
matters.
8
Carver charges fees in connection with loan commitments and originations,
rate lock-ins, loan modifications, late payments and changes of property
ownership and for miscellaneous services related to its loans. Loan origination
fees are calculated as a percentage of the loan principal. The Bank typically
receives fees of between zero and one point (one point being equivalent to 1% of
the principal amount of the loan) in connection with the origination of
fixed-rate and adjustable-rate residential mortgage loans. The loan origination
fee, net of certain direct loan origination expenses, is deferred and accreted
into income over the contractual life of the loan using the interest method. If
a loan is prepaid, refinanced or sold, all remaining deferred fees with respect
to such loan are taken into income at such time.
In addition to the foregoing fees, Carver receives fees for servicing loans
for others, which in turn generally are sub-serviced for Carver by a third party
servicer. Servicing activities include the collection and processing of mortgage
payments, accounting for loan repayment funds and paying real estate taxes,
hazard insurance and other loan-related expenses out of escrowed funds. Income
from these activities varies from period to period with the volume and type of
loans originated, sold and purchased, which in turn is dependent on prevailing
market interest rates and their effect on the demand for loans in the Bank's
market area.
Loan Maturity Schedule. The following table sets forth information at March
31, 2001 regarding the dollar amount of loans maturing in Carver's portfolio,
including scheduled repayments of principal, based on contractual terms to
maturity. Demand loans, loans having no schedule of repayments and no stated
maturity and overdrafts are reported as due in one year or less. The table below
does not include any estimate of prepayments, which significantly shorten the
average life of all mortgage loans and may cause Carver's actual repayment
experience to differ from that shown below.
Due During the Year Ending Due After Due After Due After
March 31, 3 Through 5 Through 10 Through Due After
---------------------------- 5 Years After 10 Years After 20 Years After 20 Years After
2002 2003 2004 March 31, 2001 March 31, 2001 March 31, 2001 March 31, 2001 Total
-------- -------- -------- -------------- -------------- -------------- -------------- --------
(Dollars in thousands)
Real Estate loans:
One- to four-family ...... $ 5 $ 52 $ 210 $ 1,992 $ 978 $ 9,140 $145,205 $157,582
Multi-family ............. -- -- 3,417 32,390 35,287 8,203 4,323 83,620
Commercial real estate ... -- -- -- 9,582 17,612 4,435 4,484 36,113
Construction ............. 7,101 -- -- -- -- -- -- 7,101
Consumer and business loans.. 310 -- -- 3,496 160 -- -- 3,966
-------- -------- -------- -------- -------- -------- -------- --------
Total ................ $ 7,416 $ 52 $ 3,627 $ 47,460 $ 54,037 $ 21,778 $154,012 $288,382
======== ======== ======== ======== ======== ======== ======== ========
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms due to prepayments. In addition,
due-on-sale clauses in mortgage loans generally give Carver the right to declare
a conventional loan due and payable in the event, among other things, that a
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase when current
mortgage loan market rates are substantially higher than rates on existing
mortgage loans and tends to decrease when current mortgage loan market rates are
substantially lower than rates on existing mortgage loans.
ASSET QUALITY
Non-performing Assets. When a borrower fails to make a payment on a
mortgage loan, immediate steps are taken by Carver's sub-servicers to have the
delinquency cured and the loan restored to current status. With respect to
mortgage loans, once the payment grace period has expired (in most instances 15
days after the due date), a late notice is mailed to the borrower within two
business days and a late charge is imposed if applicable. If payment is not
promptly received, the borrower is contacted by telephone, and efforts are made
to formulate an affirmative plan to cure the delinquency. Additional calls are
made by the 20th and 25th day of the delinquency. If a mortgage loan becomes 30
days delinquent, a letter is mailed to the borrower requesting payment by a
specified date. If a mortgage loan becomes 60 days delinquent, Carver seeks to
make personal contact with the borrower and also has the property inspected. If
a mortgage becomes 90 days delinquent, a letter is sent to the borrower
demanding payment by a certain date and indicating that a
9
foreclosure suit will be filed if the deadline is not met. If payment is still
not made, management may pursue foreclosure or other appropriate action.
When a borrower fails to make a payment on a consumer loan, steps are taken
by Carver's loan department to have the delinquency cured and the loan restored
to current status. With the exception of automobile loans, once the payment
grace period has expired (10 days after the due date), a late notice is mailed
to the borrower immediately and a late charge is imposed if applicable. If
payment is not promptly received, the borrower is contacted by telephone, and
efforts are made to formulate an affirmative plan to cure the delinquency. If a
consumer loan becomes 30 days delinquent, a letter is mailed to the borrower
requesting payment by a specified date. If the loan becomes 60 days delinquent,
the account is given to an independent collection agency to follow up with the
collection of the account. If the loan becomes 90 days delinquent, a final
warning letter is sent to the borrower and any co-borrower. If the loan remains
delinquent, it is reviewed for charge-off. The Bank's collection efforts
generally continue after the loan is charged off.
If an automobile loan borrower fails to make a payment on a loan, immediate
steps are taken by Carver's loan servicing department to have the delinquency
cured and the loan restored to current status. Once the payment grace period has
expired (10 days after the due date), a late notice is mailed to the borrower
immediately and a late charge is imposed if applicable. If payment is not
promptly received the borrower is contacted by telephone, with a follow-up
letter requesting payment. By the 45th day of the delinquency, if payment is not
received, repossession efforts begin. Once the vehicle is repossessed, the
borrower has a 30 day right of redemption. In order for the borrower to exercise
this right, one of the following must occur:
(1) The borrower must make all delinquent payments plus two additional
monthly payments, coupled with repossession and storage charges. In
addition, the borrower must show proof that the vehicle is fully
insured and that Carver is the loss payee.
(2) If Carver reasonably believes that something seriously affects the
ability to collect the monies owed under the installment loan note and
the security agreement or the value of the collateral, the full unpaid
balance plus accrued interest, late charges and other fees become
immediately payable in order for the vehicle to be released to the
borrower.
The following table sets forth information with respect to Carver's
non-performing assets at the dates indicated. Loans generally are placed on
non-accrual status when they become 90 days delinquent.
10
At March 31,
----------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a non-accrual basis (1):
Real estate:
One- to four-family ................................ $ 947 $ 966 $ 392 $1,134 $1,791
Multi-family ....................................... 978 870 1,051 258 --
Commercial real estate ............................. 565 -- -- -- 284
Construction ....................................... 23 122 560 3,089 954
Consumer and business loans ................................ 6 168 414 1,087 256
------ ------ ------ ------ ------
Total non-accrual loans ...................... $2,519 $2,126 $2,417 $5,568 $3,285
====== ====== ====== ====== ======
Accruing loans contractually past due 90 days or more:
Real Estate:
One- to four-family ................................ $ -- $ -- $ 568 $1,049 $ 279
Multi-family ....................................... -- -- 804 -- 373
Nonresidential ..................................... -- -- -- -- --
Construction ....................................... -- -- 530 -- 2,069
Consumer and business loans ................................ -- -- 183 226 400
------ ------ ------ ------ ------
Total accruing 90-day past due loans ......... $ -- $ -- $2,085 $1,275 $3,121
====== ====== ====== ====== ======
Total of non-accrual and accruing 90 day past due loans .... $2,519 $2,126 $4,502 $6,843 $6,406
====== ====== ====== ====== ======
Other non-performing assets (2):
Real estate:
One- to four-family ................................ $ -- $ 127 $ 185 $ 82 $ 82
Multi-family ....................................... 27 27 -- -- --
Nonresidential ..................................... 449 768 -- -- --
Consumer loans ............................................. -- 16 99 -- --
------ ------ ------ ------ ------
Total other non-performing assets ............ $ 476 $ 938 $ 284 $ 82 $ 82
====== ====== ====== ====== ======
Total non-performing assets ................................ $2,995 $3,064 $4,786 $6,925 $6,488
====== ====== ====== ====== ======
Non-performing loans to total loans ........................ 0.88% 0.79% 1.66% 2.47% 3.28%
Non-performing assets to total assets (3) .................. 0.71% 0.73% 1.15% 1.58% 1.53%
Troubled debt restructurings (4):
Real estate:
Multi-family and commercial ........................ $ -- $ -- $ -- $ 807 $ 413
====== ====== ====== ====== ======
- ----------
(1) Non-accrual status denotes any loan where the delinquency exceeds 90 days
past due and in the opinion of management the collection of additional
interest is doubtful. After a careful review of individual loan history and
related collateral by management, the loan may be designated as an accruing
loan that is contractually past due 90 days or more or, if in the opinion
of management, the collection of additional interest is doubtful, the loan
will remain in non-accrual status. Payments received on a non-accrual 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. During the year ended March 31, 2001, gross interest income of
$202,000 would have been recorded on loans accounted for on a non-accrual
basis at the end of the year if the loans had been current throughout the
year. Instead, there was no interest on such loans included in income
during the period.
(2) Other non-performing assets represent property acquired by the Company in
settlement of loans (i.e., through foreclosure or repossession or as an
in-substance foreclosure). These assets are recorded at the lower of their
fair value or the unpaid principal balance plus unpaid accrued interest of
the related loans.
(3) Non-performing assets consist of non-accrual loans, accruing loans 90 days
or more past due and property acquired in settlement of loans.
11
(4) Troubled debt restructurings, as defined under Statement of Financial
Accounting Standards ("SFAS") No. 15, are loans where the creditor has, for
economic or legal reasons, granted concessions to the debtor that the
creditor would not otherwise consider. At March 31, 2001, 2000 and 1999,
Carver had no restructured loans.
At March 31, 2001, non-performing assets decreased by $69,000, or 2.3%, to
$3.0 million compared to $3.1 million at March 31, 2000.
Loans accounted for on a non-accrual basis increased $393,000, or 18.5%, to
$2.5 million at March 31, 2001, compared to $2.1 million at March 31, 2000. The
increase primarily reflects an increase in non-performing commercial real estate
loans.
There were no loans contractually past due 90 days or more at March 31,
2001 and March 31, 2000 that were still accruing, reflecting the continued
practice adopted by the Bank during fiscal 2000 to either write off or place on
non-accrual status all loans contractually past due 90 days or more.
Other non-performing assets decreased $462,000, or 49.3%, to $476,000 at
March 31, 2001, compared to $938,000 at March 31, 2000. The decrease primarily
reflects the sale of two foreclosed properties.
Asset Classification and Allowances for Losses. Federal regulations require
savings institutions to classify their assets on the basis of quality on a
regular basis. An asset is classified as "substandard" if it is determined to be
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. An asset is classified as
"doubtful" if full collection is highly questionable or improbable. An asset is
classified as "loss" if it is considered un-collectible, even if a partial
recovery could be expected in the future. The regulations also provide for a
"special mention" designation, described as assets which do not currently expose
a savings institution to a sufficient degree of risk to warrant classification
but do possess credit deficiencies or potential weaknesses deserving
management's close attention. Assets classified as substandard or doubtful
require a savings institution to establish general allowances for loan losses.
If an asset or portion thereof is classified loss, a savings institution must
either establish specific allowances for loan losses in the amount of the
portion of the asset classified loss, or charge off such amount. Federal
examiners may disagree with a savings institution's classifications. If a
savings institution does not agree with an examiner's classification of an
asset, it may appeal this determination to the OTS Regional Director.
At March 31, 2001, Carver Federal had $2.4 million of loans classified as
substandard which represented 0.6% of the Bank's total assets and 8.0% of the
Bank's tangible regulatory capital at March 31, 2001. There were no loans
classified as doubtful or loss at March 31, 2001.
The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the ability to collect the
portfolio in a reasonable manner; and that management has established acceptable
allowance evaluation processes that meet the objectives set forth in the policy
statement. Although management believes that adequate specific and general loan
loss allowances have been established, actual losses are dependent upon future
events and, as such, further additions to the level of specific and general loan
loss allowances may become necessary. Federal examiners may disagree with the
savings institution as to the appropriate level of the institution's allowance
for loan losses. While management believes Carver has established its existing
loss allowances in accordance with generally accepted accounting principles,
there can be no assurance that regulators, in reviewing Carver's assets, will
not require Carver to increase its loss allowance, thereby negatively affecting
Carver's reported financial condition and results of operations.
Carver's methodology for establishing the allowance for loan losses takes
into consideration probable losses that have been identified in connection with
specific loans as well as losses that have not been identified but can be
expected to occur. Further, management reviews the ratio of allowances to total
loans (including projected growth) and recommends adjustments to the level of
allowances accordingly. Management conducts
12
quarterly reviews of the Bank's loans and evaluates the need to establish
general and specific allowances on the basis of this review. In addition,
management actively monitors Carver's asset quality and charges off loans and
properties acquired in settlement of loans against the allowances for losses on
loans and such properties when appropriate and provides specific loss reserves
when necessary. Although management believes it uses the best information
available to make determinations with respect to the allowances for losses,
future adjustments may be necessary if economic conditions differ substantially
from the economic conditions in the assumptions used in making the initial
determinations.
Carver reviews its assets on a quarterly basis to determine whether any
assets require classification or re-classification. The Bank has a centralized
loan processing structure that relies upon outside services, each of which
generates a monthly report of delinquent loans. The Bank's Board has designated
the Internal Asset Review Committee to perform quarterly reviews of the Bank's
asset quality, and their report is submitted to the Board for review and
approval prior to implementation of any classification. In originating loans,
Carver recognizes that credit losses will occur and that the risk of loss will
vary with, among other things, the type of loan being made, the creditworthiness
of the borrower over the term of the loan, general economic conditions and, in
the case of a secured loan, the quality of the security for the loan. It is
management's policy to maintain a general allowance for loan losses based on,
among other things, regular reviews of delinquencies and loan portfolio quality,
character and size, the Bank's and the industry's historical and projected loss
experience and current and forecasted economic conditions. In addition,
considerable uncertainty exists as to the future improvement or deterioration of
the real estate markets in various states, or of their ultimate impact on Carver
as a result of its purchased loans in such states. See "Lending Activities -
Loan Purchases." Carver increases its allowance for loan losses by charging
provisions for possible losses against the Bank's income. General allowances are
established by the Board on at least a quarterly basis based on an assessment of
risk in the Bank's loans taking into consideration the composition and quality
of the portfolio, delinquency trends, current charge-off and loss experience,
the state of the real estate market and economic conditions generally. Specific
allowances are provided for individual loans, or portions of loans, when
ultimate collection is considered improbable by management based on the current
payment status of the loan and the fair value or net realizable value of the
security for the loan. At the date of foreclosure or other repossession or at
the date the Bank determines a property is an impaired property, the Bank
transfers the property to real estate acquired in settlement of loans at the
lower of cost or fair value, less estimated selling costs. Fair value is defined
as the amount in cash or cash-equivalent value of other consideration that a
real estate parcel would yield in a current sale between a willing buyer and a
willing seller. At March 31, 2001, the Bank held $476,000, net of loss
allowance, in real estate acquired in settlement of loans. Any amount of cost in
excess of fair value is charged-off against the allowance for loan losses.
Carver records an allowance for estimated selling costs of the property
immediately after foreclosure. Subsequent to acquisition, the property is
periodically evaluated by management and an allowance is established if the
estimated fair value of the property, less estimated costs to sell, declines.
If, upon ultimate disposition of the property, net sales proceeds exceed the net
carrying value of the property, a gain on sale of real estate is recorded. See
Note 1 of Notes to Consolidated Financial Statements.
13
The following table sets forth an analysis of Carver's allowance for loan
losses for the periods indicated.
Year Ended March 31,
----------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at beginning of period ................... $2,935 $4,020 $3,138 $2,246 $1,206
------ ------ ------ ------ ------
Loans charged-off:
Real estate:
One- to four-family .......................... 252 138 -- -- --
Multi-family ................................. -- -- -- -- --
Commercial ................................... 194 171 -- -- 624
Consumer ..................................... 931 2,260 3,229 367 75
------ ------ ------ ------ ------
Total charge-offs ........................ 1,377 2,569 3,229 367 699
------ ------ ------ ------ ------
Recoveries:
Construction ................................. -- -- 45 -- 50
One-to-four-family ........................... -- 31 -- -- --
Multi-family ................................. -- 40 -- -- --
Commercial ................................... -- 22 -- -- --
Consumer loans ............................... 200 292 37 -- --
------ ------ ------ ------ ------
Total recoveries ........................ 200 385 82 -- 50
------ ------ ------ ------ ------
Net loans charged-off ............................ 1,177 2,184 3,147 367 649
Provision for loan losses .................... 1,793 1,099 4,029 1,259 1,689
------ ------ ------ ------ ------
Balance at end of period ......................... $3,551 $2,935 $4,020 $3,138 $2,246
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans
outstanding ................................ 0.42% 0.84% 1.17% 0.15% 0.69%
Ratio of allowance to total loans ................ 1.24% 1.07% 1.48% 1.11% 1.09%
Ratio of allowance to non-performing assets (1) .. 118.56% 5.79% 85.60% 45.30% 35.06%
- ----------
(1) Non-performing assets consist of non-accrual loans, accruing loans 90
days or more past due and property acquired in settlement of loans.
The following table allocates the allowance for loan losses by asset
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
At March 31,
------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------ ------------------ ------------------ ------------------ ----------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
To Total To Total To Total To Total To Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
Loans:
Real estate:
One-to four-family ...... $1,198 33.74% $1,050 35.78% $ 957 23.81% $1,691 53.91% $1,065 47.40%
Multi-family ............ 748 21.06 764 26.03 902 22.44 400 12.75 264 11.76
Commercial real estate .. 353 9.94 202 6.88 251 6.24 111 3.53 414 18.44
Construction ............ 290 8.17 272 9.27 424 10.55 340 10.84 212 9.44
Consumer and business ....... 962 27.09 647 22.04 1,486 36.96 596 18.97 291 12.96
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for loan
losses .................... $3,551 100.00% $2,935 100.00% $4,020 100.00% $3,138 100.00% $2,246 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Mortgage-Backed and Related Securities
Carver maintains a significant portfolio of mortgage-backed securities in
the form of Government National Mortgage Association ("GNMA") pass-through
certificates, Fannie Mae and FHLMC participation certificates and collateralized
mortgage obligations ("CMOs"). GNMA pass-through certificates are
14
guaranteed as to the payment of principal and interest by the full faith and
credit of the U.S. Government, while Fannie Mae and FHLMC certificates are each
guaranteed by their respective agencies as to principal and interest.
Mortgage-backed securities generally entitle Carver to receive a pro rata
portion of the cash flows from an identified pool of mortgages. CMOs are
securities issued by special purpose entities generally collateralized by pools
of mortgage-backed securities. The cash flows from such pools are segmented and
paid in accordance with a predetermined priority to various classes of
securities issued by the entity. Carver's CMOs are primarily adjustable-rate
CMOs issued by the Resolution Trust Corporation ("RTC"). Carver also has
invested in pools of loans guaranteed as to principal and interest by the Small
Business Administration ("SBA").
Although mortgage-backed securities generally yield from 60 to 100 basis
points less than whole loans, they present substantially lower credit risk and
are more liquid than individual mortgage loans and may be used to collateralize
obligations of the Bank. Because Carver receives regular payments of principal
and interest from its mortgage-backed securities, these investments provide more
consistent cash flows than investments in other debt securities which generally
only pay principal at maturity. Mortgage-backed securities also help the Bank
meet certain definitional tests for favorable treatment under federal banking
and tax laws. See "Regulation and Supervision--Regulation of Federal Savings
Associations--QTL Test" and "Federal and State Taxation."
The Bank seeks to avoid interest rate risk by investing in adjustable-rate
mortgage-backed securities which at March 31, 2001 constituted $23.3 million, or
54.3%, of the mortgage-backed securities portfolio. Mortgage-backed securities,
however, expose Carver to certain unique risks. In a declining rate environment,
accelerated prepayments of loans underlying these securities expose Carver to
the risk that it will be unable to obtain comparable yields upon reinvestment of
the proceeds. In the event the mortgage-backed security has been funded with an
interest-bearing liability with a maturity comparable to the original estimated
life of the mortgage-backed security, the Bank's interest rate spread could be
adversely affected. Conversely, in a rising interest rate environment, the Bank
may experience a lower than estimated rate of repayment on the underlying
mortgages, effectively extending the estimated life of the mortgage-backed
security and exposing the Bank to the risk that it may be required to fund the
asset with a liability bearing a higher rate of interest.
The increased effort by Carver since fiscal 1997 to originate and purchase
loans has shifted the emphasis away from the use of mortgage-backed securities
as the Bank's primary interest earning asset. Over the last fiscal year
repayments received from mortgage-backed securities have primarily been
reinvested in residential mortgage loans. This has resulted in a decrease in
Carver's investment in mortgage-backed securities and a reduction in the
percentage of mortgage-backed securities to total assets. At March 31, 2001,
mortgage-backed securities constituted 10.1% of total assets, as compared to
12.9% at March 31, 2000.
The following table sets forth the carrying value of Carver's
mortgage-backed securities at the dates indicated.
At March 31,
-----------------------------
2001 2000 1999
------- ------- -------
(In thousands)
Held to Maturity:
GNMA ....................... $ 5,774 $ 6,516 $ 7,631
Fannie Mae ................. 21,633 26,222 29,718
FHLMC ...................... 14,672 18,780 24,636
SBA ........................ 594 760 1,325
CMO:
RTC .................... -- 1,708 2,282
FHLMC .................. -- -- 647
Other .................. 193 243 345
------- ------- -------
Total CMOs .......... 193 1,951 3,274
------- ------- -------
Total held to maturity .......... $42,866 $54,229 $66,584
======= ======= =======
15
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Carver's mortgage-backed securities at
March 31, 2001. Expected maturities will differ from contractual maturities due
to scheduled repayments and because borrowers may have the right to call or
prepay obligations with or without prepayment penalties. The following table
does not take into consideration the effects of scheduled repayments or the
effects of possible prepayments.
One to Five Years Five to Ten Years More than Ten Years Total Mortgage-Backed Securities
------------------- ------------------- ------------------- -------------------------------
Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Value Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------
(Dollars in thousands)
GMNA .......... $ -- --% $ -- --% $ 5,774 6.58% $ 5,774 $ 5,855 6.58%
Fannie Mae .... -- -- 3,505 6.59 18,128 6.40 21,633 21,622 6.43
FHLMC ......... 287 7.83 842 7.61 13,543 6.31 14,672 14,636 6.42
SBA ........... -- -- -- -- 594 6.87 594 542 6.87
CMO ........... -- -- -- -- 193 5.98 193 187 5.98
------- ------- ------- ------- -------
$ 287 $ 4,347 $38,232 $42,866 $42,842
======= ======= ======= ======= =======
Investment Activities
Carver is permitted under federal law to make certain investments,
including investments in securities issued by various federal agencies and state
and municipal governments, deposits at the FHLB, certificates of deposit in
federally insured institutions, certain bankers' acceptances and federal funds.
The Bank may also invest, subject to certain limitations, in commercial paper
having one of the two highest investment ratings of a nationally recognized
credit rating agency, and certain other types of corporate debt securities and
mutual funds. Federal regulations require the Bank to maintain an investment in
FHLB stock and a sufficient amount of liquid assets which may be invested in
cash and specified securities. For additional information, see "Regulation and
Supervision--Regulation of Federal Savings Associations--Liquidity."
16
The following table sets forth the carrying value of Carver's
investment securities held to maturity and available for sale at the date
indicated.
At March 31,
---------------------------
2001 2000 1999
------- ------- -------
(In thousands)
U.S. Government and Agency securities held to maturity .... $24,996 $24,996 $ --
U.S. Government and Agency securities available for sale .. 19,926 24,952 29,918
------- ------- -------
Total investment securities ........................ $44,922 $49,948 $29,918
======= ======= =======
The following table sets forth the carrying value of Carver's investment in
FHLB stock and liquid assets at the dates indicated.
At March 31,
---------------------------
2001 2000 1999
------- ------- -------
(In thousands)
FHLB stock .............. $ 5,755 $ 5,755 $ 5,755
Federal funds sold ...... 23,700 11,300 10,200
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Carver's investments at March 31, 2001.
One Year or Less One to Five Years Total Investments
------------------- ------------------- ------------------------------
Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Value Yield
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
U.S. Government and Agency securities .. $ 19,926 4.98% $ 24,996 6.40% $ 44,922 $ 46,015 5.77%
Federal funds sold ..................... 23,700 5.00 -- -- 23,700 23,700 5.00
FHLB stock ............................. 5,755 7.32 -- -- 5,755 5,755 7.32
-------- -------- -------- --------
Total investments ...................... $ 49,381 $ 24,996 $ 74,377 $ 75,470
-------- -------- -------- --------
Deposit Activity and Other Sources of Funds
General. Deposits are the primary source of Carver's funds for lending and
other investment purposes. In addition to deposits, Carver derives funds from
loan principal repayments, interest payments and maturing investments. Loan
repayments and interest payments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by prevailing market
interest rates and money market conditions. Borrowing may be used to supplement
the Company's available funds, and from time to time the Company has borrowed
funds from the FHLB and through repurchase agreements.
Deposits. Carver attracts deposits principally from within its market area
by offering a variety of deposit instruments, including passbook and statement
accounts and certificates of deposit, which range in term from 91 days to seven
years. Deposit terms vary, principally on the basis of the minimum balance
required, the length of time the funds must remain on deposit and the interest
rate. Carver also offers Individual Retirement Accounts. Carver's policies are
designed primarily to attract deposits from local residents through the Bank's
branch network rather than from outside the Bank's market area. Carver also
holds deposits from various governmental agencies or authorities and
corporations. Carver does not accept deposits from brokers. The Bank's interest
rates, maturities, service fees and withdrawal penalties on deposits are
established by management on a periodic basis. Management determines deposit
interest rates and maturities based on the Company's funds acquisition and
liquidity requirements, the rates paid by the Company's competitors, the
Company's growth goals and applicable regulatory restrictions and requirements.
17
During the fiscal year ended March 31, 2001 the Bank sold deposits to other
financial institutions with balances as of the transfer dates of $22.5 million.
Subsequent to March 31, 2001, the Bank sold its facility and deposits in its
branch located in East New York. See "Market Area and Competition" for
additional discussion of deposits sold.
The following table sets forth deposit categories, weighted average
interest rate, minimum terms, minimum balance, aggregate balance and percentage
of total deposits for Carver's deposits at March 31, 2001.
Weighted Aggregate Percentage
Average Minimum Minimum Balance of Total
Interest Rate Term Category Balance (In thousands) Deposits
- ------------- --------- --------------------------------- -------- -------------- ---------
1.49% None NOW accounts $ 1,000 $ 14,757 5.28%
2.14 None Savings and club 300 132,645 44.47
2.25 None Money market savings accts. 500 15,718 5.63
-- None Other demand accounts 500 11,409 4.08
-------------- ---------
Total Savings accounts $ 174,529 62.46
============== =========
Certificates of Deposit:
4.26 91 days 91 to 181 Day 2,500 $ 3,379 1.21
4.13 182 days 182 to 364 Day 2,500 9,224 3.30
4.71 12 Months 12 to 17 Month 1,000 12,543 4.49
5.04 18 Months 18 to 29 Month 1,000 9,421 3.37
5.12 30 Months 30 to 59 Month 1,000 10,682 3.82
5.07 5 Years 5 to 7 Year 500 22,564 8.08
3.55 3 Years BEA FDIC Secured (1) 10,000 600 .21
3.86 -- Credit Card Collateral (2) 300 151 .05
6.26 9 Months G.W. Carver Heritage - Personal 500 7,661 2.74
5.96 9 Months G.W. Carver Heritage -NonPersonal 10,000 8,185 2.93
5.73 30 Days Jumbo 100,000 20,485 7.34
-------------- ---------
Total Certificates of Deposit 104,895 37.54
-------------- ---------
Total Deposits $ 279,424 100.00%
============== =========
(1) Bank Enterprise Award, deposit program sponsored by the U.S. Treasury
Department.
(2) Term matched to secured credit card.
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by Carver between the dates indicated.
Balance at Percentage Balance at Percentage Balance at Percentage
March 31, of Total Increase March 31, of Total Increase March 31, of Total
2001 Deposits (Decrease) 2000 Deposits (Decrease) 1999 Deposits
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Savings and club ........... $132,645 47.47% $(12,632) $145,277 51.53% $ 1,482 $143,795 51.91%
Money market savings ....... 15,718 5.63 (3,700) 19,418 6.89 (1,514) 20,932 7.56
NOW and demand accounts .... 26,166 9.36 (5,044) 31,210 11.06 4,499 26,711 9.64
Certificates of deposit .... 104,895 37.54 18,859 86,036 30.52 475 85,561 30.89
-------- ------ -------- -------- ------ ------- -------- ------
Total deposits ....... $279,424 100.00 $ (2,517) $281,941 100.00% $ 4,942 $276,999 100.00%
======== ====== ======== ======== ====== ======= ======== ======
18
The following table sets forth the average balances and interest rates based on
month end balances for certificates of deposit and non-certificate accounts as
of the dates indicated.
Year Ended March 31,
------------------------------------------------------------------
2001 2000 1999
------------------ ------------------ ------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ------- ------- ------- ------- -------
(Dollars in thousands)
Non-interest-bearing demand . $ 11,568 --% $ 11,388 --% $ 9,670 --%
Savings and club ............ 137,305 2.22 143,908 2.54 144,990 2.49
Certificates ................ 94,006 5.04 86,316 4.65 80,897 4.81
Money market savings accounts 17,598 2.34 19,578 3.22 21,541 2.85
NOW accounts ................ 15,926 1.59 18,032 1.74 18,789 1.67
-------- -------- --------
Total .................. $276,403 $279,222 $275,887
======== ======== ========
The following table sets forth time deposits in specified weighted average
interest rate categories as of the dates indicated.
At March 31,
------------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
2%-3.99% ........... $ 752 $ 5,129 $ 18,034
4%-5.99% ........... 104,143 80,907 67,527
-------- -------- --------
Total .......... $104,895 $ 86,036 $ 85,561
======== ======== ========
The following table sets forth the amount and maturities of time deposits
in specified weighted average interest rate categories at March 31, 2001.
Amount Due
-----------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- --------------- --------- --------- --------- -------- --------
( In thousands)
2% - 3.99% .... $ -- $ -- $ 752 $ -- $ 752
4% - 5.99% .... 48,933 20,034 8,905 26,271 104,143
-------- -------- -------- -------- --------
Total ... $ 48,933 $ 20,034 $ 9,657 $ 26,271 $104,895
======== ======== ======== ======== ========
Carver's certificates of deposit of $100,000 or more were $16.3 million as
of March 31, 2001.
The following table sets forth Carver's deposit reconciliation for the
periods indicated.
Year Ended March 31,
-----------------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands)
Deposits at beginning of year ............. $ 281,941 $ 276,999 $ 274,894
Net decrease before interest credited ..... (10,973) (3,670) (6,315)
Interest credited ......................... 8,456 8,612 8,420
--------- --------- ---------
Deposits at end of year ................... $ 279,424 $ 281,941 $ 276,999
========= ========= =========
Included in the net decrease in deposits before interest credited is the
amount of deposits sold during the year ended March 31, 2001 of $22.5 million at
the date of transfer.
Borrowing. Savings deposits historically have been the primary source of
funds for Carver's lending, investment and general operating activities. Carver
is authorized, however, to use advances and securities sold under agreement to
repurchase ("Repos") from the FHLB and approved primary dealers to supplement
its supply of funds and to meet deposit withdrawal requirements. The FHLB
functions as a central bank providing credit for savings institutions and
certain other member financial institutions. As a member of the FHLB system,
Carver is required to own stock in the FHLB and is authorized to apply for
advances. Advances are made pursuant to several different programs, each of
which has its own interest rate and range of
19
maturities. Advances from the FHLB are secured by Carver's stock in the FHLB and
a blanket pledge of Carver's mortgage loan and mortgage-backed securities
portfolios.
One of the elements of Carver's investment strategy is to leverage the
balance sheet by increasing liabilities with FHLB advances and Repos and
investing borrowed funds primarily in adjustable-rate mortgage loans. The Bank
seeks to match as closely as possible the term of borrowing with the repricing
cycle of the mortgage loans on the balance sheet. At March 31, 2001, Carver had
outstanding $100.3 million in FHLB advances and $4.9 million in securities sold
under agreements to repurchase.
The following table sets forth certain information regarding Carver's
short-term borrowings at the dates and for the periods indicated:
At or for the
Year Ended March 31,
--------------------------------------
2001 2000 1999
-------- -------- --------
(Dollars in thousands)
Amounts outstanding at end of period:
FHLB advances ........................................ $100,299 $ 66,688 $ 65,708
Securities sold under agreements to repurchase ....... 4,930 31,337 35,337
Weighted average rate paid at period end:
FHLB advances ........................................ 5.84% 5.60% 5.46%
Securities sold under agreements to repurchase ....... 6.70% 5.49% 5.52%
Maximum amount of borrowing outstanding at any month end:
FHLB advances ........................................ $102,314 $ 66,688 $ 65,723
Securities sold under agreements to repurchase ....... 31,337 35,337 85,720
Approximate average amounts outstanding for period:
FHLB advances ........................................ $ 80,591 $ 65,031 $ 47,393
Securities sold under agreements to repurchase ....... 17,165 32,670 59,296
Approximate weighted average rate paid during period (1):
FHLB advances ........................................ 5.72% 5.47% 5.66%
Securities sold under agreements to repurchase ....... 5.99% 5.46% 5.74%
- ----------
(1) The approximate weighted average rate paid during the period was
computed by dividing the average amounts outstanding into the related
interest expense for the period.
Subsidiary Activities
The Holding Company is the parent of two wholly owned subsidiaries, Carver
Federal and Alhambra.
As a federally chartered savings institution, Carver Federal is permitted
to invest up to 2% of its assets in subsidiary service corporations plus an
additional 1% in subsidiaries engaged in specified community purposes. At March
31, 2001, the net book value of the Bank's service corporations investments was
$158,000.
Carver Federal is also authorized to make investments of any amount in
operating subsidiaries that engage solely in activities that federal savings
institutions may conduct directly. On March 8, 1995, the Bank formed CFSB Realty
Corp. as a wholly owned subsidiary which holds real estate acquired through
foreclosure pending eventual disposition. At March 31, 2001, this subsidiary had
$158,000 in total capital and net operating expenses of $203,000.
On September 19, 1996, the Bank formed CFSB Credit Corp. ("CCC") as a
wholly owned subsidiary to undertake Carver's credit card issuance. During the
fourth quarter of fiscal 1998, in response to delinquencies in the credit card
portfolio, the Board resolved to discontinue the direct issuance of unsecured
credit cards and limited the issuance of secured credit cards to existing Bank
customers. CCC is currently inactive, and its operations have been consolidated
into the Bank's activities.
Alhambra was formed in 1996 to hold the Company's investment in a
commercial office building, which was subsequently sold in March 2000. Alhambra
is currently inactive.
20
Market Area and Competition
General. The Company's primary market area for deposits consists of the
areas served by its five branches, and the Bank considers its lending market to
include Bronx, Kings, New York, Queens and Richmond counties, together
comprising New York City, and lower Westchester County, New York.
Although Carver's branches are located in areas that have been historically
underserved by other financial institutions, Carver is facing increasing
competition for deposits and residential mortgage lending in its immediate
market areas. Management believes that this competition has become more intense
as a result of an increased examination emphasis by federal banking regulators
on financial institutions' fulfillment of their responsibilities under the
Community Reinvestment Act ("CRA") and the improving economic conditions in its
market area. Many of Carver's competitors have substantially greater resources
than Carver and offer a wider array of financial services and products than
Carver. At times, these larger commercial banks and thrifts may offer below
market interest rates on mortgage loans and above market interest rates for
deposits. These pricing concessions combined with competitors' larger presence
in the New York market add to the challenges Carver faces in expanding its
current market share. The Bank believes that it can compete with these
institutions by offering a competitive range of services as well as through
personalized attention and community commitment.
Branch Sales. During the fiscal year ended March 31, 2001, the Bank sold
its branches located in Roosevelt and Chelsea, New York. The total amount of
deposits transferred as a result of these sales was $8.4 and $14.1 million,
respectively. Subsequent to the year ended March 31, 2001, the Bank sold its
branch located in East New York (the "East New York Branch"). This sale was
completed on June 15, 2001. As a result of this sale the Bank transferred
approximately $16 million of deposits to the purchaser, City National Bank of
New Jersey.
Employees
As of March 31, 2001, Carver had 110 full-time equivalent employees, none
of whom was represented by a collective bargaining agreement. The Company
considers its employees relations to be good.
REGULATION AND SUPERVISION
General
The Bank is subject to extensive regulation, examination, and supervision
by the OTS, as its chartering agency, and the FDIC, as its deposit insurer. The
Bank's deposit accounts are insured up to applicable limits by the Savings
Association Insurance Fund ("SAIF") administered by the FDIC, and it is a member
of the FHLB. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, and it must obtain regulatory approvals
prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions. The OTS and the FDIC conduct
periodic examinations to assess the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which a savings association can engage and is
intended primarily for the protection of the insurance fund and depositors. The
Holding Company, as a savings association holding company, is required to file
certain reports with, and otherwise comply with, the rules and regulations of
the OTS and of the Securities and Exchange Commission (the "SEC") under the
federal securities laws.
The OTS and the FDIC have significant discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC, or the Congress, could have a material
adverse impact on the Holding Company, the Bank, and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations, and it does not
purport to be a comprehensive description of all such statutes and regulations.
21
Impact of Enactment of the Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act ("Gramm-Leach"), among other things, establishes
a comprehensive framework to permit affiliations among commercial banks,
insurance companies and securities firms. Generally, the new law (1) repeals the
historical restrictions and eliminates many federal and state law barriers to
affiliations among banks and securities firms, insurance companies and other
financial service providers, (2) provides a uniform framework for the activities
of banks, savings institutions and their holding companies, (3) broadens the
activities that may be conducted by subsidiaries of national banks and state
banks, (4) provides an enhanced framework for protecting the privacy of
information gathered by financial institutions regarding their customers and
consumers, (5) adopts a number of provisions related to the capitalization,
membership, corporate governance and other measures designed to modernize the
FHLB System, (6) requires public disclosure of certain agreements relating to
funds expended in connection with an institution's compliance with the CRA, and
(7) addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions,
including the functional regulation of bank securities and insurance activities.
Gramm-Leach also restricts the powers of new unitary savings and loan
association holding companies. Unitary savings and loan holding companies that
are "grandfathered," i.e., unitary savings and loan holding companies in
existence or with applications filed with the OTS on or before May 4, 1999, such
as the Holding Company, retain their authority under the prior law. All other
unitary savings and loan holding companies are limited to financially related
activities permissible for bank holding companies, as defined under Gramm-Leach.
Gramm-Leach also prohibits non-financial companies from acquiring grandfathered
unitary savings and loan association holding companies.
Gramm-Leach also requires financial institutions to disclose, on ATM
machines, any non-customer fees and to disclose to their customers upon the
issuance of an ATM card any fees that may be imposed by the institutions on ATM
users. For older ATMs, financial institutions will have until December 31, 2004
to provide such notices.
Bank holding companies are permitted to engage in a wider variety of
financial activities than permitted under the prior law, particularly with
respect to insurance and securities activities. In addition, in a change from
the prior law, bank holding companies are in a position to be owned, controlled
or acquired by any company engaged in financially related activities.
The Bank does not believe that the new law will have a material adverse
affect upon its operations in the near term. However, to the extent the new law
permits banks, securities firms and insurance companies to affiliate, the
financial services industry may experience further consolidation. This type of
consolidation could result in a growing number of larger financial institutions
that offer a wider variety of financial services than the Bank currently offers
and that can more aggressively compete in the markets we currently serve.
Regulation of Federal Savings Associations
Business Activities. The Bank derives its lending and investment powers
from the Home Owner's Loan Act, as amended ("HOLA"), and the regulations of the
OTS thereunder. Under these laws and regulations, the Bank may invest in
mortgage loans secured by residential and commercial real estate, commercial and
consumer loans, certain types of debt securities, and certain other assets. The
Bank may also establish service corporations that may engage in activities not
otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage. These investment powers are
subject to various limitations, including (a) a prohibition against the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories; (b) a limit of 400% of an association's capital on
the aggregate amount of loans secured by non-residential real estate property;
(c) a limit of 20% of an association's assets on commercial loans, with the
amount of commercial loans in excess of 10% of assets being limited to small
business loans; (d) a limit of 35% of an association's assets on the aggregate
amount of consumer loans and acquisitions of certain debt securities; (e) a
limit of 5% of assets on nonconforming loans (loans in excess of the specific
limitations of HOLA); and (f) a limit of the greater of 5% of assets or an
association's capital on certain construction loans made for the purpose of
financing what is or is expected to become residential property.
22
Loans to One Borrower. Under HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. Additional amounts may be
lent, not in excess of 10% of unimpaired capital and surplus, if such loans or
extensions of credit are fully secured by readily marketable collateral. Such
collateral is defined to include certain debt and equity securities and bullion,
but generally does not include real estate. At March 31, 2001, the Bank's limit
on loans to one borrower based on its unimpaired capital and surplus was $4.5
million. During fiscal 1999, the Bank was directed by the OTS to abstain from
originating new loans which individually, or in the aggregate exceed $2.0
million to one borrower. Since such notice, the Bank has not originated loans
which individually or in the aggregate exceed $2.0 million.
QTL Test. HOLA requires a savings association to meet a qualified thrift
lender ("QTL") test. Under the QTL test, a savings association is required to
maintain at least 65% of its "portfolio assets" in certain "qualified thrift
investments" in at least nine months of the most recent twelve-month period.
"Portfolio assets" means, in general, an association's total assets less the sum
of (a) specified liquid assets up to 20% of total assets, (b) certain
intangibles, including goodwill and credit card rights, and (c) the value of
property used to conduct the association's business. "Qualified thrift
investments" includes various types of loans made for residential and housing
purposes, investments related to such purposes, including certain
mortgage-backed and related securities, and consumer loans. At March 31, 2001,
the Bank maintained approximately 86.11% of its portfolio assets in qualified
thrift investments. The Bank had also met the QTL test in each of the prior 12
months and was, therefore, a qualified thrift lender.
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (a) engaging in any new activity not
permissible for a national bank, (b) paying dividends not permissible under
national bank regulations, (c) obtaining new advances from any FHLB, and (d)
establishing any new branch office in a location not permissible for a national
bank in the association's home state. In addition, within one year of the date a
savings association ceases to meet the QTL test, any company controlling the
association would have to register under, and become subject to the requirements
of, the Bank Holding Company Act of 1956 ("BHC Act"), as amended. If the savings
association does not re-qualify under the QTL test within the three-year period
after it failed the QTL test, it would be required to terminate any activity and
to dispose of any investment not permissible for a national bank and would have
to repay as promptly as possible any outstanding advances from an FHLB. A
savings association that has failed the QTL test may re-qualify under the QTL
test and be free of such limitations, but it may do so only once.
Capital Requirements. The OTS capital regulations require federally
chartered savings banks to meet three capital ratios: a 1.5% tangible capital
ratio, a 4% leverage (core capital) ratio and an 8% risk-based capital ratio.
The OTS regulations also provide that the minimum leverage capital ratio under
OTS regulations for a depository institution that has been assigned the highest
composite rating of 1 under the Uniform Financial Institutions Rating is 3%. In
assessing an institution's capital adequacy, the OTS takes into consideration
not only these numeric factors but also qualitative factors as well, and has the
authority to establish higher capital requirements for individual institutions
where necessary. The Bank, as a matter of prudent management, targets as its
goal the maintenance of capital ratios which exceed these minimum requirements
and that are consistent with the Bank's risk profile. At March 31, 2001, the
Bank exceeded each of its capital requirements with tangible and leverage
capital ratios of 7.02% and a risk-based capital ratio of 15.76%.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA"),
requires that the OTS and other federal banking agencies revise their risk-based
capital standards, with appropriate transition rules, to ensure that they take
into account interest rate risk ("IRR"), concentration of risk and the risks of
non-traditional activities. The OTS adopted regulations, effective January 1,
1994, that set forth the methodology for calculating an IRR component to be
incorporated into the OTS risk-based capital regulations. The OTS has
indefinitely deferred its requirements of the IRR component in the calculation
of an institution's risk-based capital calculation. The OTS continues to monitor
the IRR of individual institutions through analysis of the change in net
portfolio value ("NPV"). The OTS has also used this NPV analysis as part of its
evaluation of certain applications submitted by thrift institutions. For a more
complete discussion of NPV analysis, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Discussion of
23
Market Risk - Interest Rate Sensitivity Analysis." The OTS, through its general
oversight of the safety and soundness of savings associations, retains the right
to impose minimum capital requirements on individual institutions to the extent
the institution is not in compliance with certain written guidelines established
by the OTS regarding NPV analysis. The OTS has not imposed any such requirements
on the Bank.
Limitation on Capital Distributions. The OTS regulations impose limitations
upon capital distributions by savings associations, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cashout merger, and other distributions charged
against capital. Under the OTS regulations, certain savings associations are
permitted to pay capital distributions during a calendar year that do not exceed
the association's net income for that year plus its retained net income for the
prior two years without notice to, or the approval of, the OTS. However, a
savings association subsidiary of a savings and loan holding company, such as
the Bank, must file a notice unless the specific capital distribution requires
an application. In addition, the OTS can prohibit a proposed capital
distribution, otherwise permissible under the regulation, if the OTS has
determined that the association is in need of more than normal supervision or if
it determines that a proposed distribution by an association would constitute an
unsafe or unsound practice. Furthermore, under the OTS prompt corrective action
regulations, the Bank would be prohibited from making any capital distribution
if, after the distribution, the Bank failed to meet its minimum capital
requirements as described above. See "--Prompt Corrective Regulatory Action."
Liquidity. During fiscal 2001, Congress eliminated the statutory liquidity
requirement which required federal savings associations to maintain a minimum
amount of liquid assets of between four and ten percent, as determined by the
Director of the OTS, the Bank's primary federal regulator. The OTS recently
conformed its implementing regulations to reflect this statutory change. Under
the revised regulations, which became effective March 15, 2001, the Bank is
required to maintain sufficient liquidity to ensure its safe and sound
operation. At March 31, 2001, the Bank's liquidity ratio was 12.21%.
Assessments. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The assessment for an
individual savings association is based on three components: the size of the
association, on which the basic assessment would be based; the association's
supervisory condition, which would result in an additional assessment based on a
percentage of the basic assessment for any savings institution with a composite
rating of 3, 4 or 5 in its most recent safety and soundness examination; and the
complexity of the association's operations, which would result in an additional
assessment based on a percentage of the basic assessment for any savings
association that managed over $1.0 billion in trust assets, serviced for others
loans aggregating more than $1.0 billion, or had certain off-balance sheet
assets aggregating more than $1.0 billion. In order to avoid a disproportionate
impact on the smaller savings institutions, which are those whose total assets
never exceeded $100.0 million, the regulations provide that the portion of the
assessment based on asset size will be the lesser of the assessment under the
amended regulations or the regulations before the amendment.
Branching. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such a branch is
available (a) in states that expressly authorize branches of savings
associations located in another state and (b) to an association that qualifies
as a "domestic building and loan association" under the Internal Revenue Code of
1986, as amended (the "Code"), which imposes qualification requirements similar
to those for a "qualified thrift lender" under HOLA. See "--QTL Test." The
authority for a federal savings association to establish an interstate branch
network would facilitate a geographic diversification of the association's
activities. This authority under HOLA and the OTS regulations preempts any state
law purporting to regulate branching by federal savings associations.
Community Reinvestment. Under the CRA, as implemented by OTS regulations, a
federally chartered savings association has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the OTS, in
connection with its examination of a savings association, to assess the
association's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
association. The CRA regulations establish an assessment system that bases an
association's rating on its actual
24
performance in meeting community needs. In particular, the assessment system
focuses on three tests: (a) a lending test, to evaluate the institution's record
of making loans in its assessment areas; (b) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing, and programs benefiting low or moderate income individuals and
businesses; and (c) a service test, to evaluate the institution's delivery of
services through its branches, ATMs, and other offices. The CRA also requires
all institutions to make public disclosure of their CRA ratings. In addition, in
May, 2000, the OTS proposed regulations implementing the requirements under
Gramm-Leach that insured depository institutions publicly disclose certain
agreements that are in fulfillment of the CRA. We have no such agreement in
place at this time. The Bank received a "Satisfactory" CRA rating in its most
recent examination conducted in 2000.
Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an
affiliate of the Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions. The OTS
regulations prohibit a savings association (a) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the BHC Act and (b) from purchasing the
securities of any affiliate other than a subsidiary. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings association and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings association's
capital and surplus. Extensions of credit to affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A, and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
association as those prevailing at the time for comparable transactions with
nonaffiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
nonaffiliated companies.
The Bank's authority to extend credit to its directors, executive officers,
and 10% shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the Federal Reserve Board thereunder. Among other things,
these provisions require that extensions of credit to insiders (a) be made on
terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features and (b) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the association's capital. In addition, extensions of credit in excess
of certain limits must be approved by the association's board of directors.
Enforcement. Under the Federal Deposit Insurance Act ("FDI Act"), the OTS
has primary enforcement responsibility over savings associations and has the
authority to bring enforcement action against all "institution affiliated
parties," including any controlling stockholder or any shareholder, attorney,
appraiser and accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other significant adverse effect on an insured savings association.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders, and
certain written agreements and conditions continue, up to $1.0 million per day
for such violations if the person obtained a substantial pecuniary gain as a
result of such violation or knowingly or recklessly caused a substantial loss to
the institution. Criminal penalties for certain financial institution crimes
include fines of up to $1.0 million and imprisonment for up to 30 years. In
addition, regulators have substantial discretion to take enforcement action
against an institution that fails to comply with its regulatory requirements,
particularly with respect to its capital requirements. Possible enforcement
actions range from the imposition of a capital plan and capital directive to
receivership, conservatorship, or the termination of deposit insurance. Under
the FDI Act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings association. If
action is not taken by the Director of the OTS, the FDIC has authority to take
such action under certain circumstances.
25
Standards for Safety and Soundness. Pursuant to the FDI Act, as amended by
FDICIA and the Riegle Community Development and Regulatory Improvement Act of
1994, the OTS and the federal bank regulatory agencies have adopted a set of
guidelines prescribing safety and soundness standards. The guidelines establish
general standards relating to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings, and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director or principal shareholder. In addition, the
OTS adopted regulations pursuant to FDICIA that authorize, but do not require,
the OTS to order an institution that has been given notice by the OTS that it is
not satisfying any of such safety and soundness standards to submit a compliance
plan. If, after being so notified, an institution fails to submit an acceptable
compliance plan or fails in any material respect to implement an accepted
compliance plan, the OTS must issue an order directing action to correct the
deficiency and may issue an order directing other actions of the types to which
an undercapitalized association is subject under the "prompt corrective action"
provisions of FDICIA. If an institution fails to comply with such an order, the
OTS may seek to enforce such order in judicial proceedings and to impose civil
money penalties.
Insurance Activities. Carver is generally permitted to engage in certain
insurance activities through its subsidiaries. In August, 2000, the OTS and the
other federal banking agencies proposed regulations pursuant to Gramm-Leach
which would prohibit depository institutions from conditioning the extension of
credit to individuals upon either the purchase of an insurance product or
annuity or an agreement by the consumer not to purchase an insurance product or
annuity from an entity that is not affiliated with the depository institution.
The proposed regulations would also require prior disclosure of this prohibition
to potential insurance product or annuity customers. We do not believe that
these regulations, if adopted as proposed, would have a material impact on our
operations.
Prompt Corrective Regulatory Action. FDICIA established a system of prompt
corrective action to resolve the problems of undercapitalized depository
institutions. Under this system, the federal banking regulators are required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends on the institution's degree of capitalization. For
this purpose, a savings association would be placed in one of five categories
based on the association's capital. Generally, a savings association is treated
as "well capitalized" if its ratio of total capital to risk-weighted assets is
at least 10.0%, its ratio of core capital to risk weighted assets is at least
6.0%, its ratio of core capital to total assets is at least 5.0%, and it is not
subject to any order or directive by the OTS to meet a specific capital level. A
savings association will be treated as "adequately capitalized" if its ratio of
total capital to risk-weighted assets is at least 8.0%, its ratio of core
capital to risk weighted assets is at least 4.0%, and its ratio of core capital
to total assets is at least 4.0% (3.0% if the association receives the highest
rating on the Uniform Financial Institutions Rating System). A savings
association that has a total risk based capital of less than 8.0% or a leverage
ratio or a Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if
the association receives the highest rating on the Uniform Financial
Institutions Rating System) is considered to be "undercapitalized." A savings
association that has a total risk based capital of less than 6.0% or a Tier 1
risk based capital ratio or a leverage ratio of less than 3.0% is considered to
be "significantly undercapitalized." A savings association that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The elements of an association's capital for purposes of the
prompt corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. As of March 31, 2001, the Bank was
considered well-capitalized by the OTS. See "-- Capital Requirements."
When appropriate, the OTS can require corrective action by a savings
association holding company under the "prompt corrective action" provisions of
FDICIA.
Insurance of Deposit Accounts. The Bank is a member of the SAIF of the
FDIC, and the Bank pays its deposit insurance assessments to the SAIF of the
FDIC. The FDIC also maintains another insurance fund, the Bank Insurance Fund
("BIF"), which primarily insures the deposits of banks and state chartered
savings banks.
Pursuant to FDICIA, the FDIC established a risk based assessment system for
determining the deposit insurance assessments to be paid by insured depository
institutions. Under the assessment system, the FDIC
26
assigns an institution to one of three capital categories based on the
institution's financial information as of the reporting period ending seven
months before the assessment period. The three capital categories consist of (a)
well capitalized, (b) adequately capitalized, or (c) undercapitalized. The FDIC
also assigns an institution to one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. Under the regulation,
there are nine assessment risk classifications (i.e., combinations of capital
groups and supervisory subgroups) to which different assessment rates are
applied. Assessment rates currently range from 0.0% of deposits for an
institution in the highest category (i.e., well-capitalized and financially
sound, with no more than a few minor weaknesses) to 0.27% of deposits for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory concern). The Bank's annual assessment rate for the first half of
2001 was 0.03% of deposits. The FDIC is authorized to raise the assessment rates
as necessary to maintain the required reserve ratio of 1.25%. As a result of the
Deposit Insurance Funds Act of 1996 (the "Funds Act"), both the BIF and the SAIF
currently satisfy the reserve ratio requirement. If the FDIC determines that
assessment rates should be increased, institutions in all risk categories could
be affected. The FDIC has exercised this authority several times in the past and
could raise insurance assessment rates in the future. If such action is taken by
the FDIC, it could have an adverse effect on the earnings of the Bank.
In addition, the Funds Act expanded the assessment base for the payments on
the bonds ("FICO bonds") issued in the late 1980s by the Financing Corporation
to recapitalize the now defunct Federal Savings and Loan Insurance Corporation.
Beginning January 1, 1997, the deposits of both BIF- and SAIF-insured
institutions were assessed for the payments on the FICO bonds. The Bank's total
expense in fiscal 2001 for the assessment of deposit insurance and the FICO
payments was $424,000.
Privacy Protection. On June 1, 2000, the OTS published final privacy rules
implementing the privacy protection provisions of Section 504 of Gramm-Leach.
The proposed regulations would require each financial institution to adopt
procedures to protect customers' and consumers' "nonpublic personal information"
by November 13, 2000; however, compliance will be optional until July 1, 2001.
The Bank would be required to disclose its privacy policy, including identifying
with whom it shares "nonpublic personal information," to customers at the time
of establishing the customer relationship and annually thereafter. In addition,
the Bank would be required to provide its customers with the ability to
"opt-out" of having the Bank share its nonpublic personal information with
unaffiliated third parties.
In June 2000, the OTS and other federal banking agencies proposed
guidelines establishing standards for safeguarding customer information to
implement certain provisions of Gramm-Leach. The proposed guidelines describe
the agencies' expectations for the creation, implementation and maintenance of
an information security program, which would include administrative, technical
and physical safeguards appropriate to the size and complexity of the
institution and the nature and scope of its activities. The standards set forth
in the guidelines are intended to insure the security and confidentiality of
customer records and information, protect against any anticipated threats or
hazards to the security or integrity of such records and protect against
unauthorized access to or use of such records or information that could result
in substantial harm or inconvenience to any customer. The OTS subsequently
published final rules for safeguarding customer information. We cannot predict
what impact these regulations will have on Carver's operations.
Gramm-Leach also provides for the ability of each state to enact
legislation that is more protective of consumers' personal information.
Currently, there are a number of privacy bills pending in the New York
legislature. No action has been taken on any of these bills, and the Bank cannot
predict what impact, if any, these bills would have.
Federal Home Loan Bank System. The Bank is a member of the FHLB-NY, which
is one of the regional FHLBs composing the FHLB System. Each FHLB provides a
central credit facility primarily for its member institutions. The Bank, as a
member of the FHLB-NY, is required to acquire and hold shares of capital stock
in the FHLB-NY in an amount at least equal to the greater of 1% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, 0.390 of total assets, or 5%, of its
advances (borrowing) from the FHLB, whichever is greater. The Bank was in
compliance with this requirement with an investment in the capital stock of the
FHLB at March 31, 2001 of
27
$5.8 million. Any advances from a FHLB must be secured by specified types of
collateral, and all long term advances may be obtained only for the purpose of
providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. The FHLB paid dividends to the
Bank of $408,000 for the twelve months ended March 31, 2001 and dividends of
$393,000 for the prior fiscal year. If dividends were reduced, or interest on
future FHLB advances increased, the Bank's net interest income would likely also
be reduced.
Pursuant to Gramm-Leach, the foregoing minimum share ownership requirements
will be replaced by regulations to be promulgated by the Federal Housing Finance
Board. Gramm-Leach specifically provides that the minimum requirements in
existence immediately prior to adoption of Gramm-Leach shall remain in effect
until such regulations are adopted. Formerly, federal saving associations were
required to be members of the FHLB System. The new law removed the mandatory
membership requirement and authorized voluntary membership for federal savings
associations, as is the case for all other eligible institutions.
Federal Reserve System. The Bank is subject to provisions of the FRA and
the Federal Reserve Board's regulations pursuant to which depositary
institutions may be required to maintain noninterest-earning reserves against
their deposit accounts and certain other liabilities. Currently, reserves must
be maintained against transaction accounts (primarily NOW and regular checking
accounts). The Federal Reserve Board regulations generally require that reserves
be maintained in the amount of 3% of the aggregate of transaction accounts up to
$42.8 million. The amount of aggregate transaction accounts in excess of $42.8
million are currently subject to a reserve ratio of 10%, which ratio the Federal
Reserve Board may adjust between 8% and 14%. The Federal Reserve Board
regulations currently exempt $5.0 million of otherwise reservable balances from
the reserve requirements, which exemption is adjusted by the Federal Reserve
Board at the end of each year. The Bank is in compliance with the foregoing
reserve requirements. Because required reserves must be maintained in the form
of either vault cash, a noninterest bearing account at a Federal Reserve Bank,
or a passthrough account as defined by the Federal Reserve Board, the effect of
this reserve requirement is to reduce the Bank's interest-earning assets. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the OTS.
FHLB System members are also authorized to borrow from the Federal Reserve
"discount window," but Federal Reserve Board regulations require such
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
Holding Company Regulation. The Holding Company is a unitary savings and
loan holding company within the meaning of the HOLA. As such, it is registered
with the OTS and is subject to the OTS regulations, examinations, supervision
and reporting requirements. In addition, the OTS has enforcement authority over
the Holding Company and savings association subsidiaries. Among other things,
this authority permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings association. The Bank
must notify the OTS at least 30 days before declaring any dividend to the
Holding Company. No dividends were paid from the Bank to the Holding Company in
fiscal 2001.
The HOLA prohibits a savings and loan holding company (directly or
indirectly, or through one or more subsidiaries) from acquiring another savings
association or holding company thereof without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
associations, the OTS must consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.
Federal Securities Laws. The Holding Company is subject to the periodic
reporting, proxy solicitation, tender offer, insider trading restrictions and
other requirements under the Securities Exchange Act of 1934, as amended,
("Exchange Act").
28
Delaware Corporation Law. The Holding Company is incorporated under the
laws of the State of Delaware. Thus, we are subject to regulation by the State
of Delaware and the rights of our shareholders are governed by the General
Corporation Law of the State of Delaware.
New York State Banking Regulations. The New York State Banking Department
has proposed regulations that would impose restrictions and limitations on
certain high cost home loans made by any individual or entity, including a
federally-chartered savings association, that originates more than one high cost
home loan in New York State in a 12-month period. The regulations, among other
things, prohibit certain mortgage loan provisions and certain acts and practices
by originators and impose certain disclosure and reporting requirements. It is
unclear whether these provisions, if enacted, would be preempted by Section 5(a)
of HOLA, as implemented by the lending and investment regulations of the OTS.
The OTS has not yet adopted regulations regarding high-cost mortgage loans and
is currently considering whether it will do so. Although the Bank does not
originate loans that meet the definition of "high-cost mortgage loan" under the
proposed regulations, in the event the Bank determines to originate such loans
in the future, the Bank may be subject to such regulation, if adopted as
proposed.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Holding Company and the Bank currently file consolidated
federal income tax returns, report their income for tax return purposes on the
basis of a taxable-year ending March 31st, using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations with some exceptions, including particularly the Bank's tax
reserve for bad debts discussed below. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Holding Company.
Bad Debt Reserves. The Bank, as a "small bank" (one with assets having an
adjusted tax basis of $500 million or less) is permitted to maintain a reserve
for bad debts with respect to "qualifying loans," which, in general, are loans
secured by certain interests in real property, and to make, within specified
formula limits, annual additions to the reserve which are deductible for
purposes of computing the Bank's taxable income. Pursuant to the Small Business
Job Protection Act of 1996, the Bank is now recapturing (taking into income)
over a multi-year period a portion of the balance of its bad debt reserve as of
March 31, 1996.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's "base year reserve," i.e., its reserve as of
March 31, 1988, to the extent thereof and then from its supplemental reserve for
losses on loans, and an amount based on the amount distributed will be included
in the Bank's taxable income. Nondividend distributions include distributions in
excess of the Bank's current and accumulated earnings and profits, distributions
in redemption of stock and distributions in partial or complete liquidation.
However, dividends paid out of the Bank's current or accumulated earnings and
profits, as calculated for federal income tax purposes, will not constitute
nondividend distributions and, therefore, will not be included in the Bank's
income.
The amount of additional taxable income created from a nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the nondividend distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate.
Corporate Alternative Minimum Tax. The Code imposes an Alternative Minimum
Tax ("AMT") on alternative minimum taxable income ("AMTI") at a rate of 20%.
AMTI is increased by certain preference items. Only 90% of AMTI can be offset by
net operating loss carryovers. AMTI is also adjusted by determining the tax
treatment of certain items in a manner that negates the deferral of income
resulting from the regular tax treatment of those items. Thus, the Company's
AMTI is increased by an amount equal to 75% of the amount by which the Company's
adjusted current earnings exceeds its AMTI (determined without regard to this
adjustment and prior to reduction for net operating losses).
29
Elimination of Dividends; Dividends-Received Deduction. The Holding Company
may exclude from its income 100% of dividends received from the Bank as a member
of the same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Holding Company and the Bank will not file a
consolidated tax return, except that if the Holding Company or the Bank owns
more than 20% of the stock of a corporation distributing a dividend, then 80% of
any dividends received may be deducted.
State and Local Taxation
State of New York. The Bank and the Holding Company are subject to New York
State franchise tax on net income or one of several alternative bases, whichever
results in the highest tax. "Net income" means federal taxable income with
adjustments. The Bank and the Holding Company file combined returns and are
subject to taxation in the same manner as other corporations with some
exceptions, including the Bank's deductions for additions to its reserve for bad
debts. The New York State tax rates for fiscal years 2000 and 2001 are 10.53%
and 10.03%, respectively, (including the Metropolitan Commuter Transportation
District Surcharge) of net income. In general, the Holding Company is not
required to pay New York State tax on dividends and interest received from the
Bank or on gains realized on the sale of Bank stock.
New York State has enacted legislation that enabled the Bank to avoid the
recapture of the New York State tax bad debt reserves that otherwise would have
occurred as a result of the changes in federal law and to continue to utilize
either the federal method or a method based on a percentage of its taxable
income for computing additions to its bad debt reserve.
New York City. The Bank and the Holding Company are also subject to a
similarly calculated New York City banking corporation tax of 9% on income
allocated to New York City. In this connection, legislation was recently enacted
regarding the use and treatment of tax bad debt reserves that is substantially
similar to the New York State legislation described above.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Holding Company is exempted from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
EXECUTIVE OFFICERS OF THE HOLDING COMPANY
The name, position, term of office as officer and period during which he or
she has served as an officer is provided below for each executive officer of the
Holding Company. Each of the persons listed below is an executive officer of the
Holding Company and the Bank.
NAME AGE POSITION
- ----------------- --- ------------------------------------------------------
Deborah C. Wright 43 President and Chief Executive Officer, Director
Walter T. Bond 42 Senior Vice President and Special Assistant to the CEO
William Schult 53 Vice President and Controller
Margaret Peterson 50 Senior Vice President and Chief Administrative Officer
J. Kevin Ryan 48 Senior Vice President and Chief Lending Officer
Devon W. Woolcock 35 Senior Vice President and Chief of Retail Banking
30
Deborah C. Wright is currently President and Chief Executive Officer and a
Director of Carver and Carver Federal, positions she assumed on June 1, 1999.
Prior to assuming her current positions, Ms. Wright was President & CEO of the
Upper Manhattan Empowerment Zone Development Corporation, a position she held
since May 1996. She previously served as Commissioner of the Department of
Housing Preservation and Development under Mayor Rudolph W. Giuliani from
January 1994 through March 1996. Prior to that appointment, Ms. Wright was named
by Mayor David N. Dinkins to the New York City Housing Authority Board, which
manages New York City's 189,000 public housing units. She is a member of the
Board of Overseers of Harvard University and serves on the boards of Empire
State Development Corporation, the Initiative for a Competitive Inner City, the
New York City Partnership, Inc., and The Ministers and Missionaries Benefit
Board of the American Baptist Churches. Ms. Wright earned A.B., J.D. and M.B.A.
degrees from Harvard University.
Walter T. Bond is Senior Vice President and Special Assistant to the
President and Chief Executive Officer. Mr. Bond joined the Bank in February
1993, as Assistant Vice President, Mortgage Lender. Mr. Bond was assigned to the
position of Investment Officer in November 1995. Mr. Bond is a member of the
Bank's Investment and Loan Committees and serves as the Company's Community
Reinvestment Officer. Mr. Bond is a member of the New York Society of Securities
Analysts and the Financial Managers Society.
William Schult is Vice President and Controller. He was appointed Acting
Chief Financial Officer in May 2001. He joined Carver Federal in September 2000
after five years as an independent consultant. He has 26 years experience in the
banking industry beginning in 1974 as Senior Vice President and Controller for
the Nassau Trust Company. In 1983 Mr. Schult became Administrative Vice
President at Norstar Bank of Long Island. He moved to The Dime Savings Bank of
New York in 1985 where he was Vice President and Director of Accounting until
1995. Mr. Schult received a BBA in Accounting from Hofstra University and is a
Certified Public Accountant in the State of New York.
Margaret D. Peterson is Senior Vice President and Chief Administrative
Officer, integrating Human Resources, Information Technology, Facilities, Vendor
Management and other support activities. Ms. Peterson joined Carver Federal in
November 1999. Ms. Peterson came to Carver from Deutsche Bank where she served
as a Compensation Planning Consultant in Corporate Human Resources. Prior to
joining Deutsche Bank, Ms. Peterson was a Vice President and Senior HR
Generalist for Citibank Global Asset Management. Besides her 11 years in Human
Resources, Ms. Peterson has 10 years of Systems and Technology experience from
various positions held at JP Morgan and Chase. Ms. Peterson earned a Bachelors
Degree from Pace University, a M.B.A. from Columbia University as a Citicorp
Fellow, and has been designated a Certified Compensation Professional by the
American Compensation Association.
J. Kevin Ryan is Senior Vice President and Chief Lending Officer. Mr. Ryan
joined Carver Federal in June 2000 and has over 20 years' experience in real
estate lending. Prior to joining Carver, Mr. Ryan served as Vice President-Team
Leader for Commercial Real Estate at Greenpoint Mortgage Funding Co., where he
was employed from 1996 to 2000. From 1985 through 1996, Mr. Ryan served as
President of Manhattan Appraisal Co., a commercial and residential real estate
appraisal company which he founded in New York City. Mr. Ryan also served in
various positions at Dime Savings Bank of NY from 1977 to 1985, including Vice
President, and as an Adjunct Professor of Management & Economics at St. John's
University from 1981 through 1984. He also is a Board member of Habitat for
Humanity, New York City. Mr. Ryan received a BBA in Management from Hofstra
University and an MBA in Finance from Fordham University.
Devon W. Woolcock is Senior Vice President and Chief of Retail Banking. He
is a 12-year veteran of retail banking. He joined Carver from Citibank where he
was a Division Executive Vice President. Most recently, he managed six branches
in Brooklyn and Queens. Mr. Woolcock began his career with Barnett Bank in
Florida, holding positions including Head Teller, Division Operations Manager,
and Branch Manager. He joined Citibank in 1995 where he managed several South
Florida branches, before moving to New York City. Mr. Woolcock attended college
at the University of Houston and Bethune Cookman College.
31
ITEM 2. PROPERTIES.
The following table sets forth certain information regarding
Carver's offices and other material properties at March 31, 2001.
Lease Net Book
Owned or Expiration Value at
Year Opened Leased Date March 31, 2001
----------- -------- ---------- --------------
(In thousands)
MAIN OFFICE:
75 West 125th Street 1996 Owned -- $5,538
New York, New York
BRANCH OFFICES:
2815 Atlantic Avenue 1990 Owned -- 291
Brooklyn, New York
(East New York Office)
1281 Fulton Street 1989 Owned -- 1,024
Brooklyn, New York
(Bedford-Stuyvesant Office)
1009-1015 Nostrand Avenue 1975 Owned -- 149
Brooklyn, New York
(Crown Heights Office)
115-02 Merrick Boulevard 1982 Leased 02/28/11 281
Jamaica, New York
(St. Albans Office)
PROPOSED OFFICE:
Central Harlem Plaza-Space "A" -- Leased 04/2006 --
Lenox Avenue and West 116th -West 117th
New York, New York ======
Total $7,283
======
Carver anticipates opening the proposed branch office on Lenox Avenue in
Harlem in the second quarter of fiscal 2002.
The net book value of Carver's investment in premises and equipment totaled
approximately $10.4 million at March 31, 2001.
ITEM 3. LEGAL PROCEEDINGS
From time to time, Carver Federal is a party to various legal proceedings
incident to its business. Certain claims, suits, complaints and investigations
involving the Company, arising in the ordinary course of business, have been
filed or are pending. The Company is of the opinion, after discussion with legal
counsel representing the Company in these proceedings, that the aggregate
liability or loss, if any, arising from the ultimate disposition of these
matters would not have a material adverse effect on the Company's consolidated
financial position or results of operations. At March 31, 2001, except as set
forth below, there were no material legal proceedings to which Carver Federal or
its subsidiaries was a party, or to which any of their property was subject.
On or about April 29, 1999, plaintiff Reginald St. Rose ("St. Rose"), a
former Carver employee, filed suit against Carver Federal in the Supreme Court
of the State of New York, County of New York (the "St. Rose Action"). On or
about January 12, 1999, Carver and St. Rose entered into an agreement (the
"Agreement") providing that St. Rose would resign from Carver on the terms and
conditions set forth in the Agreement. In the St. Rose Action, St. Rose alleged
the following causes of action, which relate to the Agreement and St. Rose's
separation from Carver: (1) breach of contract; (2) promissory estoppel; and (3)
fraudulent misrepresentation. St. Rose seeks damages in an amount not less than
$50,000 with respect to the
32
breach of contract cause of action and seeks undisclosed damages with respect to
the promissory estoppel and fraudulent misrepresentation causes of action.
On or about August 18, 1999, Carver moved to dismiss St. Rose's fraudulent
misrepresentation cause of action and the Court granted Carver's motion to
dismiss. Carver has not filed an answer in the St. Rose Action. By written
stipulation of the parties, Carver's time to file an answer to St. Rose's
complaint has been extended without date. Carver has unasserted counterclaims
against St. Rose for, among other claims, payment of certain financial
obligations to Carver, which obligations remain outstanding as of the date of
this Form 10-K. The parties have had intermittent settlement discussions, but
have not reached an agreement. If the parties do not reach a settlement, Carver
intends to continue to defend the St. Rose Action vigorously.
The action brought by Ralph Williams (the "Williams Action") and the action
brought by Janice Pressley (the "Pressley Action" and, together with the
Williams Action, the "Actions") arise out of events concerning the Northeastern
Conference Federal Credit Union ("Northeastern"). Plaintiff Williams is a former
member of the Board of Directors, and plaintiff Pressley is a former treasurer,
of Northeastern, a federal credit union that maintained accounts with Carver and
other banks in the New York metropolitan area. Plaintiffs' complaints (which are
virtually identical) allege that the National Credit Union Administration (the
"NCUA") acted improperly when it placed Northeastern into conservatorship and
subsequent liquidation. On or about November 22, 2000, Williams filed his pro se
complaint against the NCUA, Carver, Chase Manhattan Bank ("Chase"), Astoria
Federal Savings and Loan Association and Reliance Federal Savings Bank (Carver
with the last three defendants, collectively the "Bank Defendants") seeking
damages in the amount of $1 million plus certain additional unspecified amounts.
On or about November 22, 2000, plaintiff Pressley filed her pro se action
against the same defendants seeking unspecified compensatory and punitive
damages. Williams seeks damages for the allegedly "unauthorized" or "invalid"
actions of the NCUA Board in taking control of Northeastern as well as damages
for discrimination and civil rights violations. Pressley seeks damages based on
identical allegations except that she also alleges certain claims of employment
discrimination.
While the bulk of the complaints relate to the action of the NCUA Board,
the plaintiffs allege that the Bank Defendants "collaborated with the NCUA
Board" in violating unspecified constitutional and privacy rights and that they
engaged in discrimination.
On or about December 15, 2000, defendant Chase moved to consolidate the
Williams Action and Pressley Action. In anticipation of that consolidation, the
Bank Defendants filed a joint motion to dismiss both complaints arguing that
both Actions are barred by principles of res judicata and because both
complaints fail to state claims on which relief can be granted.
The Bank Defendants' motion to dismiss was denied without prejudice insofar
as it applied to the Williams Action solely for the reason that it was a motion
addressed to both Actions prior to the issuance of an order consolidating these
cases. The Bank Defendants have refilled their motion to dismiss the Williams
Action and it is sub judice. The Bank Defendants' original motion to dismiss is
still sub judice insofar as it applies to the Pressley Action. If the motions to
dismiss are not granted, Carver intends to defend both Actions vigorously.
On or about December 28, 2000, plaintiff Thomas L. Clark ("Clark"), the
former President and CEO of Carver, filed suit against Carver Federal and
certain individual defendants in the Supreme Court of the State of New York,
County of New York (the "Clark Action"). Clark claims that the defendants should
be forced to obtain approval from the OTS to pay severance benefits that Clark
believes Carver owes him under an employment agreement. Clark seeks injunctive
relief and asserts claims for breach of contract, equitable estoppel and
estoppel by contract. On or about March 30, 2001, the defendants moved to
dismiss the complaint in its entirety. By written stipulation of the parties,
Clark's time to respond defendants' motion has been extended. If the Court does
not grant the motion to dismiss, Carver intends to vigorously defend this
action.
33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Holding Company held its Annual Meeting on February 27, 2001. The
purpose of the Annual Meeting was to vote on the following proposals:
1. The election of three directors for terms of three years each;
2. The ratification of the appointment of KPMG, LLP as independent
auditors of the Holding Company for the fiscal year ended March 31,
2001; and
3. To approve an Amendment to Carver's 1995 Stock Option Plan.
The results of voting were as follows:
Proposal 1: Election of Directors:
Holding Company
Nominees
Frederick O. Terrell For 2,114,655
Withheld 37,719
Robert Holland, Jr. For 2,114,629
Withheld 37,745
Dennis M. Walcott For 2,113,074
Withheld 39,300
Proposal 2: Ratification of Appointment For 2,141,705
of Independent Auditors Against 7,727
Abstain 2,942
Proposal 3: Amendment to Stock Option Plan For 1,175,447
Against 61,824
Abstain 57,925
In addition to the nominees elected at the Annual Meeting, the following
persons' terms of office as directors continued after the Annual Meeting:
Deborah C. Wright, Kevin Cohee, David L. Hinds, Pazel G. Jackson, Jr., Teri
Williams and Strauss Zelnick.
34
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock is listed on the American Stock Exchange under the symbol
"CNY." Prior to May 21, 1997, the Common Stock traded on the National Market of
The Nasdaq Stock Market under the symbol "CARV." As of May 31, 2001, there were
2,306,286 shares of the Common Stock outstanding, held by approximately 1,150
holders of record. The following table shows the high and low per share sales
prices of the Common Stock.
Closing Sales Price Quarter Ended
- -----------------------------------------------------------------------------------------------------------------------
High Low High Low
-------- ------- -------- -------
Year Ended March 31, 2001 Year Ended March 31, 2000
First Quarter..................... $10.9375 $7.5000 First Quarter...................... $11.3750 $7.5000
Second Quarter.................... $11.1250 $7.8750 Second Quarter..................... $10.0000 $7.6250
Third Quarter..................... $9.7500 $7.0000 Third Quarter...................... $11.1250 $7.0000
Fourth Quarter.................... $10.6000 $8.6000 Fourth Quarter..................... $13.5000 $8.2500
The Board declared a cash dividend of $0.05 (five cents) per share on
February 1, 2001 and February 14, 2000 payable to stockholders of record on
February 15, 2001 and February 25, 2000, respectively. The Board has not
determined to establish a regular dividend at this time, but will review the
Company's position after each quarter for the possible declaration of additional
dividends. The timing and amount of future dividends will be within the
discretion of Carver's Board and will depend on the earnings of the Company and
its subsidiaries, their financial condition, liquidity and capital requirements,
applicable governmental regulations and policies and other factors deemed
relevant by the Board.
The Bank will not be permitted to pay dividends to the Holding Company on
its capital stock if its stockholders' equity would be reduced below applicable
regulatory capital requirements or the amount required to be maintained for the
liquidation account, which was established in connection with the Bank's
conversion to stock form. The OTS capital distribution regulations applicable to
savings institutions (such as the Bank) that meet their regulatory capital
requirements permit capital distributions during a calendar year that do not
exceed the association's net income for that year plus its retained net income
for the prior two years. For information concerning the Bank's liquidation
account, see Note 3 of the Notes to the Consolidated Financial Statements.
Unlike the Bank, the Holding Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent, in part, upon dividends from the
Bank. The Holding Company is subject to the requirements of Delaware law, which
generally limit dividends to an amount equal to the excess of the net assets of
the Company (the amount by which total assets exceed total liabilities) over its
statutory capital, or if there is no such excess, to its net profits for the
current and/or immediately preceding fiscal year.
35
ITEM 6. SELECTED FINANCIAL DATA.
At March 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ---------- -----------
(Dollars in thousands)
Financial Condition Data:
Total amount of:
Assets ........................................ $ 424,500 $ 420,119 $ 416,483 $ 437,458 $ 423,614
Loans, net .................................... 283,437 270,148 270,522 274,954 197,918
Mortgage-backed securities .................... 42,866 54,229 66,584 91,116 110,853
Investment securities ......................... 24,996 24,996 -- -- 1,675
Securities available for sale (1) ............. 19,926 24,952 29,918 28,408 83,863
Excess of cost over assets acquired ........... 603 817 1,030 1,246 1,456
Cash and cash equivalents ..................... 31,758 22,202 21,321 15,120 4,231
Deposits ...................................... 279,424 281,941 276,999 274,894 266,471
Borrowed funds ................................ 105,600 98,578 102,038 124,946 121,101
Stockholders' equity .......................... 32,096 32,641 31,175 35,534 33,984
Number of:
Deposit accounts .............................. 44,751 54,597 58,113 51,550 49,142
Offices ....................................... 5 7 7 7 7
Year Ended March 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ---------- -----------
(Dollars in thousands - except share data)
Operating Data:
Interest income ............................... $ 28,307 $ 27,367 $ 28,473 $ 27,828 $ 22,847
Interest expense .............................. 14,278 14,009 14,815 15,019 12,483
----------- ----------- ----------- ---------- -----------
Net interest income ........................... 14,029 13,358 13,658 12,809 10,364
Provision for loan losses ..................... 1,793 1,099 4,029 1,260 1,690
----------- ----------- ----------- ---------- -----------
Net interest income after provision for loan
losses ................................... 12,236 12,259 9,629 11,549 8,674
----------- ----------- ----------- ---------- -----------
Non-interest income:
Gain (loss) on sales of deposits and assets ... 1,013 -- 4 188 (927)
Other ......................................... 1,921 2,539 2,378 2,163 1,040
----------- ----------- ----------- ---------- -----------
Total non-interest income ..................... 2,934 2,539 2,382 2,351 113
----------- ----------- ----------- ---------- -----------
Non-interest expenses:
Loss on sale of foreclosed real estate ........ -- -- -- -- 38
Other ......................................... 15,461 15,823 17,963 11,651 11,764
----------- ----------- ----------- ---------- -----------
Total non-interest expense .................... 15,461 15,823 17,963 11,651 11,802
----------- ----------- ----------- ---------- -----------
(Loss) income before income taxes ............. (291) (1,025) (5,952) 2,249 (3,015)
----------- ----------- ----------- ---------- -----------
Income tax expense (benefit) .................. 98 110 (1,499) 1,203 (1,275)
----------- ----------- ----------- ---------- -----------
Net (loss) income ............................. $ (389) $ (1,135) $ (4,453) $ 1,046 $ (1,740)
=========== =========== =========== ========== ===========
Net (loss) income per common share ............ $ (0.26) $ (0.53) $ (2.02) $ 0.48 $ (0.80)
=========== =========== =========== ========== ===========
Weighted average number of common shares
Outstanding ............................... 2,256,441 2,238,846 2,206,133 2,187,619 2,156,346
=========== =========== =========== ========== ===========
36
At or for the Year Ended March 31,
-------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Key Operating Ratios:
Return on average assets (1) (2) ....................... (0.07)% (0.27)% (1.05)% 0.25% (0.47)%
Return on average equity (2)(3) ........................ (0.89) (3.29) (12.70) 3.00 (5.00)
Interest rate spread (4) ............................... 3.48 3.38 3.29 3.14 2.90
Net interest margin (5) ................................ 3.61 3.47 3.43 3.27 3.04
Operating expenses to average assets (2)(6) ............ 3.72 3.82 4.22 2.80 3.22
Equity-to-assets (7) ................................... 7.56 7.77 7.49 8.12 8.03
Efficiency Ratio (2)(8) ................................ 91.14 99.54 111.98 76.85 112.65
Average interest-earning assets to average
interest-bearing liabilities ....................... 1.03x 1.03x 1.04x 1.04x 1.04x
Asset Quality Ratios:
Non performing assets to total assets (9) .............. 0.71% 0.73% 1.15% 1.58% 1.53%
Non performing assets to total loans (9) ............... 1.04 1.12 1.66 2.47 3.28
Allowance for loan losses to total loans ............... 1.24 1.07 1.48 1.11 1.09
Allowance for loan losses to non-performing loans (9) .. 140.97 138.07 85.60 45.30 35.06
Net loan charge-offs to average loans outstanding ...... 0.42 0.84 1.17 0.15 0.69
- ----------
(1) Net income divided by average total assets.
(2) For fiscal 1999, excluding non-recurring items amounting to $7.8
million, the return on average assets, return on average equity,
operating expenses to average assets and Efficiency Ratio were 0.24%,
2.85%, 2.98% and 78.94%, respectively. Excluding an assessment to
recapitalize the SAIF of $1.6 million, the return on average assets,
return on average equity, operating expenses to average assets and
Efficiency Ratio for fiscal 1997 were (0.022%), (2.29%), 2.77% and
97.07%, respectively.
(3) Net income divided by average total equity.
(4) Combined weighted average interest rate earned less combined weighted
average interest rate cost.
(5) Net interest income divided by average interest-earning assets.
(6) Non-interest expenses less loss on foreclosed real estate, divided by
average total assets.
(7) Total equity divided by assets at period end.
(8) Efficiency ratio represents operating expenses divided by the sum of
net interest income plus operating income.
(9) Non-performing assets consist of non-accrual loans, accruing loans 90
days or more past due and property acquired in settlement of loans.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Carver's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loan, investment
and mortgage-backed securities portfolios and the interest paid on its
interest-bearing liabilities, such as deposits and borrowings. In addition, net
income is affected by the level of provision for loan losses, as well as
non-interest income and operating expenses.
The operations of the Company are significantly affected by prevailing
economic conditions, competition and the monetary and fiscal policies of
governmental agencies. Lending activities are influenced by the demand for and
supply of housing, competition among lenders, the level of interest rates and
the availability of funds. Deposit flow and costs of funds are influenced by
prevailing market rates of interest, primarily on competing investments, account
maturities, and the levels of personal income and savings.
Asset/Liability Management
Net interest income, the primary component of Carver's net income, is
determined by the difference or "spread" between the yield earned on
interest-earning assets and the rates paid on its interest-bearing liabilities
and the relative amounts of such assets and liabilities. Because Carver's
interest-bearing liabilities consist
37
primarily of shorter term deposit accounts, Carver's interest rate spread can be
adversely affected by changes in general interest rates if its interest-earning
assets are not sufficiently sensitive to changes in interest rates. Management
has sought to reduce Carver's exposure to changes in interest rates by more
closely matching the effective maturities and repricing periods of its
interest-earning assets and interest-bearing liabilities through a variety of
strategies, including the origination and purchase of adjustable-rate loans for
its portfolio, investment in adjustable-rate mortgage-backed securities and
shorter-term investment securities and the sale of all long-term fixed-rate
loans originated into the secondary market. The Company has also reduced
interest rate risk through its origination and purchase of primarily
adjustable-rate mortgage loans and extension of the term of borrowings.
Discussion of Market Risk -- Interest Rate Sensitivity Analysis
As a financial institution, the Bank's primary component of market risk is
interest rate volatility. Fluctuations in interest rates will ultimately impact
both the level of income and expense recorded on a large portion of the
Company's assets and liabilities, and the market value of all interest-earning
assets, other than those which possess a short term to maturity. Since all of
the Bank's interest-bearing liabilities and virtually all of the Bank's
interest-earning assets are located at the Bank, virtually all of the Bank's
interest rate risk exposure lies at the Bank level. As a result, all significant
interest rate risk management procedures are performed at the Bank level. Based
upon the Bank's nature of operations, the Bank is not subject to foreign
currency exchange or commodity price risk. The Bank does not own any trading
assets.
Carver seeks to manage its interest rate risk by monitoring and controlling
the variation in repricing intervals between its assets and liabilities. To a
lesser extent, the Bank also monitors its interest rate sensitivity by analyzing
the estimated changes in market value of its assets and liabilities assuming
various interest rate scenarios. As discussed more fully below, there are a
variety of factors which influence the repricing characteristics of any given
asset or liability.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate-sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific period of time and the amount of interest-bearing
liabilities repricing within that same time period. A gap is considered positive
when the amount of rate-sensitive assets exceeds the amount of rate-sensitive
liabilities and is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of rate-sensitive assets. Generally,
during a period of falling interest rates, a negative gap could result in an
increase in net interest income, while a positive gap could adversely affect net
interest income, and during a period of rising interest rates a negative gap
could adversely affect net interest income, while a positive gap could result in
an increase in net interest income. As illustrated below, Carver had a negative
one-year gap equal to 10.38% of total rate-sensitive assets at March 31, 2001,
as a result of which its net interest income could be negatively affected by
rising interest rates, and positively affected by falling interest rates.
The following table sets forth information regarding the projected
maturities, prepayments and repricing of the major rate-sensitive asset and
liability categories of Carver as of March 31, 2001. Maturity repricing dates
have been projected by applying prepayment rates which management believes are
appropriate and repricing dates. The information presented in the following
table is derived in part from data incorporated in "Schedule CMR: Consolidated
Maturity and Rate," which is part of the Bank's quarterly reports filed with
OTS. The repricing and other assumptions are not necessarily representative of
the Bank's actual results. Classifications of items in the table below are
different from those presented in other tables and the financial statements and
accompanying notes included herein and do not reflect non-performing loans.
38
Over One
Three or Four to Through Over Three Over Five Over
Less Twelve Three Through Through Ten
Months Months Months Years Five Years Ten Years Years Total
- ------------------------------------------------------ -------- --------- --------- ---------- --------- -------- --------
(Dollars in thousands)
Rate-Sensitive Assets:
Loans and MBS ........................................ $55,395 $ 66,241 $104,980 $71,200 $ 25,013 $ 5,900 $328,729
Federal funds sold ................................... 23,700 -- -- -- -- -- 23,700
Investment securities(1) ............................. 19,926 -- -- 24,996 -- -- 44,922
------- --------- -------- ------- -------- -------- --------
Total interest-earning assets ................. $99,021 $ 66,241 $104,980 $96,196 $ 25,013 $ 5,900 $397,351
======= ========= ======== ======= ======== ======== ========
Rate-Sensitive Liabilities:
NOW accounts ......................................... $2,355 $ 3,140 $ 6,803 $ 3,402 $ 5,233 5,233 26,166
Savings accounts ..................................... 5,306 6,699 11,426 21,217 41,699 46,298 132,645
Money market accounts ................................ 2,986 9,274 1,570 1,258 315 315 15,718
Certificates of deposit .............................. 21,590 53,741 16,374 13,190 -- -- 104,895
Borrowings ........................................... 41,000 60,430 -- 3,861 -- 309 105,600
------- --------- -------- ------- -------- -------- --------
Total interest-bearing liabilities ............ $73,237 $ 133,284 $ 36,173 $42,928 $ 47,247 $ 52,155 $385,024
======= ========= ======== ======= ======== ======== ========
Interest sensitivity gap ............................. $25,784 $ (67,043) $ 68,807 $53,268 $(22,234) $(46,255) $ 12,327
Cumulative interest sensitivity gap .................. $25,784 $ (41,259) $ 27,548 $80,816 $ 58,535 $ 12,327 --
Ratio of cumulative gap to total rate-sensitive assets 6.49% (10.38)% 6.93% 20.34% 14.74% 3.10%
- ----------
(1) Includes securities available-for-sale.
In addition, it is assumed that fixed maturity deposits are not withdrawn
prior to maturity and that transaction accounts will decay as disclosed in the
table above.
Certain shortcomings are inherent in the method of analysis presented in
the table above. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in the market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, generally have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayments and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Additionally, an
increased credit risk may result as the ability of many borrowers to service
their debt may decrease in the event of an interest rate increase. Virtually all
of the adjustable-rate loans in Carver's portfolio contain conditions, which
restrict the periodic change in interest rate.
NPV Analysis. As part of its efforts to maximize net interest income and
manage the risks associated with changing interest rates, management uses the
NPV methodology, which the OTS has adopted as part of its capital regulations.
Under this methodology, interest rate risk exposure is assessed by
reviewing the estimated changes in net interest income ("NII") and NPV which
would hypothetically occur if interest rates rapidly rise or fall all along the
yield curve. Projected values of NII and NPV at both higher and lower regulatory
defined rate scenarios are compared to base case values (no change in rates) to
determine the sensitivity to changing interest rates.
Presented below, as of March 31, 2001, is an analysis of the bank's
interest rate risk ("IRR") as measured by changes in NPV and NII for
instantaneous and sustained parallel shifts of 100 basis points in market
interest rates. Such limits have been established with consideration of the
impact of various rate changes and the Bank's current capital position. The
information set forth below relates solely to the Bank; however, because
virtually all of the Company's IRR exposure lies at the bank level, management
believes the table below also accurately reflects an analysis of the Company's
IRR.
39
Net Portfolio Value NPV as % of PV of Assets
Change in Rate $ Amount $ Change % Change NPV Ratio Change
- -------------- -------- -------- -------- --------- ------
(Dollars in thousands)
+300 bp 46,077 (10,443) (18)% 10.55% (198)bp
+200 bp 50,122 (6,398) (11)% 11.34% (119)bp
+100 bp 53,565 (2,955) (5)% 11.99% (54)bp
0 bp 56,520 -- -- 12.53% --
(100) bp 59,501 2,981 +5% 13.06% + 53bp
(200) bp 60,998 4,478 +8% 13.30% + 77bp
(300) bp 62,931 6,410 +11% 13.61% +109bp
March 31, 2001
--------------
Risk Measures: 200 BP Rate Shock
Pre-Shock NPV Ratio: NPV as % of PV of Assets.............. 12.53%
Post-Shock NPV Ratio....................................... 11.34%
Sensitivity Measure; Decline in NPV Ratio.................. 119bp
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions, which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV Table presented assumes that the composition of the Company's interest
sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured and also assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV Table provides an indication of the
Company's interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Company's net interest income
and will differ from actual results.
Average Balance, Interest and Average Yields and Rates
The following table sets forth certain information relating to Carver's
average interest-earning assets and average interest-bearing liabilities and
reflects the average yield on assets and the average cost of liabilities for the
years indicated. Such yields and costs are derived by dividing income or expense
by the average balances of assets or liabilities, respectively, for the periods
shown. Average balances are derived from average month-end balances, except for
federal funds which are derived from daily balances. Management does not believe
that the use of average monthly balances instead of average daily balances on
all other accounts has caused any material difference in the information
presented.
The table also presents information for the years indicated with respect to
the difference between the weighted average yield earned on interest-earning
assets and the weighted average rate paid on interest-bearing liabilities, or
"interest rate spread," which savings institutions have traditionally used as an
indicator of profitability. Another indicator of an institution's net interest
income is its "net interest margin," which is its net interest income divided by
the average balance of interest-earning assets. Net interest income is affected
by the interest rate spread and by the relative amounts of interest-earning
assets and interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate NII.
40
At March 31, Year ended March 31,
2001 2001
-------------------- ------------------------------
Average Average
Yield Average Yield
Balance Cost Balance Interest Cost
-------- -------- -------- -------- --------
(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net (1) ............................. $283,437 7.55% $278,264 $ 21,398 7.69%
Investment securities(2) .............................. 50,677 5.67 43,350 2,874 6.63
Mortgage-backed securities ............................ 42,866 7.03 48,899 3,012 6.16
Federal funds sold .................................... 23,700 4.32 18,256 1,023 5.60
-------- -------- -------- -------- --------
Total interest-earning assets ......................... 400,680 7.06% 388,769 $ 28,307 7.28%
-------- -------- --------
Non-interest earning assets ........................... 23,820 27,127
-------- --------
Total assets .......................................... $424,500 $415,896
======== ========
Interest-Bearing Liabilities:
Deposits
DDA .............................................. $ 11,409 --% $ 11,568 $ -- --%
NOW .............................................. 14,757 1.71 15,926 253 1.59
Savings and club ................................. 132,645 2.30 137,305 3,051 2.22
Money market accounts ............................ 15,718 2.62 17,598 412 2.34
Certificate of deposits .......................... 104,895 4.52 94,006 4,740 5.04
-------- -------- -------- -------- --------
Total deposits ........................................ 279,424 3.03 276,403 8,456 3.06
Borrowed money ........................................ 105,600 5.51 99,783 5,822 5.84
-------- -------- -------- -------- --------
Total interest-bearing liabilities .................... 385,024 3.71% 376,186 $ 14,278 3.80%
-------- -------- --------
Non-interest-bearing liabilities ...................... 7,433 7,072
-------- --------
Total liabilities ..................................... 392,457 383,258
Stockholders' equity .................................. 32,043 32,638
-------- --------
Total liabilities and stockholders' equity ............ $424,500 $415,896
======== ========
Net interest income ................................... $ 14,029
========
Interest rate spread .................................. 3.35% 3.48%
======== ========
Net interest margin ................................... 3.61%
========
Ratio of average interest-earning assets to average
interest-bearing liabilities .................... 1.03
========
41
Year Ended March 31,
--------------------------------------------------------------------
2000 1999
-------------------------------- --------------------------------
Average Average
Average Yield Average Yield
Balance Interest Cost Balance Interest Cost
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Interest Earning Assets:
Loans(1) ..................................... $259,408 $ 19,443 7.50% $269,241 $ 20,576 7.64%
Investment securities(2) ..................... 57,357 3,593 6.26 32,284 1,801 5.58
Mortgage-backed securities ................... 55,075 3,641 6.61 85,236 5,431 6.37
Federal funds sold ........................... 13,000 690 5.31 12,013 665 5.54
-------- -------- -------- -------- -------- --------
Total interest-earning assets ................ 384,840 $ 27,367 7.12% 398,774 $ 28,473 7.14%
-------- -------- -------- --------
Non-interest earning assets .................. 29,220 26,709
-------- --------
Total assets ................................. $414,060 $425,483
======== ========
Interest-Bearing Liabilities:
Deposits:
DDA ...................................... $ 11,388 $ -- --% $ 9,670 $ -- --%
NOW ...................................... 18,032 314 1.74 18,789 314 1.67
Savings and clubs ........................ 143,908 3,650 2.54 144,990 3,604 2.49
Money market accounts .................... 19,578 631 3.22 21,541 613 2.85
Certificate of deposits .................. 86,316 4,017 4.65 80,897 3,890 4.81
-------- -------- -------- -------- -------- --------
Total deposits ............................... 279,222 8,612 3.08 275,887 8,421 3.05
Borrowed money ............................... 95,769 5,397 5.64 107,766 6,394 5.93
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities ........... 374,991 $ 14,009 3.74% 383,653 $ 14,815 3.85%
-------- -------- --------
Non-interest-bearing liabilities ............. 4,596 -- 6,771
-------- -------- --------
Total liabilities ............................ 379,587 $ 14,009 390,424
--------
Stockholders' equity ......................... 34,473 35,059
-------- --------
Total liabilities and stockholders'
equity ................................... $414,060 $425,483
======== ========
Net interest income .......................... $ 13,358 $ 13,658
======== ========
Interest rate spread ......................... 3.38% 3.29%
======== ========
Net interest margin .......................... 3.47% 3.43%
======== ========
Ratio of average interest-earning assets to
Average interest-bearing liabilities ..... 1.03 1.04
======== ========
(1) Includes non-accrual loans.
(2) Includes FHLB stock and fair value of investments available for sale.
Rate/Volume Analysis
The following table sets forth information regarding the extent to which
changes in interest rates and changes in volume of interest related assets and
liabilities have affected Carver's interest income and expense during the
periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided for changes attributable to
(i) changes in volume (changes in volume multiplied by old rate), (ii) changes
in rates (change in rate multiplied by old volume), and (iii) changes in
rate/volume. Changes in rate/volume variance are allocated proportionately
between changes in rate and changes in volume.
42
Year Ended March 31,
-------------------------------------------------------------
2001 vs. 2000 2000 vs. 1999
Increase (Decrease) due to Increase (Decrease) due to
----------------------------- -----------------------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
(Dollars in thousands)
Interest-earning assets:
Loans ................................................. $ 1,420 $ 535 $ 1,955 $ (753) $ (378) $(1,133)
Investment securities (1) ............................. (859) 140 (719) 1,549 243 1,792
Mortgage-backed securities (1) ........................ (408) (221) (629) (2,003) 213 (1,790)
Federal funds sold .................................... 283 50 333 50 (25) 25
------- ------- ------- ------- ------- -------
Total interest-earning assets ................... 436 504 940 (1,159) 53 (1,106)
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
NOW ............................................... (37) (24) (61) (13) 13 --
Savings and clubs ................................. (167) (432) (599) (27) 73 46
Money market accounts ............................. (64) (155) (219) (42) 60 18
Certificate of deposits ........................... 358 365 723 252 (125) 127
------- ------- ------- ------- ------- -------
Total deposits .................................. 90 (246) (156) 170 21 191
Borrowed money .................................... 227 198 425 (722) (275) (997)
------- ------- ------- ------- ------- -------
Total deposit and interest-bearing liabilities .. 317 (48) 269 (552) (254) (806)
------- ------- ------- ------- ------- -------
Net change in net interest income ..................... $ 119 $ 552 $ 671 $ (607) $ 307 $ (300)
======= ======= ======= ======= ======= =======
- ----------
(1) Includes securities available for sale.
Comparison of Financial Condition at March 31, 2001 and 2000
At March 31, 2001, total assets increased by $4.4 million, or 1.0%, to
$424.5 million compared to $420.1 million at March 31, 2000. The increase in
total assets was primarily attributable to increases in loans, and cash and cash
equivalents, offset in part by decreases, mortgage-backed securities held to
maturity and securities available for sale. Loans receivable, net increased by
$13.3 million, or 4.9%, to $283.4 million compared to $270.1 million one year
ago. The increase in loans results primarily from Carver originations and
purchases during 2001 which exceeded loan payments. At March 31, 2001, total
cash and cash equivalents increased by $9.6 million, or 43.2%, to $31.8 million
compared to $22.2 million at March 31, 2000. Mortgage-backed securities held to
maturity decreased by $11.3 million, or 20.9%, to $42.9 million, compared to
$54.2 million at March 31, 2000. The decrease in mortgage-backed securities held
to maturity primarily reflects principal repayments.
At March 31, 2001 total liabilities increased $4.9 million or 1.3% to
$392.4 million compared to $387.5 million at March 31, 2000. This increase was
primarily attributable to an increase of $33.6 million in advances from the
Federal Home Loan Bank of New York, offset in part by decreases of $26.4 million
in securities sold under agreement to repurchase and $2.5 million in deposits.
The decrease in deposits was primarily attributable to the sale of deposits from
the Roosevelt and Chelsea branches during fiscal year 2001. Excluding deposits
of the Roosevelt and Chelsea branches, total deposits would have increased by
approximately $25.3 million during fiscal year 2001.
At March 31, 2001, total stockholders' equity decreased $545,000, or 1.7%,
to $32.1 million compared to $32.6 million at March 31, 2000. The decrease in
stockholders' equity was primarily attributable to the net loss for the year as
well as dividends paid on the Company's preferred stock. The Bank's capital
levels meet regulatory requirements of a well capitalized financial institution.
Comparison of Operating Results For The Years Ended March 31, 2001 and 2000
Net Loss
The Company reported a net loss for the twelve-month period ended March 31,
2001 of $389,000 compared to a net loss of $1.1 million for the same period the
prior year. The decrease in the net loss was primarily due to a gain on the sale
of deposits of $1.0 million, a $671,000 improvement in net interest income and a
$362,000 reduction in non-interest expense, partially offset by a non-recurring
gain of $728,000 on the sale of an investment property recognized in fiscal 2000
and a $694,000 increase in the provision for loan losses.
43
Interest Income
Interest income increased by $941,000, or 3.4%, to $28.3 million for the
twelve month period ended March 31, 2001 compared to $27.4 million for the
twelve month period ended March 31, 2000. The increase in interest income was
primarily attributable to an improvement in the average yield on
interest-earning assets from 7.12% for the twelve months ended March 31, 2000,
compared to 7.28% for the twelve months ended March 31, 2001. Interest income on
loans increased by $2.0 million, or 10.3%, to $21.4 million for fiscal 2001
compared to $19.4 million for fiscal 2000. The increase in interest income from
loans reflects an increase of $18.9 million, or 7.3%, in the average balance of
loans to $278.3 million for fiscal 2001 compared to $259.4 million for fiscal
2000, coupled with a 19 basis point increase in the average rate earned on loans
to 7.69% for fiscal 2001 from 7.50% for the prior year. Interest income on
investment securities decreased by approximately $0.7 million, or 19.4%, to $2.9
million for the twelve months ended March 31, 2001, compared to $3.6 million for
the prior year, reflecting an decrease of $14 million in the average balance of
investment securities to $43.4 million for fiscal 2001 compared to $57.4 million
for fiscal 2000, coupled with a 37 basis point increase in the average rate
earned on investment securities to 6.63% from 6.26%. Interest income on
mortgage-backed securities decreased by $0.6 million, or 16.7%, to $3.0 million
for the twelve months ended March 31, 2001 compared to $3.6 million for the
prior year reflecting a decrease of $12.2 million in the average balance of
mortgage-backed securities to $42.9 million for fiscal 2001 compared to $55.1
million for fiscal 2000, and, to a lesser extent, a 45 basis point decrease in
the average rate earned on mortgage-backed securities to 6.16% from 6.61%.
Interest Expense
Interest expense increased by $269,000, or 1.92%, to $14.3 million for
fiscal 2001 compared to $14.0 million for the prior year. The increase in
interest expense is attributable to a $1.2 million increase in the average
balance of interest-bearing liabilities combined with a 6 basis point increase
in the average cost of interest bearing liabilities.
Interest expense on deposits decreased $156,000, or 1.8%, to $8.5 million
for fiscal 2001 compared to $8.6 million for the prior year. This decrease is
attributable to a $2.8 million, or 1.0%, decrease in the average balance of
deposits to $276.4 million for fiscal 2001 compared to $279.2 million for fiscal
2000, and to a lesser extent, to a two basis point decrease in the cost of
average deposits.
Interest expense on borrowed money increased by $425,000, or 7.9%, to $5.8
million for fiscal 2001 compared to $5.4 million for the prior year. The average
balance of borrowed money was $4.0 million, or 4.19%, higher during fiscal 2001
than during fiscal 2000, and the average cost of borrowed money for fiscal 2001
was 20 basis points higher than the average cost of borrowed money for fiscal
2000.
Net Interest Income
Net interest income before the provision for loan losses increased
$671,000, or 5.0%, to $14.0 million for fiscal 2001 compared to $13.4 million
for the prior year. The 17 basis point increase in the return on average
interest-earning assets coupled with the six basis point increase in the cost of
interest-bearing liabilities used to fund interest earning assets contributed to
an 11 basis point increase in the interest rate spread to 3.5% for fiscal 2001
compared to 3.38% for the prior year. The net interest margin increased to 4.81%
for fiscal 2001 compared to 3.47% for fiscal 2000. The improved interest rate
spread and margin were the most significant items responsible for the
improvement in net interest income in fiscal 2001 compared to fiscal 2000.
Provision for Loan Losses
Provision for loan losses increased by $694,000 or 63.2%, to $1.8 million,
for the twelve month period ended March 31, 2001, compared to $1.1 million for
the year ended March 31, 2000. When determining the provision for loan losses,
management assesses the risk inherent in its loan portfolio based on the
information available at such time relating to trends in the local and national
economy, trends in the real estate market and the Company's level of
non-performing loans and assets and net charge offs. The provision for loan
losses for fiscal 2001 represents the amount required to maintain the allowance
for loan losses at the level required by the Company's policy. During fiscal
2001, the Bank charged off approximately $1.4 million of loans. At March
44
31, 2001, non-performing loans totaled $2.5 million, or 0.9%, of total loans
compared to $2.1 million, or 0.8%, of total loans at March 31, 2000. At March
31, 2001, the Bank's allowance for loan losses was $3.6 million compared to $2.9
million at March 31, 2000, resulting in a ratio of the allowance to
non-performing loans of 141.0% at March 31, 2001 compared to 138.1% at March 31,
2000 and a ratio of the allowance for possible loan losses to total loans of
1.23% and 1.1% at March 31, 2001 and March 31, 2000, respectively.
Non-Interest Income
Non-interest income is composed of loan fees and service charges, gains or
losses from the sale of securities and certain other items, fee income for
banking services and miscellaneous non-interest income. Non-interest income
increased $395,000 or 15.6%, to $2.9 million for fiscal 2001 compared to $2.5
million for fiscal 2000. The increase in non-interest income is primarily due to
non-recurring income of $1.0 million relating to the sale of deposits less the
non-recurrence of $728,000 of income in 2000 resulting from the sale of the
Alhambra Building by the Company's subsidiary, Alhambra Realty. Excluding from
the 2001 fiscal year the gain from the sale of deposits and excluding the 2000
income from the sale of the Alhambra Building, total non-interest income
increased by $395,000, or 15.6%, compared to fiscal 2000.
Non-Interest Expense
Non-interest expense decreased by $362,000, or 2.3%, to $15.5 million for
fiscal 2001 compared to $15.8 million for the prior fiscal year. The decrease in
non-interest expense was primarily attributable to decreases of $573,000 in
other non-interest expenses, $62,000 in net occupancy expenses and $57,000 in
equipment expense, offset in part by an increase of $330,000 in salaries and
employee benefits. The decrease in other non-interest expenses was primarily
attributable to reductions in accounting records adjustments and a decrease in
the Bank's insurance assessment rate.
Income Tax Expense
In connection with the loss from operations incurred for fiscal 2001 and
fiscal 2000, the Company has an operating loss carry forward available to offset
future taxable income totaling approximately $5.7 million that will expire in
2019. The Company recorded income tax expense of $98,000 for fiscal 2001 and
$110,000 for fiscal 2000, respectively. The income tax expense for fiscal 2001
and fiscal 2000 represents taxes payable to New York State and New York City.
Comparison of Operating Results For The Years Ended March 31, 2000 and 1999
Net Loss
The Company reported a net loss for the twelve month period ended March 31,
2000 of $1.1 million compared to a net loss of $4.5 million for the same period
the prior year. The decrease in the net loss was primarily due to decreases in
non-interest expenses and the provision for possible loan losses.
Interest Income
Interest income decreased by $1.1 million, or 3.9%, to $27.4 million for
the twelve month period ended March 31, 2000 compared to $28.5 million for the
twelve month period ended March 31, 1999. The decrease in interest income was
primarily attributable to a $13.9 million, or 3.5%, decrease in average balance
of interest earning assets to $384.8 million for the twelve months ended March
31, 2000, compared to $398.8 million for twelve months ended March 31, 1999. The
yield on average interest earning assets declined to 7.12% for the twelve months
ended March 31, 2000, compared to 7.14% for the prior year.
Interest income on loans decreased by $1.1 million, or 5.5%, to $19.4
million for fiscal 2000 compared to $20.6 million for fiscal 1999. The decrease
in interest income from loans reflects a decrease of $9.8 million, or 3.7%, in
the average balance of loans to $259.4 million for fiscal 2000 compared to
$269.2 million for fiscal 1999, coupled with a 14 basis point decrease in the
average rate earned on loans to 7.50% for fiscal 2000 from 7.64% for the prior
year. Interest income on investment securities increased by approximately $1.8
million, or 99.5%, to $3.6 million for the twelve months ended March 31, 2000,
compared to $1.8 million for the prior year, reflecting an increase of $25
million in the average balance of investment securities to $57.4
45
million for fiscal 2000 compared to $32.3 million for fiscal 1999, coupled with
a 68 basis point increase in the average rate earned on investment securities to
6.26% from 5.58%. Interest income on mortgage-backed securities decreased by
$1.8 million, or 33.0%, to $3.6 million for the twelve months ended March 31,
2000 compared to $5.4 million for the prior year, reflecting a decrease of $30.2
million in the average balance of mortgage-backed securities to $55.1 million
for fiscal 2000 compared to $85.2 million for fiscal 1999, offset in part by a
24 basis point increase in the average rate earned on mortgage-backed securities
to 6.61% from 6.37%.
The increase in the average balance of investment securities is primarily
attributable to the reallocation that existed throughout most of fiscal 2000 of
cash flows from loans and mortgage-backed securities into investment securities.
Significant turnover of personnel in the Lending Department adversely affected
the Bank's ability to originate and purchase loans during fiscal 2000,
contributing to the decrease in the average balance of loans.
Interest Expense
Interest expense decreased by $805,000, or 5.4%, to $14.0 million for
fiscal 2000 compared to $14.8 million for the prior year. The decrease in
interest expense is attributable to an $8.7 million decrease in the average
balance of interest-bearing liabilities combined with an 11 basis point decrease
in the average cost of interest bearing liabilities.
Interest expense on deposits increased $191,000, or 2.3%, to $8.6 million
for fiscal 2000 compared to $8.4 million for the prior year. This increase is
attributable to a $3.3 million, or 1.2%, increase in the average balance of
deposits to $279.2 million for fiscal 2000 compared to $275.9 million for fiscal
1999, and to a lesser extent, to a three basis point increase in the cost of
average deposits.
Interest expense on borrowed money decreased by $996,000, or 15.6%, to $5.4
million for fiscal 2000 compared to $6.4 million for the prior year. The average
balance of borrowed money was $12.0 million, or 11.1%, lower during fiscal 2000
than during fiscal 1999, and the average cost of borrowed money for fiscal 2000
was 29 basis points lower than the average cost of borrowed money for fiscal
1999.
Net Interest Income
Net interest income before the provision for possible loan losses decreased
$301,000, or 2.2%, to $13.4 million for fiscal 2000 compared to $13.7 million
for the prior year. The 11 basis point decrease in the cost of interest-bearing
liabilities used to fund interest earning assets contributed to an eight basis
point increase in the interest rate spread to 3.38% for fiscal 2000 compared to
3.29% for the prior year. The decrease in the cost of interest-bearing
liabilities used to fund interest earning assets also contributed to a 4 basis
point increase in the net interest margin to 3.47% for fiscal 2000 compared to
3.43% for fiscal 1999. However, the average balance on interest earning assets
decreased to a greater degree that the average balance of interest-bearing
liabilities, and the decrease in the average balance of interest earning assets
was the most significant factor resulting in the $302,000 decrease in net
interest income for fiscal 2000 as compared to fiscal 1999.
Provision for Loan Losses
Provision for loan losses decreased by $2.9 million, or 72.7%, to $1.1
million, for the twelve month period ended March 31, 2000, compared to $4.0
million for the year ended March 31, 1999. When determining the provision for
loan losses, management assesses the risk inherent in its loan portfolio based
on the information available at such time relating to trends in the local and
national economy, trends in the real estate market and the Company's level on
non-performing loans and assets and net charge offs. The provision for possible
loan losses for fiscal 2000 represents the amount required to maintain the
allowance for possible loan losses at the level required by the Company's
policy, and the reduced provision is primarily attributable to the decrease in
non-performing loans during fiscal 2000. During fiscal 2000, the Bank charged
off approximately $2.6 million of loans. At March 31, 2000, non-performing loans
totaled $2.1 million, or 0.8%, of total loans compared to $4.5 million, or 1.6%,
of total loans at March 31, 1999. At March 31, 2000, the Bank's allowance for
possible loan losses was $2.9 million compared to $4.0 million at March 31,
1999, resulting in a ratio of the allowance to non-performing loans of 138.0% at
March 31, 2000 compared to 89.3%
46
at March 31, 1999 and a ratio of the allowance for possible loan losses to total
loans of 1.07% and 1.46% at March 31, 2000 and March 31, 1999, respectively.
Non-Interest Income
Non-interest income is composed of loan fees and service charges, gains or
(losses) from the sale of securities, and fee income for banking services.
Non-interest income increased $157,000, or 6.6%, to $2.5 million for fiscal 2000
compared to $2.4 million for fiscal 1999. The increase in non-interest income is
primarily due to non-recurring income of $728,000 resulting from the sale of the
Alhambra Building by the Company's subsidiary, Alhambra Realty. Excluding the
income from the sale of the Alhambra Building, total non-interest income
decreased by $571,000, or 24.0%, compared to fiscal 1999. Excluding the income
from the sale of the Alhambra Building, the decrease in non-interest income is
primarily attributable to a decrease in bank loan fees and service charges as
well as the decrease in bank service charges on deposit accounts.
Non-Interest Expense
Non-interest expense decreased by $2.1 million, or 11.9%, to $15.8 million
for fiscal 2000 compared to $18.0 million for the prior fiscal year. The
decrease in non-interest expense is primarily attributable to a decrease of $2.5
million in other non-interest expenses, offset by increases of $475,000 in
salaries and employee benefits. The increase in salaries and employee benefits
is the result of increased expenses associated with certain of the Bank's
benefit plans. The decrease in other non-interest expenses is primarily
attributable to reductions in consultant fees and reconciliation adjustments,
which offset increases of approximately $318,000 in FDIC assessments, $229,000
in audit expenses and $335,000 in legal expenses.
Income Tax Expense
In connection with the loss from operations incurred for fiscal 2000 and
fiscal 1999, the Company has available an operating loss carry forward totaling
approximately $5.7 million that will expire in 2019 to offset future taxable
income. The Company recorded income tax expense of $110,000 for fiscal 2000,
compared to a tax benefit of $1.5 million for fiscal 1999. The income tax
expense for fiscal 2000 represents taxes payable to New York State and New York
City based upon the Company's total assets. The Company paid no taxes for the
year ended March 31, 1999.
Liquidity And Capital Resources
Carver Federal's primary sources of funds are deposits, FHLB advances, and
proceeds from principal and interest payments on loans and mortgage-backed
securities. While maturities and scheduled amortization of loans and investments
are predictable sources of funds, deposit flow and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition.
Congress eliminated the statutory liquidity requirement which required
federal savings associations to maintain a minimum amount of liquid assets of
between four and ten percent, as determined by the Director of the OTS, the
Bank's primary federal regulator. The OTS recently conformed its implementing
regulations to reflect this statutory change. Under the revised regulations,
which became effective March 15, 2001, the Bank is required to maintain
sufficient liquidity to ensure its safe and sound operation. At March 31, 2001,
the Bank's liquidity ratio was 12.21%.
The Bank's most liquid assets are cash and short-term investments. The
level of these assets are dependent on the Bank's operating, financing lending
and investing activities during any given period. At March 31, 2001, and 2000,
assets qualifying for short-term liquidity, including cash and short-term
investments, totaled $50.0 million and $72.7 million, respectively.
The Consolidated Statements of Cash Flows present the change in cash from
operating, investing and financing activities. During fiscal 2001, cash and cash
equivalents increased by $9.6 million. Net cash provided by operating activities
was $2.6 million, representing primarily the results of operations adjusted for
depreciation and amortization, the provision for loan losses. Net cash provided
by investing activities was $1.8 million, which was primarily the result of a
decline in securities available for sale and mortgage-backed securities, offset
in part by an increase in loans receivable. Net cash provided by financing
activities was $5.2
47
million, reflecting primarily a net increase in deposits and borrowed funds
partially offset by the proceeds from the sale of branches.
Regulatory Capital Position
The Bank must satisfy three minimum capital standards established by the
OTS. For a description of the OTS capital regulation, see "Regulation and
Supervision--Regulation of Federal Savings Associations--Capital Requirements."
The Bank presently exceeds all capital requirements as currently
promulgated. At March 31, 2001, the Bank had tangible, core, and risk-based
capital ratios of 7.02%, 7.02%, and 15.76%, respectively.
The following table reconciles the Bank's stockholders equity at March 31,
2001, under accounting principles generally accepted in the United States of
America to regulatory capital requirements:
REGULATORY CAPITAL REQUIREMENTS
----------------------------------------------
GAAP TANGIBLE TIER I/CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- ----------- ----------
(Dollars in thousands)
Stockholders' Equity at March 31, 2001 (1) .. $ 30,360 $ 30,360 $ 30,360 $ 30,360
========
Add:
General valuation allowance .............. -- -- 2,576
Deduct:
Excess of cost over net assets
acquired ................................. (603) (603) (603)
-------- -------- --------
Regulatory capital ....................... 29,757 29,757 32,333
Minimum capital requirement .............. 6,358 16,956 16,413
-------- -------- --------
Regulatory capital excess ................ $ 23,399 $ 12,801 $ 15,920
======== ======== ========
(1) Reflects Bank only.
Impact Of Inflation And Changing Prices
The financial statements and accompanying notes appearing elsewhere herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of Carver's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Bank are monetary in
nature. As a result, interest rates have a greater impact on Carver's
performance than do the effects of the general level of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
Tax Bad Debt Reserves
Federal tax law changes were enacted in August 1996 to eliminate the
"thrift bad debt" method of calculating bad debt deductions. The legislation
requires the Bank to recapture into taxable income (over a six-year period) all
bad debt reserves accumulated after March 31, 1988. Since the Bank's federal bad
debt reserves approximated the 1988 base-year amounts, this recapture
requirement had no significant impact. The tax law changes also provide that
taxes associated with the recapture of pre-1988 bad debt reserves would become
payable under more limited circumstances than under prior law. For example, such
taxes would no longer be payable in the event that the thrift charter is
eliminated and the Bank is required to convert to a bank charter.
Amendments to the New York State and New York City tax laws redesignate the
Bank's state and New York City bad debt reserves at December 31, 1995 as the
base-year amount and also permit future
48
additions to the base-year reserves using the percentage-of-taxable-income
method. This change eliminated the excess New York State and New York City
reserves for which the Company had recognized a deferred tax liability.
Management does not expect these changes to have a significant impact on the
Bank. Taxes associated with the recapture of the New York State and New York
City base-year reserve would still become payable under various circumstances,
including conversion to a bank charter or failure to meet various thrift
definition tests.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
statement also requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and those
instruments at fair value. This statement, as amended, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of
this statement is not anticipated to have a material impact on the financial
position or results of operations of Carver.
In September 2000, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
140") - a replacement of SFAS 125. SFAS 140 revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain additional disclosures. The collateral provisions and
disclosure requirements of SFAS 140 are effective for fiscal years ending after
December 15, 2000, whereas the other provisions of SFAS 140 are to be applied
prospectively to transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. The adoption of SFAS 140 is not
expected to have a material impact on the Company's financial position or
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The information required by this item appears under the caption "Discussion
of Market Risk--Interest Rate Sensitivity Analysis" in Item 7, incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
For our Consolidated Financial Statements, see index on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.
None.
49
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
Information with Respect to Directors
The following table sets forth certain information with respect to each
director of the Holding Company. Pursuant to the terms of a Securities Purchase
Agreement relating to the issuance of the Holding Company's Series B Preferred
Stock to Provender, Mr. Frederick O. Terrell was appointed to the Boards of the
Holding Company and the Bank for a term expiring at the annual meeting of
stockholders for the fiscal year ending March 31, 2000. He was re-elected for a
three-year term at that meeting. Pursuant to the terms of a settlement agreement
entered into between BBC Capital Market, Inc. and Carver, et al. in May of 2000,
Mr. Kevin Cohee and Ms. Teri Williams were appointed to the Boards of the
Holding Company and the Bank for terms expiring at the annual meeting of
stockholders for the fiscal year ending March 31, 2002. There are no other
arrangements or understandings between the Holding Company and any director
pursuant to which such other person was elected to be a director of the Holding
Company.
End of Position Held with the
Name Age (1) Term Company and the Bank Director Since
- -------------------- ------- ------ ---------------------- --------------
Deborah C. Wright 43 2001 President, Chief Executive 1999
Officer and Director
Frederick O. Terrell 46 2003 Chairman 2000
Pazel G. Jackson, Jr. 69 2001 Director 1997
David L. Hinds 54 2001 Director 2000
Kevin Cohee 43 2002 Director 2000
Teri Williams 43 2002 Director 2000
Strauss Zelnick 43 2002 Director 2000
Robert Holland, Jr. 61 2003 Director 2000
Dennis M. Walcott 49 2003 Director 2000
(1) As of May 31, 2001.
The principal occupation and business experience of each director is set
forth below.
Deborah C. Wright is currently President, Chief Executive Officer and
Director of the Holding Company and the Bank, positions she assumed on June 1,
1999. Prior to assuming her current positions, Ms. Wright was President & CEO of
the Upper Manhattan Empowerment Zone Development Corporation, a position she
held since May 1996. She previously served as Commissioner of the Department of
Housing Preservation and Development under Mayor Rudolph W. Giuliani from
January 1994 through March 1996. Prior to that appointment, Ms. Wright was named
by Mayor David N. Dinkins to the New York City Housing Authority Board which
manages New York City's 189,000 public housing units. She is a member of the
Board of Overseers of Harvard University and serves on the boards of Empire
State Development Corporation, the Initiative for a Competitive Inner City, The
New York City Partnership, Inc. and the Ministers and Missionaries Benefit Board
of the American Baptist Churches. Ms. Wright earned A.B., J.D. and M.B.A.
degrees from Harvard University.
Frederick O. Terrell is currently Managing Partner and Chief Executive
Officer of Provender Capital Group, LLC, a private equity investment firm based
in New York and Los Angeles. Prior to forming Provender in 1997, Mr. Terrell was
a Managing Director and Partner with the international investment banking firm
of Credit Suisse First Boston, beginning his association with the firm in 1983.
In addition to Carver, he is a member of the Boards of Vanguarde Media, Inc.,
Empire Health Choice, Inc., The Diversity Channel, Inc.,
50
PacPizza LLC and the Yale School of Management. Mr. Terrell received his B.A.
degree from La Verne College, an M.A. from Occidental College and his MBA from
the Yale School of Management.
Pazel G. Jackson, Jr. is a retired Senior Vice President of J.P. Morgan
Chase. From January 1995 to 2000, Mr. Jackson was responsible for new business
development in targeted markets throughout the United States. Prior to joining
J.P. Morgan Chase, Mr. Jackson served as the Senior Credit Officer of the
Residential Mortgage Division of Chemical Bank. Mr. Jackson's previous business
experience also includes employment as a Senior Vice President in charge of
Commercial and Residential Lending at The Bowery Savings Bank. Mr. Jackson
joined The Bowery in 1969 and held various positions at this financial savings
institution including, Senior Vice President, Assistant to the Chairman
(1985-1986); Senior Vice President, Division Head, Real Estate Finance
(1981-1985); Senior Vice President, Marketing Director (1977-1981); and Vice
President, Asset Recovery (1973-1977). Mr. Jackson also served Chief of
Engineering Design for the 1964-1965 New York World's Fair Corporation
(1962-1966). Mr. Jackson is a licensed professional engineer and earned his MBA
from Columbia University.
David L. Hinds is a retired Managing Director of Deutsche Bank who, during
his tenure there, developed an expertise in turnaround management and process
reengineering. During his extensive career at Deutsche Bank and Bankers Trust,
Mr. Hinds led several operating divisions, a start-up technology division and a
global marketing and sales organization. Most recently, he was Managing
Director/Partner for Deutsche Bank's Global Cash Management and Trade Finance
Division, where he had profit and loss responsibility for all business
activities' including global sales, operations, product management, credit and
technology. Under his leadership, the Division's profit contribution more than
doubled over four years. He is a board member of the SBLI Mutual Life Insurance
Company, past President of the Executive Leadership Council, Co-Founder of the
Urban Bankers Coalition and Chairman of the NAACP New York Act - So Advisory
Committee.
Kevin Cohee is currently Chairman and Chief Executive Officer of Boston
Bank of Commerce. Mr. Cohee is also a board member of the Boston Bank of
Commerce. Mr. Cohee has an extensive background as an executive and an
entrepreneur. He was employed by Salomon Brothers, Inc. in their Financial
Institutions Group. By 1988, through a leverage buyout, Mr. Cohee obtained
Military Professional Services, Inc., a 29 year old company that marketed Visa
and Master Card credit cards to military personnel. Mr. Cohee purchased a
majority controlled interest in Boston Bank of Commerce in 1995. Mr. Cohee holds
a B.A. and M.B.A. from the University of Wisconsin and a J.D. from Harvard Law
School.
Teri Williams is currently employed as an Executive Vice President of
Boston Bank of Commerce. Ms. Williams is also a board member of the Boston Bank
of Commerce. Ms. Williams began her business career over 17 years ago at
American Express TRS Company where she became one of the youngest vice
presidents in the company's history. Ms. Williams is very involved in community
projects, including Vice Chairperson of Dimock Community Health Center,
Treasurer of UNICEF/New England and the Board of Overseers for WGBH (public tv).
Ms. Williams holds a B.A. with distinctions in economics from Brown University
and an M.B.A. with honors from Harvard Graduate School of Business
Administration.
Strauss Zelnick is the founder of Zelnick Media LLC, an investment and
advisory firm specializing in media and entertainment. From 1998 to 2000, Mr.
Zelnick was President and Chief Executive Officer of BMG Entertainment, a $4.7
billion music and entertainment unit of Bertelsmann A.G. BMG Entertainment
includes the record labels Arista, RCA, Windham Hill and Ariola, among many
others, as well as one of the largest music publishing companies in the world,
the world's largest record club and significant online activities, including a
joint partnership in GetMusic, which promotes artists and sells their music over
the Internet. Mr. Zelnick has spent his career in the entertainment industry and
has a broad background in managing and developing creative organizations,
including businesses in film, television, video and multimedia. Before joining
BMG, Mr. Zelnick was President and Chief Executive Officer of Crystal Dynamics,
a leading producer and distributor of interactive entertainment software. Prior
to that, he worked for four years as President and Chief Operating Officer of
20th Century Fox. He spent three years at Vestron Inc. as a senior executive,
becoming President and Chief Operating Officer. Mr. Zelnick also served as Vice
President, International Television for Columbia Pictures. Mr. Zelnick's
educational board memberships include Wesleyan University and Pencil Inc. He
also serves on the board of several other charitable, corporate and
entertainment organizations. Mr. Zelnick holds a J.D. and an M.B.A. from Harvard
University and a B.A. from Wesleyan University.
51
Robert Holland, Jr. was Chairman and Chief Executive Officer of Workplace
Integrators, a Southeast Michigan company he acquired in June 1997 and built
into one of the largest Steelcase Office Furniture dealerships in the United
States. He recently divested this business. Mr. Holland is the former President
and Chief Executive Officer of Ben & Jerry's and previously served as the
Chairman and Chief Executive Officer of Rokher-J, Inc., a New York-based holding
company participating in business development projects and providing strategy
development assistance to senior management of major corporations. Prior to
these positions, Mr. Holland was a long-standing partner with McKinsey &
Company. Mr. Holland is a member of the Boards of The MONY Group, Lexmark
International, Inc., Tricon Restaurants, Inc., and Mazaruni Granite Products and
was a member of the Boards of AC Nielsen Corporation and Trumark, Inc. before
those companies were sold. He spent ten years as the Chairman of the Board of
Trustees of Spelman College, where he currently serves as Vice Chairman, and is
a member of the Board of the Harlem Junior Tennis Program and the Executive
Board of the Harvard Journal of African-American Public Policy.
Dennis M. Walcott is President and Chief Executive Officer of the New York
Urban League. For the past ten years, he has been head of the New York Urban
League, which is dedicated to advocating for the rights of New York City
residents, particularly in the areas of education, police/community relations
and welfare-to-work initiatives. Mr. Walcott supervises a staff of over 150
employees and 500 volunteers located in 17 sites throughout the five boroughs of
New York City. Mr. Walcott is also responsible for the New York Urban League's
award of grants from the New York City Board of Education to recruit and train
parents to serve on School Leadership Teams and to create welfare-to-work
initiatives, including training, counseling and job placement services.
Previously, Mr. Walcott was Executive Director of Harlem Dowling Westside Center
for five years and was a former citywide appointee to the New York City Board of
Education. Mr. Walcott received a Masters of Social Work from Fordham University
and a Masters of Education from the University of Bridgeport. He serves on
numerous boards, including the Independence Bank Foundation.
Information with Respect to Officers
The following table sets forth certain information with respect to each
officer of the Holding Company. There are no arrangements between the Holding
Company and any officer pursuant to which such person was selected to be a
officer of the Holding Company.
Position Held with the
Name Age Company and the Bank Officer Since (1)
- -------------------- --- ------------------------ -----------------
Deborah C. Wright 43 President, Chief 1999
Executive Officer
and Director
Walter T. Bond 42 Senior Vice President 1993
and Special Assistant
to the President and
Chief Executive Officer
Margaret D. Peterson 50 Senior Vice President 1999
and Chief Administrative
Officer
J. Kevin Ryan 48 Senior Vice President and
Chief Lending Officer 2000
Devon W. Woolcock 35 Senior Vice President and 2000
Chief of Retail Banking
William Schult 53 Vice President and 2000
Controller and Acting
Chief Financial Officer
- ----------
(1) Includes terms as officers of the Bank prior to the incorporation of
the Holding Company in 1996.
52
The principal occupation and business experience of each officer who is not
a director is set forth below.
Walter T. Bond is Senior Vice President, Acting Corporate Secretary and
Special Assistant to the President and Chief Executive Officer. Mr. Bond is a
member of the Bank's Investment Committee. Mr. Bond joined the Bank in February
1993, as Assistant Vice President, Mortgage Lender. Mr. Bond was assigned to the
position of Investment Officer in November 1995. Mr. Bond is a member of the
Bank's Investment and Loan Committees and serves as the Company's Community
Reinvestment Officer. Mr. Bond is a member of the New York Society of Securities
Analysts and the Financial Managers Society.
Margaret D. Peterson is Senior Vice President and Chief Administrative
Officer, integrating Human Resources, Information Technology, Facilities, Vendor
Management and other support activities. Ms. Peterson joined Carver Federal in
November 1999. Ms. Peterson came to Carver from Deutsche Bank where she served
as a Compensation Planning Consultant in Corporate Human Resources. Prior to
joining Deutsche Bank, Ms. Peterson was a Vice President and Senior Human
Resources Generalist for Citibank Global Asset Management. Besides her 11 years
in Human Resources, Ms. Peterson has 10 years of systems and technology
experience from various positions held at JP Morgan and Chase Manhattan Bank.
Ms. Peterson earned a Bachelors degree from Pace University, a MBA from Columbia
University as a Citicorp Fellow, and has been designated a Certified
Compensation Professional by the American Compensation Association.
J. Kevin Ryan is Senior Vice President and Chief Lending Officer. Mr. Ryan
joined Carver Federal in June 2000 and has over 20 years' experience in real
estate and lending. Prior to joining Carver, Mr. Ryan served as Vice
President-Team Leader for Commercial Real Estate at Greenpoint Mortgage Funding
Co., where he was employed from 1996 to 2000. From 1985 through 1996, Mr. Ryan
served as President of Manhattan Appraisal Co., a commercial and residential
real estate appraisal company which he founded in New York City. Mr. Ryan also
served in various positions at Dime Savings Bank of New York from 1977 to 1985,
including Vice President, and as an Adjunct Professor of Management and
Economics at St. John's University from 1981 through 1984. He is a Board member
of Habitat for Humanity, New York City. Mr. Ryan received a BBA in Management
from Hofstra University and an MBA in Finance from Fordham University.
Devon W. Woolcock is Senior Vice President and Chief of Retail Banking. He
is a 12-year veteran of retail banking. He joined Carver from Citibank where he
was a Division Executive Vice President. Most recently, he managed six branches
in Brooklyn and Queens. Mr. Woolcock began his career with Barnett Bank in
Florida, holding positions including Head Teller, Division Operations Manager,
and Branch Manager. He joined Citibank in 1995 where he managed several South
Florida branches, before moving to New York City. Mr. Woolcock attended college
at the University of Houston and Bethune Cookman College.
William Schult is Vice President and Controller. He was appointed Acting
Chief Financial Officer in May 2001. He joined Carver Federal in September 2000
after five years as an independent consultant. He has 26 years experience in the
banking industry beginning in 1974 as Senior Vice President and Controller for
the Nassau Trust Company. In 1983 Mr. Schult became Administrative Vive
President at Norstar Bank of Long Island. He moved to The Dime Savings Bank of
New York in 1985 where he was Vice President and Director of Accounting until
1995. Mr. Schult received a BBA in Accounting from Hofstra University and is a
Certified Public Accountant in the State of New York.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Holding Company's directors and certain officers
and persons who own more than ten percent of a registered class of the Holding
Company's equity securities to file reports of ownership and changes in
ownership with the SEC and the American Stock Exchange. Officers, directors and
greater than ten percent shareholders are required by SEC regulation to furnish
the Holding Company with copies of all Section 16(a) forms they file.
Based solely on a review of copies of such reports of ownership furnished
to Carver, or written representations that no forms were necessary, Carver
believes that, during the last fiscal year, all filing requirements applicable
to its directors, officers and greater than ten percent shareholders of the
Company were complied with, except for the late filing with the SEC of one Form
3 "Initial Statement of Beneficial
53
Ownership of Securities" ("Form 3") by David L. Hinds upon first becoming a
director of Carver, one Form 3 by Devon W. Woolcock upon first becoming an
executive officer of Carver Federal, and one Form 3 by William Schult upon first
becoming a key manager of Carver Federal.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth cash and noncash compensation for the fiscal
year ended March 31, 2001 awarded to or earned by the Holding Company's Chief
Executive Officer and by each other executive officer whose compensation
exceeded $100,000 for services rendered in all capacities to the Holding Company
and the Bank during the fiscal year ended March 31, 2001 ("Named Executive
Officers").
Summary Compensation Table
Long Term Compensation
----------------------------------------------
Annual Compensation Awards Payouts
------------------------------------ --------------------- ----------------------
Other Restricted
Annual Stock LTIP All Other
Name and Principal Fiscal Compensation Awards Options Payouts Compensation
Positions Year(1) Salary($) Bonus($)(2) ($) ($)(3) (#) ($) ($)
- ----------------------------------- ------- --------- ----------- ------------ ---------- ------- ------- ------------
Deborah C. Wright 2001 235,000 -- -- -- 30,000 -- --
President and
Chief Executive Officer 2000 195,833 44,650 -- 60,938 30,000 -- --
James Boyle 2001 125,000 -- -- 12,375 4,000 -- --
Senior Vice President and Chief
Financial Officer
Devon W. Woolcock 2001 85,000 48,500(5) -- -- 4,000 -- --
Senior Vice President and Chief of
Retail Banking
Walter T. Bond 2001 100,000 -- -- 8,750 4,000 -- --
Senior Vice President
2000 62,000 -- -- -- -- -- --
1999 62,000 -- -- -- -- -- --
- ----------
(1) Ms. Wright commenced employment on June 1, 1999. Mr. Boyle commenced
employment on January 31, 2000 and terminated employment on May 25, 2001.
Mr. Woolcock commenced employment on July 17, 2000. Mr. Bond commenced
employment on September 12, 1995.
(2) Does not include perquisites and other personal benefits the value of which
did not exceed the lesser of $50,000 or 10% of salary and bonus.
(3) Pursuant to her employment agreement, an award of 7,500 shares of
restricted stock was made to Ms. Wright as of June 1, 1999, which vests in
equal installments over a three-year period such that the first installment
vested on June 1, 2000, and the Board may accelerate the vesting schedule
based on the attainment of specified performance goals. The dollar amount
for this award is based on the closing price of $8.125 per share of Common
Stock on June 1, 1999, the award date, as reported on the Nasdaq Stock
Market. When shares become vested and are distributed, the recipient also
receives an amount equal to accumulated dividends and earnings thereon, if
any. Pursuant to their letter employment agreements, Messrs. Boyle and Bond
each received 1,000 shares of restricted stock. Messrs. Boyle and Bond
received their awards on January 31, 2000 and April 1, 2000, respectively,
each which vest in three equal annual installments such that each first
installment is vested on the first anniversary of the respective grant
date. The restricted stock award amounts attributed to Messrs. Boyle and
Bond are based on the closing prices the grant dates which were $12.375 and
$8.750, respectively.
(4) Includes amounts received under the MRP.
(5) Includes one-time payment under the letter employment agreement to
compensate for benefits from his previous employer that were forfeited.
Employee Benefit Plans
Management Recognition Plan. The MRP provides for automatic grants of
restricted stock to certain employees as of the September 12, 1995 adoption of
the MRP. In addition, the MRP provides for additional
54
discretionary grants of restricted stock to those employees selected by the
committee established to administer the MRP. Awards generally vest in three to
five equal annual installments such that the first installment vests on the
first anniversary date of the award, provided the recipient is still an employee
of the Holding Company or the Bank on such date. Awards will become 100% vested
upon termination of service due to death or disability. When shares become
vested and are distributed, the recipients will receive an amount equal to any
accrued dividends with respect thereto.
Incentive Compensation Plan. The Incentive Compensation Plan provides
incentive compensation to certain eligible employees in the form of bonuses,
stock options and restricted stock. For each fiscal year, eligible employees
will receive a bonus equal to 4% of such employee's compensation, multiplied by
the lesser of 8 and the sum of certain specified factors. In addition, each such
employee may receive a restricted stock award of shares having a market value
equal to 30% of the employee's bonus, which will vest in five equal annual
installments such that the first installment vests on the first anniversary of
the date of the grant. Each such employee also may receive an option to purchase
4 times the number of shares of restricted stock awarded to such employee, which
will vest in five equal annual installments such that the first installment
vests on the first anniversary of the date of the grant.
Option Plan. The Carver Bancorp, Inc. 1995 Stock Option Plan (the "Option
Plan") provides for automatic option grants to certain employees as of September
12, 1995. In addition, the Option Plan provides for additional discretionary
option grants to those employees selected by the committee established to
administer the Option Plan with an exercise price equal to the fair market value
of a share of Common Stock on the date of the grant. Options granted under the
Option Plan generally vest in three to five equal annual installments such that
the first installment vests on the first anniversary of the effective date of
the grant, provided the recipient is still an employee of the Holding Company or
the Bank on such date. Upon death or disability, all options previously granted
automatically become exercisable. At the annual shareholders meeting in February
2001, the shareholders approved an amendment to the Option Plan to increase the
number of shares reserved under the Option Plan by 200,000.
The following table provides certain information with respect to the
options and SARs granted to Named Executive Officers during the fiscal year
ended March 31, 2001.
Option/SAR Grants in Last Fiscal Year
Individual Grants
- ------------------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed Annual
Number of Percent Of Rates Of Stock Price
Securities Total Options/ Appreciation For Option
Underlying SARs Granted Exercise Of Term
Option/SARs To Employees In Base Price --------------------------
Name Granted (#) (1) Fiscal Year ($/Sh) Expiration Date 5% ($) 10% ($)
- ----------------- --------------- --------------- ----------- --------------- ------ -------
Deborah C. Wright 30,000 53.57% $8.2100 5/31/2010 154,897 392,539
Devon W. Woolcock 4,000 7.14% $9.9510 7/16/2010 25,033 63,437
Walter T. Bond 4,000 7.14% $8.7500 3/31/2010 22,011 55,781
- ----------
(1) The option awards for Ms. Wright and Messrs. Woolcock and Bond become
exercisable in three equal annual installments such that each first
installment vests on the first anniversary of the date of the grant. None
of the options were granted in tandem with any stock appreciation rights.
The following table provides certain information with respect to the number
of shares of Common Stock acquired through the exercise of, or represented by,
outstanding stock options held by the Named Executive Officers on March 31,
2001. Also reported is the value for any "in-the-money" options, which represent
the positive spread between the exercise price of any such existing stock
options and the fiscal year-end price of Common Stock, which was $8.87 per
share.
55
Fiscal Year End Option/SAR Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Fiscal Options/SARs at Fiscal
Shares Value Realized on Year-end (1) Year-end (1)
Acquired on Exercise Exercise (#) ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ----------------- -------------------- ----------------- ------------------------- -------------------------
Deborah C. Wright -- -- 20,000/40,000 14,900/27,250
James Boyle -- -- 1,333/2,667 --
Devon W. Woolcock -- -- 0/4,000 --
Walter T. Bond -- -- 1,745/2,771 415/385
- ----------
(1) The value of in-the-money options represents the difference between the
fair market value of the Common Stock of $8.87 per share as of March 31,
2001, and the exercise price per share of the options. All 30,000 of the
options granted to Ms. Wright on June 1, 1999, have an exercise price of
$8.125 per share, and 20,000 were exercisable as of March 31, 2001. All
30,000 of the options granted to her on June 1, 2000 have an exercise price
of $8.210 per share and none were exercisable as of March 31, 2001. All
options granted to Mr. Boyle have an exercise price of $12.375 and were not
in-the-money as of March 31, 2001. Mr. Boyle terminated his employment with
the Company on May 25, 2001, and all unexercisable options indicated above
were forfeited. All options granted to Mr. Woolcock have an exercise price
of $9.951 per share and were not in-the-money as of March 31, 2001. Mr.
Bond was granted 516 options on August 20, 1996, with an exercise price of
$8.250. 412 of the options were exercisable on March 31, 2001, and all of
the 516 options were in-the-money as of such date. Mr. Bond also was
granted 4,000 options on April 1, 2000, with an exercise price of $8.75.
1,333 of the options were exercisable as of March 31, 2001, and all 4,000
were in-the-money as of such date.
Pension Plan. The Bank maintains the Carver Federal Savings Bank Retirement
Income Plan, a noncontributory, tax-qualified defined benefit plan (the "Pension
Plan"). The Pension Plan was amended such that future benefit accrual ceased as
of December 31, 2000. Since that date no new participants were eligible to enter
into the Pension Plan, and participants as of such date have not been credited
with additional years of service or increased compensation.
The following table sets forth the estimated annual benefits that would be
payable under the Pension Plan in the form of a single life annuity before
reduction for the social security amount upon retirement at the normal
retirement date. The amounts are expressed at various levels of compensation and
years of service.
Years of Credited Service
--------------------------------------------------------
Final Earnings (1) 15 20 25 30 35
- ------------------ -------- -------- -------- -------- --------
$100,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
150,000 75,000 75,000 75,000 75,000 75,000
200,000(2) 100,000 100,000 100,000 100,000 100,000
250,000(2) 125,000 125,000 125,000 125,000 125,000
300,000(2) 150,000 150,000 150,000 150,000 150,000
350,000(2) 175,000 175,000 175,000 175,000 175,000
400,000(2) 200,000 200,000 200,000 200,000 200,000
- ----------
(1) Final earnings equal the average of the participant's highest three
consecutive calendar years of taxable compensation during the last 10 full
calendar years of employment prior to termination, or the average of the
participant's annual compensation over his or her total service, if less.
(2) Under Section 401(a)(17) of the Code, a participant's compensation in
excess of $170,000 (as adjusted to reflect cost-of- living increases) is
disregarded for purposes of determining final earnings. The amounts shown
in the table include the supplemental retirement benefits payable to Ms.
Wright under her employment agreement to compensate for the limitation on
includible compensation.
Participants become 100% vested after five years of service, death or
termination of the Pension Plan, regardless of the participant's years of
service. As of December 31, 2000, only Ms. Wright and Mr. Bond
56
were participants in the Pension Plan. At such date, Ms. Wright's final earnings
(as defined) under the Pension Plan were $244,813, and her credited service was
1 year and 7 months. Mr. Bond's final earnings under the Pension Plan were
$63,881, and his credited service was 8 years and 5 months.
Employment Agreements and Severance Provisions
Employment Agreement with Deborah C. Wright. As of June 1, 1999, both the
Holding Company and the Bank entered into employment agreements to secure the
services of Deborah C. Wright as President and Chief Executive Officer of the
Holding Company and the Bank. The employment agreement with the Holding Company
is intended to set forth the aggregate compensation and benefits payable to Ms.
Wright for all services rendered to the Holding Company and any of its
subsidiaries, including the Bank, and to the extent that payments under the
Holding Company's employment agreement and the Bank's employment agreement are
duplicative, payments due under the Holding Company's employment agreement would
be offset by amounts actually paid by the Bank for services rendered to it. Both
employment agreements provide for an initial term of three years beginning June
1, 1999. Prior to the second anniversary date of the agreements, and each
anniversary date thereafter, the term of the agreements may be extended an
additional year after a review by the Board of the Bank and the Holding Company
of Ms. Wright's performance. Unless the Board or Ms. Wright determines not to
extend the agreements, in general the remaining term of the agreements will not
exceed two years.
The employment agreements provide for an annual base salary of $235,000
which will be reviewed annually by the Board. Under the agreements, as of June
1, 1999, Ms. Wright is entitled to a restricted stock award of 7,500 shares of
Common Stock, which will vest in equal installments over a three-year period,
and the grant of an option to purchase 30,000 shares of Common Stock, 50% of
which is immediately exercisable and 50% of which will become exercisable in
equal installments over a three-year period. In addition, the employment
agreements provide for an annual incentive payment based on the achievement of
certain performance goals, future grant of stock awards, a supplemental
retirement benefit, additional life insurance protection and participation in
the various employee benefit plans maintained by the Holding Company and the
Bank from time to time. The agreements also provide customary corporate
indemnification and errors and omissions insurance coverage throughout the term
of the agreements and for six years thereafter.
The Bank or the Holding Company may terminate Ms. Wright's employment at
any time for cause as defined in the employment agreements. In the event the
Bank or the Holding Company terminates Ms. Wright's employment for reasons other
than for cause, she would be entitled to a severance benefit equal in value to
the cash compensation, retirement and other fringe benefits she would have
earned had she remained employed for the remaining term of the agreements. The
same severance benefits would be available if Ms. Wright resigns during the term
of the employment agreements following: a loss of title, office or membership on
the Board; a material reduction in her duties, functions or responsibilities;
involuntary relocation of her principal place of employment by over 30 miles
from its location as of June 1, 1999; other material breach of contract by the
Holding Company or the Bank that is not cured within 30 days; or, in the case of
the Holding Company, a change in control, and, in the case of the Bank, certain
circumstances not later than one year after the effective date of the change in
control. In the event of a change in control, the remaining term of Ms. Wright's
Agreement with the Holding Company at any point in time will be three years
unless written notice of non-renewal is given by the Board or Ms. Wright.
A portion of the severance benefits payable to Ms. Wright under the
employment agreements in the event of a change in control might constitute
"excess parachute payments" under current federal tax laws. Federal tax laws
impose a 20% excise tax, payable by the executive, on excess parachute payments.
In the event that any amounts paid to Ms. Wright following a change of control
would constitute "excess parachute payments", the employment agreement with the
Holding Company provides that she will be indemnified for any excise taxes
imposed due to such excess parachute payments, and any additional income and
employment taxes imposed as a result of such indemnification of excise taxes.
Any excess parachute payments and indemnification amounts paid will not be
deductible compensation expenses for the Holding Company or the Bank.
Letter Agreements. The Company has entered into letter employment
agreements with Messrs. Bond, Boyle, Ryan, Schult and Woolcock, and Ms. Peterson
(each, an "Executive"). Generally, each letter employment agreement (each, a
"Letter Agreement") provides for "at-will" employment and compensation in
57
the form of base salary, annual discretionary bonus, options and a one-time
payment. The annual base salary amount for each of Messrs. Bond, Boyle, Ryan,
Schult and Woolcock is $100,000, $125,000, $125,000, $100,000 and $125,000,
respectively. The annual base salary amount for Ms. Peterson is $72,500 from
January 1, 2001 through September 30, 2001, and $145,000 thereafter. On the date
of hire, Messrs. Bond, Boyle, Ryan and Woolcock and Ms. Peterson received stock
options to purchase 4,000 shares of common stock, such options vesting in three
equal annual installments such that the first installment vests at the end of
the first year of employment (except in the case of Ms. Peterson, whose first
installment vested on March 31, 2001). Messrs. Bond, Boyle and Ryan and Ms.
Peterson each received a one-time payment of 1,000 shares, which vest in three
equal annual installments such that the first installment vests at the end of
the first year of employment (except in the case of Ms. Peterson, whose first
installment vested on March 31, 2001). Messrs. Schult and Woolcock and Ms.
Peterson each received a one-time payment of $15,000, $48,000 and $75,000,
respectively, after completion of three months of employment. Mr. Woolcock's and
Ms. Peterson's bonuses are intended to compensate the Executives for benefits
from their previous employers that were forfeited. The one-time payment would be
forfeited if the Executive resigned within one year of entering into the
agreement.
In the event of a termination without cause (as defined) due to a change in
control, each Executive will be entitled to the following severance benefits:
(1) continuation of weekly salary for 39 weeks as well as a lump sum payment for
any unused vacation time, (2) continuation of participation in the Bank's health
plan, including premium sharing arrangements, deductibles and co-payments,
during the 39 weeks, and (3) utilization of the services of an outplacing
counseling firm at the Bank's expense, up to 10% of the Executive's salary.
These benefits are subject to completion of a list of transition assignments,
release of legal liabilities, non-compete and non-disclosure provisions.
Directors' Compensation
Directors' Fees. The Bank's directors, other than the Chief Executive
Officer, receive $600 per meeting attended of the Bank's Board of Directors,
except that the Chairman receives a fee of $850 per meeting. In addition, the
Chairman of the Board receives a quarterly retainer fee of $1,000. Fees for
executive committee meetings are $700 per meeting and $475 for all other
committee meetings. Ms. Wright does not receive fees for her attendance at
meetings of either the Holding Company's or Bank's Board of or their respective
committees. Directors of the Bank also serve as directors of the Holding
Company, but do not receive additional fees for service as directors of the
Holding Company.
Option Plan. The Holding Company maintains the Option Plan for the benefit
of its directors and certain key employees. Any individual who becomes an
outside director following the effective date of the Option Plan will be granted
options to purchase 1,000 shares of Common Stock with an exercise price equal to
the fair market value of a share of Common Stock on the date of the grant.
Options granted under the Option Plan generally vest in five equal annual
installments commencing on the first anniversary of the effective date of the
grant, provided the recipient is still a director of the Holding Company or the
Bank on such date. In 1997, the Option Plan was amended to provide the Committee
with discretion to grant stock options that will vest and become exercisable
pursuant to a vesting schedule that differs from the Option Plan's standard
five-year schedule. The Option Plan continues to provide that upon the death or
disability of an option holder, all options previously granted to such
individual will automatically become exercisable.
Management Recognition Plan. The Holding Company maintains the MRP for the
benefit of its directors and certain key employees. Any individual who becomes
an outside director following the effective date of the MRP will be granted
1,000 shares of restricted stock. Awards granted under the MRP will generally
vest in five equal annual installments commencing on the first anniversary date
of the award, provided the recipient is still a director of the Holding Company
or the Bank on such date. Awards will become 100% vested upon termination of
service due to death or disability. When shares become vested and are
distributed, the recipients will receive an amount equal to any accrued
dividends with respect thereto. The MRP was also amended in 1997, to permit the
Committee, in its discretion, to grant restricted stock awards with vesting
schedules that differ from the Plan's standard five-year schedule.
Incentive Compensation Plan. The Incentive Compensation Plan allows
directors to defer all or a portion of their fees. Under the plan, each
participating director will have a bookkeeping account which will be credited
with the amount deferred and any investment earnings or losses incurred thereon.
A participating director may select from among the following rate of returns for
his account: (1) two percent of certain
58
specified factors, (2) the highest interest rate being paid by the Bank on
12-month certificates of deposit and (3) the rate of return on Common Stock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth, as of May 31, 2001, certain information as
to shares of Voting Stock beneficially owned by persons owning in excess of 5%
of Carver's outstanding Voting Stock. Carver knows of no person, except as
listed below, who beneficially owned more than 5% of any class of the
outstanding shares of our Voting Stock as of May 31, 2001. Except as otherwise
indicated, the information provided in the following table was obtained from
filings with the Securities and Exchange Commission ("SEC") and with Carver
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Addresses provided are those listed in the filings as the address of the
person authorized to receive notices and communications. For purposes of the
table below and the table set forth under "Security Ownership of Management," in
accordance with Rule 13d-3 under the Exchange Act, a person is deemed to be the
beneficial owner, for purposes of these tables, of any shares of stock (1) over
which he or she has or shares, directly or indirectly, voting or investment
power, or (2) of which he or she has the right to acquire beneficial ownership
at any time within 60 days after May 31, 2001. As used in this Form 10-K,
"voting power" is the power to vote or direct the voting of shares, and
"investment power" includes the power to dispose or direct the disposition of
shares.
Amount and
Nature of Percent of Percent of
Name and Address Beneficial Class Common Stock
Title of Class of Beneficial Owner Ownership Outstanding (1) Outstanding
- -------------- ---------------------------------------------- ---------- --------------- -----------
Common Stock Koch Asset Management, L.L.C. 226,650(2) 9.83% 9.83%
1293 Mason Road
Town & Country, MO 63131
Common Stock EQSF Advisers, Inc. 218,500(3) 9.47% 9.47%
767 Third Avenue
New York, NY 10017
Common Stock Blaylock & Partners, L.P. 199,000(4) 8.63% 8.63%
609 Fifth Avenue
New York, NY 10017
Common Stock BBC Capital Market, Inc. 170,700(5) 7.40% 7.40%
133 Federal Street
Boston, MA 02110
Common Stock Carver Bancorp, Inc. 166,656(6) 7.23% 7.23%
Employee Stock Ownership Plan
Trust (the "ESOP Trust") 75 West 125th Street
New York, NY 10027
Series A Morgan Stanley & Co. 40,000(7) 100% 3.49%
Preferred Stock Incorporated
1585 Broadway
New York, New York 10036
Series B Provender Opportunities Fund L.P. 60,000(8) 100% 5.14%
Preferred Stock 17 State Street
New York, NY 10004
- ----------
(1) On May 31, 2001 there were outstanding 2,306,286, 40,000 and 60,000 shares
of Common Stock, Series A Preferred Stock and Series B Preferred Stock,
respectively.
(2) Based on a Schedule 13G, dated March 14, 2001 and filed with the SEC
jointly by Koch Asset Management, L.L.C. ("KAM") and Donald Leigh Koch, who
owns 100% of KAM and is the sole Managing Member of KAM. KAM is a
registered investment adviser which furnishes investment advice to
individual clients by exercising trading authority over securities held in
accounts on behalf of such clients (collectively, the "Managed
Portfolios"). In its role as an investment adviser to its clients, KAM has
sole dispositive power over the Managed Portfolios and may be deemed to be
the beneficial owner of shares of Common Stock held by such Managed
Portfolios, and Mr. Koch may be deemed to have the power to exercise any
dispositive power that KAM may have with respect to the Common Stock held
by the Managed Portfolios. However, KAM does not have the right to vote or
to receive dividends from, or proceeds from the sale of the Common Stock
held in such Managed Portfolios. Mr. Koch, individually, owns and holds
voting power with respect to Managed Portfolios containing approximately
46,000 shares of Common Stock, or an aggregate of approximately 1.9%
59
of the total number of outstanding shares of Common Stock (the "Koch
Shares"). Other than with respect to the Koch Shares, all shares reported
in the Schedule 13G have been acquired by KAM, and Mr. Koch disclaims
beneficial ownership, voting rights, rights to dividends, or rights to sale
proceeds associated with such shares.
(3) Based on a Schedule 13G, dated March 14, 2001, and filed with the SEC
jointly by EQSF Advisers, Inc. ("EQSF"), M.J. Whitman Advisers, Inc.
("MJWA") and Martin J. Whitman, the Chief Executive Officer and controlling
person of MJWA and EQSF. EQSF beneficially owns 218,500 shares of Common
Stock. Mr. Whitman disclaims beneficial ownership of such stock. Third
Avenue Value Fund, Inc., an investment company registered under the
Investment Company Act of 1940, has the right to receive dividends with
respect to, and proceeds from the sale of, such shares. EQSF has sole
voting and dispositive power over such shares.
(4) Based on a Schedule 13G, dated February 14, 2001 filed with the SEC by
Blaylock & Partners, L.P., a Delaware limited partnership.
(5) Based on a Schedule 13D, dated January 31, 2000, and filed with the SEC
jointly by the Boston Bank of Commerce (the "BBOC") and BBC Capital Markets
("BBC"). Kevin Cohee, the Chairman, President and Chief Executive Officer
of BBOC, and Teri Williams, the Executive Vice President-Marketing/Human
Resources of BBOC, collectively own as joint tenants 66.6% of the
outstanding common stock of BBOC. Mr. Cohee and Ms. Williams, both of whom
are directors of Carver, disclaim beneficial ownership of the Common Stock
owned beneficially by BBOC or BBC Capital. BBOC and BBC Capital have sole
voting and sole dispositive power over all of the shares of Common Stock
shown.
(6) Based on a Schedule 13G, dated February 14, 2000, and filed with the SEC by
the Carver Bancorp, Inc. ESOP Committee (the "Administrative Committee").
The Administrative Committee established to administer the ESOP consists of
officers of the Bank. The ESOP's assets are held in the ESOP Trust, for
which HSBC Bank USA serves as trustee (the "ESOP Trustee"). The
Administrative Committee instructs the ESOP Trustee regarding the
investment of funds contributed to the ESOP. Common Stock purchased by the
ESOP Trust is held in a suspense account and allocated to participants'
accounts annually based on contributions made to the ESOP by the Bank.
Shares released from the suspense account are allocated among participants
in proportion to their compensation, as defined in the ESOP, for the year
the contributions are made, up to the limits permitted under the Code. The
ESOP Trustee must vote all allocated shares held in the ESOP Trust in
accordance with the instructions of participants. As of December 31, 2000,
a total of 98,959 shares had been allocated, but not distributed, to
participants. Under the ESOP, unallocated shares or shares for which no
voting instructions have been received will be voted by the ESOP Trustee in
the same proportion as allocated shares with respect to which the ESOP
Trustee receives instructions.
(7) Morgan Stanley holds 40,000 shares of Carver's Series A Preferred Stock,
which Carver issued on January 11, 1999 through a private placement. The
Series A Preferred Stock accrues annual dividends of $1.96875 per share.
Each share of Series A Preferred Stock was purchased for $25.00 and is
convertible at the option of the holder at any time into 2.083 shares of
Carver's Common Stock, subject to certain antidilution adjustments. Carver
may redeem the Series A Preferred Stock beginning January 15, 2004. In the
event of any liquidation, dissolution or winding up of Carver, whether
voluntary or involuntary, the holders of the shares of Series A Preferred
Stock shall be entitled to receive $25 per share of Series A Preferred
Stock plus all dividends accrued and unpaid thereon. Morgan Stanley is
deemed to have beneficial ownership of 83,320 shares or 3.49% of Carver's
Common Stock since it may elect to convert the Series A Preferred Stock at
any time. Pursuant to a Securities Purchase Agreement, dated January 11,
2000, among Morgan Stanley, Provender (as defined below) and Carver, Morgan
Stanley has agreed not to grant any proxies with respect to the Series A
Preferred Stock or any Common Stock of Carver other than as recommended by
Carver's Board of Directors, without first obtaining Carver's prior
consent.
(8) Provender holds 60,000 shares of Carver's Series B Preferred Stock, which
Carver issued on January 11, 1999 through a private placement. The Series B
Preferred Stock accrues annual dividends at $1.96875 per share. Each share
of Series B Preferred Stock was purchased for $25.00 and is convertible at
the option of the holder at any time into 2.083 shares of Carver's Common
Stock, subject to certain antidilution adjustments. Carver may redeem the
Series B Preferred Stock beginning January 15, 2004. In the event of any
liquidation, dissolution or winding up of Carver, whether voluntary or
involuntary, the holders of the shares of Series B Preferred Stock shall be
entitled to receive $25 per share of Series B Preferred Stock plus all
dividends accrued and unpaid thereon. Provender is deemed to have
beneficial ownership of 124,980 shares or 5.14% of Carver's Common Stock
since it may elect to convert the Series B Preferred Stock at any time.
Pursuant to a Securities Purchase Agreement, dated January 11, 2000, among
Morgan Stanley, Provender and Carver, Provender has agreed not to grant any
proxies with respect to the Series B Preferred Stock or any Common Stock of
Carver other than as recommended by Carver's Board without first obtaining
Carver's prior consent.
Security Ownership of Management
The following table sets forth information, determined as of May 31, 2001,
as to the total number of shares of Common Stock beneficially owned by each
director and each Named Executive Officer, as defined herein, identified in the
Summary Compensation Table, appearing elsewhere herein, and all directors and
executive officers of the Holding Company or the Bank as a group. Ownership
information is based upon information furnished by the respective individuals.
Except as otherwise indicated, each person and the group shown in the table has
sole voting and investment power with respect to the shares indicated.
60
Amount and Percent of
Nature of Common
Beneficial Stock
Name Title Ownership(1)(2) Outstanding(3)
- ---------------------------------------------- ------------------------------------------------- --------------- --------------
Frederick O. Terrell(4) Chairman 125,180 5.42%
Deborah C. Wright (5) President and Chief Executive Officer 45,000 1.95
Walter T. Bond(6) Senior Vice President 3,082 *
James Boyle Senior Vice President and Chief Financial Officer 1,666 *
Kevin Cohee (7) Director 170,900 7.41
David L. Hinds Director 7,075 *
Robert Holland, Jr. Director 12,000 *
Pazel G. Jackson, Jr. Director 1,800 *
Dennis M. Walcott Director 2,200 *
Devon W. Woolcock Senior Vice President and Chief of Retail Banking 1,333 *
Strauss Zelnick Director 7,222 *
Teri Williams (7) Director 170,900 7.41
All directors and executive
officers as a group (15 persons)(8)(9)(10)(11) 384,815 16.36%
- ----------
* Less than 1% of outstanding Common Stock.
(1) Includes 200, 412, 1,333, 200, 200, 200, 800, 200, 200, 35,000 and 200
shares which may be acquired by Messrs. Terrell, Bond, Boyle, Cohee, Hinds,
Holland, Jr., Jackson, Walcott and Zelnick and Mss. Wright and Williams,
respectively, pursuant to options granted under the Option Plan.
(2) Excludes 266, 667, 400 and 2,500 shares of restricted stock granted to
Messrs. Bond, Boyle and Jackson and Ms. Wright, respectively, pursuant to
the MRP with respect to which such individuals have neither voting nor
dispositive power.
(3) Percentages with respect to each person or group of persons have been
calculated on the basis of 2,306,286 shares of Common Stock, the total
number of shares of the Holding Company's Common Stock outstanding as of
May 31, 2001, plus the number of shares of Common Stock which such person
or group has the right to acquire within 60 days after May 31, 2001, by the
exercise of stock options.
(4) Includes 60,000 Shares of Series B Preferred Stock owned by Provender.
Provender also is deemed to have beneficial ownership of 125,000 shares of
Common Stock, which represents 5.12% of the Holding Company's outstanding
Common Stock (since the Series B Preferred Stock may be converted at any
time.) As a Managing General Partner of Provender, Mr. Terrell may be
deemed to beneficially own such securities. Mr. Terrell disclaims
beneficial ownership to such securities.
(5) On June 1, 1999, Ms. Wright received an option award to purchase 30,000
shares of Common Stock at $8.125 per share. On June 1, 2001, 25,000 options
will be vested and the remaining 5,000 options will vest on June 1, 2002.
On June 1, 1999, Ms. Wright also received an award of 7,500 shares of
restricted stock under the MRP. On June 1, 2001, 5,000 shares will be
vested, and the remaining 2,500 shares will vest on June 1, 2002. On June
1, 2000, Ms. Wright received an option award under the Option Plan to
purchase 30,000 shares at $8.210 per share. On June 1, 2001, 10,000 options
will be vested, and the remaining 20,000 options will vest in two equal
annual installments such that the next installment will vest on June 1,
2002.
(6) Mr. Bond received an option award to purchase 516 shares at $8.250 per
share on August 20, 1996. 412 options were vested on August 20, 2000, and
the remaining 104 options will vest on August 20, 2001. Mr. Bond also
received an option award to purchase 1,000 shares at $8.750 per share on
April 1, 2000. 1,333 options vested on March 31, 2001, and the remaining
2,667 options will vest in two equal annual installments such that the next
installment will vest on March 31, 2002.
(7) Represents shares owned by BBC Capital, a subsidiary of Boston Bank of
Commerce, in which Kevin Cohee and Teri Williams are executive officers and
controlling shareholders.
(8) Includes 3,224 shares in the aggregate held by the ESOP Trust that have
been allocated as of December 31, 2000 to the individual accounts of
executive officers under the ESOP and as to which an executive officer has
sole voting power for the shares allocated to such person's account, but no
dispositive power, except in limited circumstances. Also includes 65,795
unallocated shares held by the ESOP Trust as to which the Board shares
voting and dispositive power. Each member of the Board disclaims beneficial
ownership of the shares held in the ESOP.
(9) Includes 108 shares in the aggregate attributable to the individual
accounts of executive officers under the 401(k) Plan and as to which each
executive officer has sole dispositive power for the shares allocated to
such person's account and shared voting power with the members of the
committee established to administer the 401(k) Plan.
(10) Includes 3,140 shares which may be acquired by executive officers pursuant
to options granted under the Option Plan. Also includes 309 shares which
may be acquired by the executive officers pursuant to options granted under
the Incentive Compensation Plan. Excludes the 240 shares of restricted
stock awarded to the executive officers under the MRP and Incentive
Compensation Plan with respect to which such executive officers have
neither voting nor dispositive power.
61
(11) Includes 125,000 shares of Common Stock issuable on conversion of the
Series B Preferred Stock held by Provender Opportunities Fund L.P.
Excluding the effect of the Series B Preferred Stock, the directors, former
directors and executive officers of the Holding Company own 347,467 shares
of the Common Stock representing 15.04% of such securities. See footnote 4
above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") requires that all loans or extensions of credit to executive officers
and directors must be made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. Carver Federal offers
loans to its directors, officers and employees, which loans are made in the
ordinary course of business, and are not made with more favorable terms nor do
they involve more than the normal risk of collectibility or present unfavorable
features. Furthermore, loans above the greater of $25,000 or 5% of the Bank's
capital and surplus (up to $500,000) to the Bank's directors and executive
officers must be approved in advance by a disinterested majority of the Bank's
Board. Under prior law, however, Carver had a policy of offering loans to
directors, officers, employees and their immediate family members residing at
the same address on terms substantially equivalent to those offered to the
public, except the interest rates on loans were reduced so long as the director,
officer or employee remained at the Bank.
Directors and officers of the Company were customers of the Bank in the
ordinary course of business during fiscal 2001 for substantially the same terms,
including interest rates, as those prevailing at the time for comparable
transactions with unaffiliated persons, and none of such transactions presented
unfavorable features. At March 31, 2001 there were no loans made to directors
and executive officers of the Bank whose terms included reduced interest rates
or other preferential terms and whose total aggregate balances exceeded $60,000
at any time since April 1, 2000.
62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) List of Documents Filed as Part of this Report
(1) Consolidated Financial Statements. For our Consolidated Financial
Statements, see index on page F-1.
(2) Financial Statement Schedules. All financial statement schedules have
been omitted as the required information is either inapplicable or
included in the Financial Statements or related notes.
(b) Reports on Form 8-K Filed During the Last Quarter of the Registrant's Fiscal
Year Ended March 31, 2001 - None.
(c) Exhibits required by Item 601 of Regulation S-K:
See Index of Exhibits following the Consolidated Financial Statements.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CARVER BANCORP, INC.
June 26, 2001 By /s/ Deborah C. Wright
-------------------------------------
Deborah C. Wright
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below on June 26, 2001 by the following
persons on behalf of the registrant and in the capacities indicated.
/s/ Deborah C. Wright
--------------------------- President, Chief Executive
Deborah C. Wright Officer and Director
(Principal Executive Officer)
/s/ William Schult
--------------------------- Vice President and Controller
William Schult (Principal Financial and Accounting Officer)
/s/ Frederick O. Terrell
--------------------------- Chairman
Frederick O. Terrell
/s/ Kevin Cohee
--------------------------- Director
Kevin Cohee
/s/ David L. Hinds
--------------------------- Director
David L. Hinds
/s/ Robert Holland, Jr.
--------------------------- Director
Robert Holland, Jr.
/s/ Pazel G. Jackson, Jr.
--------------------------- Director
Pazel G. Jackson, Jr.
/s/ Dennis M. Walcott
--------------------------- Director
Dennis M. Walcott
/s/ Teri Williams
--------------------------- Director
Teri Williams
--------------------------- Director
Strauss Zelnick
CONSOLIDATED FINANCIAL STATEMENTS OF
CARVER BANCORP INC. AND SUBSIDIARIES
INDEX
Page
Consolidated Financial Statements as of March 31, 2001, 2000 and 1999
KPMG LLP Independent Auditor's Report .................................F-2
Mitchell & Titus LLP Independent Auditor's Report .....................F-3
Consolidated Statements of Financial Condition as of March 31,
2001 and 2000 .......................................................F-4
Consolidated Statements of Operations for the years ended March 31,
2001, 2000 and 1999 .................................................F-5
Consolidated Statements of Changes in Stockholders' Equity for the
years ended March 31, 2001, 2000 and 1999 ...........................F-6
Consolidated Statements of Cash Flows for the years ended March 31,
2001, 2000 and 1999 .................................................F-7
Notes to Consolidated Financial Statements ............................F-8
F-1
LETTERHEAD OF KPMG LLP
To the Board of Directors and Stockholders
Carver Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Carver Bancorp, Inc. and subsidiaries (the "Company") as of March
31, 2001 and 2000 and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for each of the years in the two-year
period ended March 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
accompanying consolidated financial statements of Carver Bancorp, Inc. for the
year ended March 31, 1999 were audited by other auditors whose report thereon
dated June 29, 1999, expressed an unqualified opinion on those consolidated
financial statements.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and the significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of March 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the years in the two-year period ended March 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
KPMG LLP
May 24, 2001
New York, New York
F-2
LETTERHEAD OF MITCHELL & TITUS LLP
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
and Stockholders
Carver Bancorp, Inc.
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows for the year ended March 31, 1999 of
Carver Bancorp Inc. and Subsidiaries. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and the significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of its operations and cash flows
for the year ended March 31, 1999, in conformity with accounting principles
generally accepted in the United States of America.
June 29, 1999
New York, New York
F-3
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
AS OF MARCH 31,
-----------------------
2001 2000
--------- ---------
ASSETS
Cash and amounts due from depository institutions .............................. $ 8,058 $ 10,902
Federal funds sold ............................................................. 23,700 11,300
--------- ---------
Total cash and cash equivalents ......................................... 31,758 22,202
--------- ---------
Securities available for sale .................................................. 19,926 24,952
Investments securities held to maturity
(including $14,330 pledged as collateral at March 31, 2001) .................... 24,996 24,996
Mortgage-backed securities held to maturity, net
(including $12,068 pledged as collateral at March 31, 2001) .................... 42,866 54,229
Loans receivable ............................................................... 286,988 273,083
Less allowance for loan losses .......................................... (3,551) (2,935)
--------- ---------
Loans receivable, net ................................................... 283,437 270,148
--------- ---------
Real estate owned, net ......................................................... 476 922
Property and equipment, net .................................................... 10,421 11,175
Federal Home Loan Bank of New York stock, at cost .............................. 5,755 5,755
Accrued interest receivable .................................................... 2,541 2,653
Excess of cost over net assets acquired, net ................................... 603 817
Other assets ................................................................... 1,721 2,270
--------- ---------
Total assets ................................................................... $ 424,500 $ 420,119
========= =========
LIABILITIES
Deposits ....................................................................... $ 279,424 $ 281,941
Securities sold under agreements to repurchase ................................. 4,930 31,337
Advances from Federal Home Loan Bank of New York ............................... 100,299 66,688
Other borrowed money ........................................................... 371 553
Other liabilities .............................................................. 7,380 6,959
--------- ---------
Total liabilities .............................................................. 392,404 387,478
--------- ---------
Commitments and contingencies .................................................. -- --
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value per share; 1,000,000 shares authorized;
100,000 shares issued and outstanding ...................................... 1 1
Common stock; $0.01 par value per share; 5,000,000 shares authorized;
2,314,275 shares issued at March 31, 2001 and 2000; and 2,306,286 and
2,314,275 issued and outstanding at March 31, 2001 and 2000,
respectively ............................................................... 23 23
Additional paid-in capital ..................................................... 23,769 23,789
Retained earning ............................................................... 8,793 9,480
Treasury stock, at cost (7,989 shares at March 31, 2001) ....................... (61) --
Common stock acquired by ESOP .................................................. (334) (652)
Common stock acquired by Management Recognition Plan ........................... (95) --
--------- ---------
Total stockholders' equity .............................................. 32,096 32,641
--------- ---------
Total liabilities and stockholders' equity ..................................... $ 424,500 $ 420,119
========= =========
See accompanying notes to consolidated financial statements.
F-4
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
Year Ended March 31,
-------------------------------------------
2001 2000 1999
----------- ----------- -----------
INTEREST INCOME
Loans receivable .................................. $ 21,398 $ 19,443 $ 20,576
Mortgage-backed securities ........................ 3,012 3,641 5,431
Investment securities ............................. 2,874 3,593 1,801
Federal funds sold ................................ 1,023 690 665
----------- ----------- -----------
Total interest income .......................... 28,307 27,367 28,473
----------- ----------- -----------
INTEREST EXPENSE
Deposits .......................................... 8,456 8,612 8,421
Advances and other borrowed money ................. 5,822 5,397 6,394
----------- ----------- -----------
Total interest expense ......................... 14,278 14,009 14,815
----------- ----------- -----------
Net interest income ................................... 14,029 13,358 13,658
Provision for loan losses ............................. 1,793 1,099 4,029
----------- ----------- -----------
Net interest income after provision for loan losses ... 12,236 12,259 9,629
----------- ----------- -----------
NON-INTEREST INCOME
Loan fees and service charges ..................... 330 353 673
Gain on sale of securities available for sale ..... -- -- 4
Income from sale of deposits ...................... 1,013 -- --
Proceeds from sale of Alhambra Building ........... -- 728 --
Other ............................................. 1,591 1,458 1,705
----------- ----------- -----------
Total non-interest income ...................... 2,934 2,539 2,382
----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits .................... 6,052 5,722 5,248
Net occupancy expense ............................. 1,401 1,463 1,491
Equipment ......................................... 1,294 1,351 1,409
Other ............................................. 6,714 7,287 9,815
----------- ----------- -----------
Total non-interest expenses .................... 15,461 15,823 17,963
----------- ----------- -----------
Loss before income taxes .............................. (291) (1,025) (5,952)
Income tax expense (benefit) .......................... 98 110 (1,499)
----------- ----------- -----------
Net loss .............................................. $ (389) $ (1,135) $ (4,453)
=========== =========== ===========
Net loss available to common stockholders ............. $ (585) $ (1,180) $ (4,453)
=========== =========== ===========
Net loss per common share ............................. $ (0.26) $ (0.53) $ (2.02)
=========== =========== ===========
Weighted average number of shares outstanding ......... 2,256,441 2,238,846 2,206,133
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
COMMON COMMON TOTAL
ADDITIONAL STOCK STOCK STOCK-
PREFERRED COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED ACQUIRED HOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK INCOME BY ESOP BY MRP EQUITY
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance--March
31, 1998 ........ $ -- $ 23 $ 21,419 $ 15,290 $ -- $ (13) $ (1,184) $ -- $ 35,535
Net loss for the
year ended
March 31, 1999 .. -- -- -- (4,453) -- -- -- -- (4,453)
Allocation of
ESOP Stock ...... -- 5 -- -- -- 191 -- 196
Dividends paid ..... -- -- -- (116) -- -- -- -- (116)
Decrease in
unrealized,
loss in
Securities
available for
sale, net ....... -- -- -- -- -- 13 -- -- 13
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance--March
31, 1999 ........ -- 23 21,424 10,721 -- -- (993) -- 31,175
Net loss for the
year ended
March 31, 2000 .. -- -- -- (1,135) -- -- -- -- (1,135)
Preferred Stock .... 1 -- 2,365 -- -- -- -- -- 2,366
Allocation of
ESOP Stock ...... -- -- -- 341 -- 341
Dividends paid ..... -- -- -- (106) -- -- -- -- (106)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance--March
31, 2000 ........ 1 23 23,789 9,480 -- -- (652) -- 32,641
Net loss for the
year ended
March 31,
2001 ............ -- -- -- (389) -- -- -- -- (389)
Dividends paid ..... -- -- -- (298) -- -- -- -- (298)
Treasury stock
activity ........ -- -- -- -- (61) -- -- -- (61)
Allocation of
ESOP Stock ...... -- -- (20) -- -- -- 318 -- 298
Purchase of
shares for
Management
Recognition
Plan ............... -- -- -- -- -- -- -- (95) (95)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance--March
31, 2001 ........ $ 1 $ 23 $ 23,769 $ 8,793 $ (61) $ -- $ (334) $ (95) $ 32,096
======== ======== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED MARCH 31,
-------------------------------------
2001 2000 1999
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................................... $ (389) $ (1,135) $ (4,453)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization .............................. 1,142 1,222 1,043
Amortization of intangibles ................................ 214 213 217
Other accretion and amortization ........................... (719) 355 1,109
Provision for loan losses .................................. 1,793 1,099 4,029
Gain from sale of Alhambra ................................. -- (728) --
Gain on sale of branches ................................... (1,013) -- --
Gain on sale of foreclosed real estate ..................... (24) -- --
Impairment of foreclosed real estate ....................... 90 -- --
Net gain on sale of securities available for sale .......... -- -- (4)
Allocation of ESOP stock ................................... 298 341 196
Decrease in accrued interest receivable .................... 112 207 98
Increase in refundable income taxes ........................ -- -- 1,196
Decrease (increase) in other assets ........................ 549 2,776 (38)
Charge-off of branch improvements and related items, net ... 222 -- --
MRP activity ............................................... (95) -- --
Increase in other liabilities .............................. 421 687 4,847
--------- --------- ---------
Net cash provided by operating activities .................. 2,601 5,037 8,240
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal repayments on investments held to maturity ....... 11,077 -- --
Principal repayments on securities available for sale ...... -- -- 3,753
Purchases of securities available for sale ................. (166,227) (460,000) (331,889)
Proceeds from maturity of securities available for sale .... 172,254 465,000 319,510
Purchase of investment securities held to maturity ......... -- (25,000) --
Proceeds from maturities and calls of investment
securities held to maturity ............................. -- -- 1,798
Principal repayment of mortgage-backed securities held
to maturity ............................................. 12,209 23,592
Net change in loans receivable ............................. (15,078) (965) 4,433
Proceeds from sale of Alhambra building .................... -- 1,369 --
Proceed from the sale of other real estate owned ........... 380 -- --
Additions to premises and equipment ........................ (610) (512) (1,657)
--------- --------- ---------
Net cash provided by (used in) investing activities ........ 1,796 (7,899) 19,540
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ................................... 19,960 4,942 2,105
Net decrease in short-term borrowings ...................... (26,407) (4,000) (51,683)
Repayment of FHLB Advances ................................. (117,379) (19,020)
Federal Home Loan Bank Advances ............................ 150,990 20,000 28,967
Repayment of other borrowed money .......................... (182) (439) (191)
Purchase of Treasury Stock - net ........................... (61) -- --
Proceeds from issuance of Preferred Stock .................. -- 2,366 --
Dividends paid ............................................. (298) (106) (116)
Cash paid to fund sale of deposits ......................... (21,464) -- --
Decrease in advance payments by
borrowers for taxes and insurance ....................... -- -- (660)
--------- --------- ---------
Net cash provided by (used in) financing activities ........ 5,159 3,743 (21,578)
--------- --------- ---------
Net increase in cash and cash equivalents .................. 9,556 881 6,202
Cash and cash equivalents--beginning ....................... 22,202 21,321 15,119
--------- --------- ---------
Cash and cash equivalents--ending .......................... $ 31,758 $ 22,202 $ 21,321
--------- ========= =========
Supplemental disclosure of non-cash activities:
Loans receivable transferred to real estate owned .......... $ -- $ 738 $ --
========= ========= =========
Cash paid for:
Interest ................................................... $ 13,897 $ 13,506 $ 14,815
========= ========= =========
Federal, state and city income taxes ....................... $ 238 $ 29 $ --
========= ========= =========
See accompanying notes to consolidated financial statements.
F-7
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidated financial statement presentation
The consolidated financial statements include the accounts of the Holding
Company (the "Holding Company"), the Carver Federal Savings Bank (the "Bank" or
"Carver Federal") its wholly owned subsidiaries CFSB Realty Corp. and CFSB
Credit Corp., and Alhambra Holding Corp. and its majority-owned subsidiary. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. 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. Estimates that are
particularly susceptible to significant changes in the near-term relate to
prepayment assumptions on mortgage-backed securities, the determination of the
allowance for loan losses and the valuation of real estate owned. Actual results
could differ significantly from those estimates.
Management believes that prepayment assumptions on mortgage-backed
securities are appropriate, the allowance for loan losses is adequate and real
estate owned is properly valued. While management uses available information to
recognize losses on loans and real estate owned, future additions to the
allowance for loan losses or future write downs of real estate owned may be
necessary based on changes in economic conditions in the areas where Carver had
extended mortgages and other credit instruments.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Carver's allowance for loan losses and
real estate owned valuations. Such agencies may require Carver to recognize
additions to the allowance for loan losses or additional write downs of real
estate owned based on their judgments about information available to them at the
time of their examination.
Cash and cash equivalents
Cash and cash equivalents include cash and amounts due from depository
institutions and federal funds sold. Generally, federal funds sold are sold for
one-day periods.
Investment and mortgage-backed securities
Carver does not have trading securities, but does differentiate between
held to maturity securities and available for sale securities. When purchased,
securities are classified in either the investments held to maturity portfolio
or the securities available for sale portfolio. Securities can be classified as
held to maturity and carried at amortized cost only if the Bank has a positive
intent and ability to hold those securities to maturity. If not classified as
held to maturity, such securities are classified as securities available for
sale. Available for sale securities are reported at fair value. Unrealized
holding gains or losses for securities available for sale are to be excluded
from earnings and reported net of deferred income taxes as a separate component
of other comprehensive income in the Consolidated Statements of Changes in
Stockholders' Equity.
Investment and mortgage-backed securities held to maturity are carried at
cost, adjusted for the amortization of premiums and the accretion of discounts
using the level-yield method over the remaining period until maturity.
Gains or losses on sales of securities of all classifications are
recognized based on the specific identification method.
F-8
Loans receivable
Loans receivable are carried at unpaid principal balances plus unamortized
premiums, less the allowance for loan losses and deferred loan fees and
discounts.
Carver defers loan origination fees and certain direct loan origination
costs and accretes such amounts as an adjustment of yield over the contractual
lives of the related loans using methodologies which approximate the interest
method. Premiums and discounts on loans purchased are amortized or accreted as
an adjustment of yield over the contractual lives of the related loans using
methodologies which approximate the interest method.
Loans are generally placed on non-accrual status when they are past due
three months or more as to contractual obligations or when other circumstances
indicate that collection is questionable. When a loan is placed on non-accrual
status, any interest accrued but not received is reversed against interest
income. Payments received on a non-accrual loan are either applied to the
outstanding principal balance or recorded as interest income, depending on an
assessment of the ability to collect the loan. A non-accrual loan is restored to
accrual status when principal and interest payments become current and its
future collectibility is reasonably assured.
A loan is considered to be impaired, as defined by FAS No. 114, "Accounting
by Creditors for Impairment of a Loan," when it is probable that Carver will be
unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement. Carver tests loans covered under FAS
No. 114 for impairment if they are on nonaccrual status or have been
restructured. Consumer credit nonaccrual loans are not tested for impairment
because they are included in large groups of smaller-balance homogeneous loans
that, by definition along with leases, are excluded from the scope of FAS No.
114. Impaired loans are required to be measured based upon the present value of
expected future cash flows, discounted at the loan's initial effective interest
rate, or at the loan's market price or fair value of the collateral if the loan
is collateral dependent. If the loan valuation is less than the recorded value
of the loan, an impairment reserve must be established for the difference. The
impairment reserve is established by either an allocation of the reserve for
credit losses or by a provision for credit losses, depending on various
circumstances. Impairment reserves are not needed when credit losses have been
recorded so that the recorded investment in an impaired loan is less than the
loan valuation.
Allowance for loan losses
An allowance for loan losses is maintained at a level considered adequate
to provide for potential loan losses. Management, in determining the allowance
for loan losses, considers the risks inherent in its loan portfolio and changes
in the nature and volume of its loan activities, along with the general economic
and real estate market conditions.
Carver maintains a loan review system, which allows for a periodic review
of its loan portfolio and the early identification of potential problem loans.
Such system takes into consideration, among other things, delinquency status,
size of loans, type of collateral and financial condition of the borrowers. Loan
loss allowances are established for problem loans based on a review of such
information and/or appraisals of the underlying collateral. On the remainder of
its loan portfolio, loan loss allowances are based upon a combination of factors
including, but not limited to, actual loan loss experience, composition of loan
portfolio, current economic conditions and management's judgment. Although
management believes that adequate loan loss allowances have been established,
actual losses are dependent upon future events and, as such, further additions
to the level of the loan loss allowance may be necessary in the future.
Concentration of risk
The Bank's principle lending activities are concentrated in loans secured
by real estate, a substantial portion of which is located in the State of New
York and the State of California. Accordingly, the ultimate
F-9
collectibility of a substantial portion of the Company's loan portfolio is
susceptible to changes in New York's and California's market conditions.
Premises and equipment
Premises and equipment are comprised of land, at cost, and buildings,
building improvements, furnishings and equipment and leasehold improvements, at
cost, less accumulated depreciation and amortization. Depreciation and
amortization charges are computed using the straight-line method over the
following estimated useful lives:
Buildings and improvements 10 to 40 years
Furnishings and equipment 3 to 10 years
Leasehold improvements The lesser of useful life or remaining
term of lease
Significant renewals and betterments are charged to the property and
equipment account. Maintenance and repairs are charged to expense in the year
incurred.
Real estate owned
Real estate acquired by foreclosure or deed in lieu of foreclosure is
recorded at the fair value at the date of acquisition and thereafter carried at
the lower of cost or fair value less estimated selling costs. The fair value of
such assets is determined based primarily upon independent appraisals and other
relevant factors. The amounts ultimately recoverable from real estate owned
could differ from the net carrying value of these properties because of economic
conditions.
Costs incurred to improve properties or get them ready for sale are
capitalized. Revenues and expenses related to the holding and operating of
properties are recognized in operations as earned or incurred. Gains or losses
on sale of properties is recognized as incurred.
Excess of cost over net assets acquired
In connection with the acquisition of two branches, core deposit premiums
paid and other capitalized acquisition costs are being amortized to expense over
periods from five to fifteen years using the straight-line method. The company
reviews these assets annually for signs of permanent impairment.
Interest-rate risk
The Bank is principally engaged in the business of attracting deposits from
the general public and using these deposits, together with borrowings and other
funds, to originate and purchase loans secured by real estate and to purchase
investment and mortgage-backed securities. The potential for interest-rate risk
exists as a result of the shorter duration of interest-sensitive liabilities
compared to the generally longer duration of interest-sensitive assets. In a
rising rate environment, liabilities will reprice faster than assets, thereby
reducing the market value of long-term assets and net interest income. For this
reason, management regularly monitors the maturity structure of the assets and
liabilities in order to measure its level of interest-rate risk and plan for
future volatility.
Income taxes
Carver accounts for income taxes using the asset and liability method.
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.
F-10
Comprehensive income
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130") establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general - purpose financial statements. SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional paid
in capital in the equity section of a statement of financial position. Carver
has included the required disclosures in the Consolidated Statements of Changes
in Stockholders' Equity.
Net income (loss) per common share
Basic earnings per share ("EPS") is computed by dividing income available
to common shareholders by the weighted-average number of common shares
outstanding. Diluted EPS includes any additional common shares as if all
potentially dilutive common shares were issued (e.g. convertible preferred
stock). For the purpose of these calculations, unreleased shares of the Carver
Federal Savings Bank Employee Stock Ownership Plan ("ESOP") are not considered
to be outstanding.
Pension Plans
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. Carver has made the
required disclosures in the accompanying Notes to the Consolidated Financial
Statements.
Future Application of Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which was amended by SFAS No. 138. This
statement establishes accounting and reporting standards for derivative
instruments, and for hedging activities. SFAS 133 supercedes the disclosure
requirements in SFAS 80, 105 and 119 and is effective for fiscal periods
beginning after June 15, 2000. The adoption of SFAS No. 133 is not expected to
have a material impact on the financial position or results of operations of the
Company.
In September 2000, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
140") - a replacement of SFAS 125. SFAS 140 revises the standards for accounting
for securitzations and other transfers of financial assets and collateral and
requires certain additional disclosures. The collateral provisions and
disclosure requirements of SFAS 140 are effective for fiscal years ending after
December 15, 2000, whereas the other provisions of SFAS 140 are to be applied
prospectively to transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. The adoption of SFAS 140 is not
expected to have a material impact on the Company's financial position or
results of operations.
Reclassifications
Certain amounts in the consolidated financial statements presented for
prior periods have been reclassified to conform with the 2001 presentation.
NOTE 2. BUSINESS OPERATIONS
Background
The Holding Company was incorporated in May 1996 and whose principal wholly
owned subsidiaries are the Bank and Alhambra Holding Corp. CFSB Realty Corp. and
CFSB Credit Corp. are wholly owned
F-11
subsidiaries of the Bank. 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 and changed its name at that time. On October 24, 1994, the Bank
converted from mutual 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 and became a wholly owned
subsidiary of the Holding Company. In connection with the Reorganization, each
share of the Bank's outstanding common stock was exchanged for one share of the
Holding Company's common stock, par value $.01 per share. See Note 3.
Nature of operations
Carver's banking subsidiary's principal business consists of attracting
passbook and other savings accounts through its branch offices and investing
those funds in mortgage loans and other investments permitted by federal savings
banks. Carver's banking subsidiary has five branches located throughout the City
of New York that primarily serve the communities in which they operate.
NOTE 3. CONVERSION TO STOCK FORM OF OWNERSHIP AND REORGANIZATION INTO A HOLDING
COMPANY
On October 24, 1994, the Bank issued an initial offering of 2,314,375
shares of common stock (par value $0.01) at a price of $10 per share resulting
in net proceeds of $21,519,000. As part of the initial public offering, the Bank
established a liquidation account at the time of conversion, in an amount equal
to the surplus and reserves of the Bank at September 30, 1994. In the unlikely
event of a complete liquidation of the Bank (and only in such event), eligible
depositors who continue to maintain accounts shall be entitled to receive a
distribution from the liquidation account. The total amount of the liquidation
account may be decreased if the balances of eligible deposits decreased as
measured on the annual determination dates. The balance of the liquidation
account was approximately $3.0 million (unaudited), and $3.5 million (unaudited)
at March 31, 2001 and 2000, respectively, based on an assumed decrease of 15.25%
of eligible deposits per annum. On October 17, 1996, the Bank completed the
reorganization and became the wholly owned subsidiary of the Holding Company.
Pursuant to an Agreement and Plan of Reorganization, dated May 21, 1996, each
share of the Bank's outstanding common stock was exchanged for one share of the
Holding Company's common stock. In connection with the Reorganization, a
shareholder of the Bank exercised appraisal rights and 100 shares of the Bank's
common stock were purchased from such shareholder in the fourth fiscal quarter
of 1997. Accordingly, 2,314,275 shares of the Company's common stock remain
outstanding. The Bank's shareholder approved the Reorganization at the Bank's
annual meeting of shareholders held on July 29, 1996. As a result of the
Reorganization, the Bank will not be permitted to pay dividends to the Holding
Company on its capital stock if the effect thereof would cause its net worth to
be reduced below either: (i) the amount required for the liquidation account or
(ii) the amount required for the Bank to comply with applicable minimum
regulatory capital requirements.
NOTE 4. SECURITIES AVAILABLE FOR SALE
At March 31, 2001 and 2000, the Company held no MBS as available for sale.
Securities available for sale at March 31, 200 and 2001 are as follows:
F-12
March 31, 2001
---------------------------------------------
Gross Unrealized
--------------------
Carrying Estimated
Value Gains Losses Fair-Value
-------- -------- -------- ----------
(In thousands)
U.S. Government Agency securities ... $ 19,926 $ -- $ -- $ 19,926
-------- -------- -------- --------
$ 19,926 $ -- $ -- $ 19,926
======== ======== ======== ========
March 31, 2000
---------------------------------------------
Gross Unrealized
--------------------
Carrying Estimated
Value Gains Losses Fair-Value
-------- -------- -------- ----------
(In thousands)
U.S. Government Agency securities ... $ 24,952 $ -- $ -- $ 24,952
-------- -------- -------- --------
$ 24,952 $ -- $ -- $ 24,952
======== ======== ======== ========
At March 31, 2001 and 2000, U.S. Government Agency securities consisted of
short-term discount notes with maturities of 30 days or less. The estimated fair
value of the U.S. Government Agency securities approximates the carrying value
at March 31, 2001 and 2000.
Proceeds from the sales of investment securities available for sale during
the year ended March 31, 1999 were $24.4 million resulting in a gross realized
gain of $4,000. There were no sales of investment securities available for sale
during the year ended March 31, 2001 and 2000.
NOTE 5. INVESTMENT SECURITIES HELD TO MATURITY, NET
The carrying value and estimated fair market value of investment securities
held to maturity at March 31, 2001 and 2000 were as follows:
March 31, 2001
---------------------------------------------
Gross Unrealized
--------------------
Carrying Estimated
Value Gains Losses Fair-Value
-------- -------- -------- ----------
(In thousands)
U.S. Government Agency securities .. $ 24,996 $ 1,093 $ -- $ 26,089
-------- -------- -------- --------
$ 24,996 $ 1,093 $ -- $ 26,089
======== ======== ======== ========
March 31, 2000
---------------------------------------------
Gross Unrealized
--------------------
Carrying Estimated
Value Gains Losses Fair-Value
-------- -------- -------- ----------
(In thousands)
U.S. Government Agency securities .. $ 24,996 $ -- $ 687 $ 24,309
-------- -------- -------- --------
$ 24,996 $ -- $ 687 $ 24,309
======== ======== ======== ========
There were no sales of securities held to maturity during the years ended
March 31, 2001, 2000 and 1999. All securities in the above table mature within
one to five years.
F-13
NOTE 6. MORTGAGE-BACKED SECURITIES HELD TO MATURITY, NET
A summary of gross unrealized gains and losses and estimated fair value
follows:
March 31, 2001
---------------------------------------------
Gross Unrealized
--------------------
Carrying Estimated
Value Gains Losses Fair Value
-------- -------- -------- ----------
(In thousands)
Government National Mortgage Association .. $ 5,774 $ 81 $ -- $ 5,855
Federal Home Loan Mortgage Corporation .... 14,672 -- 36 14,636
Federal National Mortgage Association ..... 21,633 -- 11 21,622
Small Business Administration ............. 594 -- 52 542
Collateralized Mortgage Obligations ....... 193 6 187
-------- -------- -------- --------
$ 42,866 $ 81 $ 105 $ 42,842
======== ======== ======== ========
March 31, 2000
---------------------------------------------
Gross Unrealized
--------------------
Carrying Estimated
Value Gains Losses Fair Value
-------- -------- -------- ----------
(In thousands)
Government National Mortgage Association .. $ 6,516 $ -- $ 272 $ 6,244
Federal Home Loan Mortgage Corporation .... 18,780 -- 788 17,992
Federal National Mortgage Association ..... 26,222 -- 1,218 25,004
Small Business Administration ............. 760 6 -- 766
Collateralized Mortgage Obligations:
Resolution Trust Corporation ......... 1,708 -- 12 1,696
Other ................................ 243 -- 6 237
-------- -------- -------- --------
$ 54,229 $ 6 $ 2,296 $ 51,939
======== ======== ======== ========
The following is a schedule of final maturities as of March 31, 2001:
Carrying Estimated
Value Fair Value
-------- ----------
(In thousands)
Due in one year or less ........... -- --
After one through five years ...... $ 287 $ 294
After five through ten years ...... 4,347 4,633
After ten years ................... 38,232 37,915
-------- --------
$ 42,866 $ 42,842
======== ========
There were no sales of mortgage-backed securities held to maturity during
the years ended March 31, 2001, 2000 and 1999.
F-14
NOTE 7. LOANS RECEIVABLE, NET
Year ended March 31,
-----------------------
2001 2000
--------- ---------
(In thousands)
-----------------------
Real estate mortgage:
One- to four-family ........... $ 157,582 $ 152,458
Multi-family .................. 83,620 86,184
Commercial real estate ........ 36,113 22,721
Equity and second mortgages ... 185 252
--------- ---------
277,500 261,615
--------- ---------
Real estate construction .......... 7,101 6,393
--------- ---------
Commercial loans .................. 290 700
--------- ---------
Consumer:
Secured personal loans ........ 211 294
Student education ............. -- 67
Other ......................... 3,280 5,412
--------- ---------
3,491 5,773
--------- ---------
Total loans ....................... 288,382 274,481
--------- ---------
Add: Premium ...................... 705 582
Less: Loans in process ............ (1,280) (1,062)
Allowance for loan losses ......... (3,551) (2,935)
Deferred loan fees and discounts .. (819) (918)
--------- ---------
(4,945) (4,333)
--------- ---------
$ 283,437 $ 270,148
========= =========
As March 31, 2001, the Company's real estate loans receivable were
principally secured by properties located in the state of New York (58.7%).
The following is an analysis of the allowance for loan losses:
Year Ended March 31,
------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
------------------------------
Balance--beginning ............................ $ 2,935 $ 4,020 $ 3,138
Provision charged to operations ............... 1,793 1,099 4,029
Recoveries of amounts previously charged off .. 200 385 82
Loans charged off ............................. (1,377) (2,569) (3,229)
-------- -------- --------
Balance--ending ............................... $ 3,551 $ 2,935 $ 4,020
======== ======== ========
Non-accrual loans consist of loans for which the accrual of interest has
been discounted as a result of such loans becoming three months or more
delinquent as to principal and/or interest payments. Interest income on
non-accrual loans is recorded when received. Restructured loans consist of loans
where borrowers have been granted concessions in regards to the terms of their
loans due to financial or other difficulties, which rendered them unable to
service their loans under the original contractual terms. The balances of
non-accrual and restructured loans and their impact in interest income are as
follows:
Year Ended March 31,
--------------------------
2001 2000 1999
------ ------ ------
(In thousands)
--------------------------
Non-accrual loans ......................... $2,519 $2,126 $2,417
Restructured loans ........................ -- -- --
------ ------ ------
$2,519 $2,126 $2,417
====== ====== ======
F-15
Year Ended March 31,
--------------------------
2001 2000 1999
------ ------ ------
(In thousands)
--------------------------
Interest income which would have been
recorded had loans performed in
accordance with original contracts .... $ 202 $ 345 $ 419
Interest income received .................. -- -- 107
------ ------ ------
Interest income lost ...................... $ 202 $ 345 $ 312
====== ====== ======
At March 31, 2001 and 2000, the recorded investment in impaired loans was
$2.5 million and $2.1 million, respectively. The related allowance for credit
losses was approximately $291,000 and $330,000 at March 31, 2001 and 2000,
respectively. The impaired loan portfolio is primarily collateral dependent. The
average recorded investment in impaired loans during the fiscal years ended
March 31, 2001, 2000 and 1999 was approximately $3.2 million, $2.3 million and
$4.0 million, respectively. For the years ended March 31, 2001, 2000 and 1999,
the Company recognized cash basis interest income on these impaired loans of $0,
$0 and $107,000, respectively.
At March 31, 2001, there were no loans to officers.
The following is a summary of loans to the Bank's directors and officers
(and to any associates of such persons), exclusive of loans to any such person
which in aggregate did not exceed $60,000:
Year Ended March 31,
--------------------
2001 2000
------ ------
(In thousands)
Balance--beginning ........... $ 112 $ 659
Loans originated ............. -- --
Other (1) .................... -- (530)
Repayments ................... (112) (17)
------ ------
Balance--ending .............. $ -- $ 112
====== ======
- ----------
(1) Represents loans to individuals who are no longer directors and officers of
Carver at March 31, 2000.
F-16
NOTE 8. LOANS SERVICING
The mortgage loan portfolios serviced for the FHLMC and Fannie Mae are not
included in the accompanying consolidated financial statements. The unpaid
principal balances of these loans aggregated $2,104,000, $2,775,000 and
$3,035,000 at March 31, 2001, 2000 and 1999, respectively.
Custodial escrow balances, maintained in connection with the foregoing loan
servicing, were approximately $34,000, $56,000 and $55,000 at March 31, 2001,
2000 and 1999, respectively.
NOTE 9. PREMISES AND EQUIPMENT, NET
The detail of premises and equipment is as follows:
MARCH 31,
--------------------
2001 2000
-------- --------
(In thousands)
--------------------
Land ............................................. $ 451 $ 451
Buildings and improvements ....................... 8,556 8,521
Leasehold improvements ........................... 335 719
Furnishings and equipment ........................ 6,469 6,018
-------- --------
15,811 15,709
Less accumulated depreciation and amortization ... 5,390 4,534
-------- --------
$ 10,421 $ 11,175
======== ========
Depreciation and amortization charged to operations for the years ended
March 31, 2001, 2000 and 1999 were $1,142,000, $1,222,000 and $1,043,000,
respectively.
NOTE 10. ACCRUED INTEREST RECEIVABLE
The detail of accrued interest receivable is as follows:
MARCH 31,
--------------------
2001 2000
-------- --------
(In thousands)
--------------------
Loans receivable ................................. $ 1,632 $ 1,768
Mortgage-backed securities ....................... 788 849
Investments and other interest bearing assets .... 121 36
-------- --------
Total accrued interest receivable ................ $ 2,541 $ 2,653
======== ========
NOTE 11. EXCESS OF COST OVER NET ASSETS ACQUIRED, NET
The excess of cost over net assets acquired relates to the acquisition of
the Bedford-Stuyvesant office. The detail is as follows:
MARCH 31,
--------------------
2001 2000
-------- --------
(In thousands)
--------------------
Core deposit premium ............................. $ 581 $ 788
Acquisition costs ................................ 22 29
-------- --------
$ 603 $ 817
======== ========
F-17
NOTE 12. DEPOSITS
MARCH 31,
-----------------------------------------------------------------------
2001 2000
--------------------------------- ---------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT PERCENT RATE AMOUNT PERCENT
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
DEMAND:
Interest-bearing .......... 1.71% $ 14,757 5.28% 1.66% $ 18,873 6.68%
Non-interest-bearing ...... -- 11,409 4.08 -- 12,337 4.38
-------- -------- --------
0.96 26,166 9.36 1.00 31,210 11.06
-------- -------- --------
SAVINGS:
Savings and club .......... 2.32 132,645 47.47 2.51 145,277 51.53
Money Management .......... 2.62 15,718 5.63 3.25 19,418 6.89
Certificates of deposit ... 4.55 104,895 37.54 4.70 86,036 30.52
-------- -------- -------- --------
......................... 3.26 253,258 90.64 3.31 250,731 88.94
-------- -------- -------- --------
......................... 3.04% $279,424 100.00% 3.06% $281,941 100.00%
======== ======== ======== ========
The scheduled maturities of certificates of deposits are as follows:
MARCH 31,
--------------------
2001 2000
-------- --------
(In thousands)
One year or less ................................. $ 28,449 $ 22,860
After one year to three years .................... 22,067 29,699
After three years to five years .................. 10,682 10,984
After five years ................................. 43,697 22,493
-------- --------
$104,895 $ 86,036
======== ========
The aggregate amount of certificates of deposit with minimum denominations
of $100,000 or more was approximately $16,322,000 and $17,514,000 at March 31,
2001 and 2000, respectively.
Interest expense on deposits consists of the following:
FOR YEAR ENDED MARCH 31,
----------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
----------------------------------
Demand ................................................... $ 253 $ 314 $ 314
Savings and clubs ........................................ 3,081 3,650 3,604
Money Management ......................................... 412 631 613
Certificates of deposit .................................. 4,739 4,047 3,902
-------- -------- --------
8,485 8,642 8,433
Penalty for early withdrawals of certificate of deposit .. (29) (30) (12)
-------- -------- --------
$ 8,456 $ 8,612 $ 8,421
======== ======== ========
F-18
NOTE 13. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The scheduled maturities of securities sold under agreements to repurchase
are as follows:
MARCH 31,
---------------------
LENDER MATURITY INTEREST RATE 2001 2000
- ---------------------- ----------------- ------------- --------- --------
(In thousands)
Federal Home Loan Bank May 22, 2000 5.88% $ -- $ 4,400
Federal Home Loan Bank July 26, 2000 5.41 -- 8,000
Federal Home Loan Bank September 5, 2000 5.40 -- 6,750
Federal Home Loan Bank October 26, 2000 4.81 -- 5,187
Federal Home Loan Bank December 4, 2000 6.44 -- 7,000
Federal Home Loan Bank September 5, 2001 6.70 4,930 --
--------- --------
$ 4.930 $ 31,337
========= ========
Information concerning securities sold under agreements to repurchase is
summarized as follows:
FOR THE YEAR ENDED
MARCH 31,
-------------------
2001 2000
------- -------
(Dollars in thousands)
Average balance during the year ................................. $17,165 $32,670
Average interest rate during the year ........................... 5.99% 5.46%
Maximum month-end balance during the year ....................... $31,337 $35,337
Mortgage-backed securities underlying the agreements at year end:
Carrying value ............................................ $ 5,379 $34,225
Estimated fair value ...................................... $ 5,441 $32,878
NOTE 14. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK
Information relating to the maturities of advances from the Federal Home
Loan Bank of New York is summarized as follows:
MARCH 31,
----------------------------------------------------------
2001 2000
------------------------- ------------------------
MATURING
YEAR ENDED WEIGHTED WEIGHTED
MARCH 31, AVERAGE RATE AMOUNT AVERAGE-RATE AMOUNT
--------- ------------ ------ ------------ ------
(Dollars in thousands)
2001 --% $ -- 5.76% $ 51,000
2002 5.86 96,500 5.17 15,000
2003 -- -- 3.58 358
2006 5.44 3,490 -- --
2012 3.50 309 3.50 330
-------- --------
5.84% $100,299 5.60% $ 66,688
======== ========
F-19
At March 31, 2001 and 2000, the advances were secured by pledges of the
Bank's investment in the capital stock of the Federal Home Loan Bank totaling
$5,755,000 respectively and a blanket assignment of the Bank's unpledged
qualifying mortgage, mortgage-backed securities and investment portfolios.
NOTE 15. INCOME TAXES
The components of income tax expense for the years ended March 31, 2001,
2000 and 1999 are as follows:
YEAR ENDED MARCH 31,
------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Federal income tax benefit
Current ........................................ $ -- $ -- $ (701)
Deferred ....................................... -- -- (689)
State and local income tax expense (benefit)
Current ........................................ 98 110 152
Deferred ....................................... -- -- (261)
-------- -------- --------
Total provision for income tax expense (benefit) ... $ 98 $ 110 $ (1,499)
======== ======== ========
The reconciliation of the expected federal tax rate to the consolidated
effective tax rate for the years ended March 31, 2001, 2000 and 1999 are as
follows:
YEAR ENDED MARCH 31,
----------------------------------------------------------------
2001 2000 1999
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
(Dollars in thousands)
Statutory federal income tax .............................. $ (99) 34.0% $ (349) 34.0% $(2,024) 34.0%
State and local income taxes, net of Federal tax benefit .. 98 (33.7) 110 (10.7) (72) 1.2
Change in valuation allowance ............................. 157 (54.0) 298 (26.0) 597 (10.0)
Other ..................................................... (58) (20.0) 51 (8.0) 0 0.0
------- ------- ------- ------- ------- -------
Total income tax expense .................................. $ 98 (33.7)% $ 110 (10.7)% $(1,499) 25.2%
======= ======= ======= ======= ======= =======
The Company has net operating loss carryforwards for federal income tax
purposes at March 31, 2001 and 2000 of approximately $5.7 million. These net
operating loss carryforwards begin to expire in the year ended March 31, 2019.
The Bank's stockholders' equity includes approximately $3.55 million and
$2.94 million at March 31, 2001 and 2000, respectively, which has been
segregated for federal income tax purposes as a bad debt reserve. The use of
this amount for purposes other than to absorb losses on loans may result in
taxable income for Federal income taxes at the then current tax rate.
F-20
The tax effects of existing temporary differences that give rise to
significant portions of deferred tax assets and deferred tax liabilities are as
follows:
MARCH 31,
--------------------
2001 2000
-------- --------
(In thousands)
DEFERRED TAX ASSETS
Net operating loss carryforward ....................... $ 1,940 $ 1,940
Allowance for loan losses ............................. 1,665 1,376
Deferred loan fees .................................... 353 430
Employees pension plan ................................ 132 84
Management recognition plan ........................... -- 5
Directors' retirement plan ............................ -- 208
Contributions carryforward ............................ 67 28
-------- --------
Total deferred tax assets before valuation allowance .. 4,157 4,071
Valuation allowance ................................... (2,439) (2,281)
-------- --------
Total deferred tax asset .............................. 1,718 1,790
======== ========
DEFERRED TAX LIABILITIES
Excess of cost over net assets acquired ............... 251 328
Depreciation .......................................... 429 424
Excess tax bad debt reserve ........................... 16 16
-------- --------
Total deferred tax liabilities ........................ 696 768
-------- --------
Net deferred tax assets included in other assets ...... $ 1,022 $ 1,022
======== ========
Management believes it is more likely than not that the results of future
operations will generate sufficient future taxable income to realize the
deferred tax asset. The Company will have to generate approximately $2.5 million
of future taxable income to realize this asset.
F-21
NOTE 16. EARNINGS PER SHARE
The following table reconciles the loss available to common
shareholders (numerator) and the weighted average common stock outstanding
(denominator) for both basic and diluted earnings per share for the periods
presented:
YEAR ENDED MARCH 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
--------------------------------
Net loss ....................................................................... $ (389) $ (1,135) $ (4,453)
Preferred stock dividends ...................................................... (196) (45) --
-------- -------- --------
Net loss - basic ............................................................... (585) (1,180) (4,453)
Impact of potential conversion of convertible preferred stock to common stock .. 196 45 --
-------- -------- --------
Net loss - diluted ............................................................ $ (389) $ (1,135) $ (4,453)
======== ======== ========
Weighted average common shares outstanding - basic ............................. 2,256 2,239 2,206
Effect of dilutive securities
Convertible preferred stock ................................................ 208 46 --
-------- -------- --------
Weighted average common shares outstanding - diluted ........................... 2,464 2,285 2,206
======== ======== ========
NOTE 17. STOCKHOLDERS' EQUITY
Convertible Preferred Stock. On January 11, 2000, Carver sold, pursuant to
a Securities Purchase Agreement, dated January 11, 2000, in a private placement
40,000 shares of Series A Convertible Preferred Stock (the "Series A Preferred
Stock") to Morgan Stanley & Co. Incorporated ("MSDW") and 60,000 Shares of
Series B Convertible Preferred Stock (the "Series B Preferred Stock") to
Provender Opportunities Fund L.P. ("Provender"). In addition, Carver entered
into a Registration Rights Agreement, dated January 11, 2000 with MSDW and
Provender. The gross proceeds from the private placement were $2.5 million.
The Series A Preferred Stock and Series B Preferred Stock (collectively the
"Preferred Stock") accrue annual dividends at $1.97 per share. Dividends are
payable semi-annually commencing on June 15 and December 15 of each year. Each
share of Preferred Stock is convertible at the option of the holder, at any
time, into 2.083 shares of Carver's Common Stock, subject to certain
antidilution adjustments. Carver may redeem the Preferred Stock beginning
January 15, 2004. In the event of any liquidation, dissolution or winding up of
Carver, whether voluntary or involuntary, the holders of the shares of Preferred
Stock shall be entitled to receive $25 per share of Preferred Stock plus all
dividends accrued and unpaid thereon. Each share of Preferred Stock is entitled
to one vote for each share of Common Stock into which the Preferred Stock can be
converted.
At March 31, 2001 unpaid accrued dividends related to preferred stock
amounted to $57,421.
Regulatory Capital. The operations and profitability of the Bank are
significantly affected by legislation and the policies of the various regulatory
agencies. As required by the Financial Institutions Reform, Recovery, and
Enforcement Act, the Federal Office of Thrift Supervision ("OTS") promulgated
capital requirements for financial institutions consisting of minimum tangible
and core capital ratios of 1.5% and 3.0%, respectively, of the institution's
adjusted total assets and a minimum risk-based capital ratio of 8.0% of the
institution's risk weighted assets. Although the minimum core capital ratio is
3.0%, the Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
stipulates that an institution with less than 4.0% core capital is deemed
undercapitalized. At March 31, 2001 and 2000, the Bank exceeded all the current
capital requirements.
F-22
The following table sets out the Bank's various regulatory capital
categories at March 31, 2001 and 2000.
At March 31, 2001 At March 31, 2000
-------------------------- ---------------------------
DOLLARS PERCENTAGE DOLLARS PERCENTAGE
-------- ---------- -------- ----------
(Dollars in thousands) (Dollars in thousands)
Core/leverage capital ............. $ 29,757 7.02% $ 28,715 6.85%
Tier 1 risk-based capital ......... 29,757 14.50 28,715 14.15
Total risk-based capital .......... 32,333 15.76 31,213 15.38
The following table reconciles the Bank's stockholders' equity at March 31,
2001 and 2000, in accordance with accounting principles generally accepted in
the United States of America to regulatory capital requirements:
REGULATORY CAPITAL REQUIREMENTS
----------------------------------------------
GAAP TANGIBLE TIER I/CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- ----------- ----------
(Dollars in thousands)
Stockholders' Equity at March 31, 2001 (1) .. $ 30,360 $ 30,360 $ 30,360 $ 30,360
Add:
General valuation allowances ............. -- -- 2,576
Deduct:
Excess of cost over net assets acquired .. (603) (603) (603)
Regulatory capital .......................... 29,757 29,757 32,333
Minimum capital requirement ................. 6,358 16,956 16,413
-------- -------- --------
Regulatory capital excess ................... $ 23,399 $ 12,801 $ 15,920
======== ======== ========
REGULATORY CAPITAL REQUIREMENTS
----------------------------------------------
GAAP TANGIBLE TIER I/CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- ----------- ----------
(Dollars in thousands)
March 31, 2000 (1) ...................... $ 29,532 $ 29,532 $ 29,532 $ 29,532
Add:
General valuation allowances ............. -- -- 2,538
Deduct:
Excess of cost over net assets acquired .. (817) (817) (817)
Asset required to be deducted ............ -- -- (40)
-------- -------- --------
Regulatory capital .......................... 28,715 28,715 31,213
Minimum capital requirement ................. 6,283 16,766 16,235
-------- -------- --------
Regulatory capital excess ................... $ 22,432 $ 11,949 $ 14,978
======== ======== ========
- ----------
(1) Reflects Bank only.
F-23
NOTE 18. BENEFIT PLANS
Pension Plan
Carver has a non-contributory defined benefit pension plan covering all
eligible employees. The benefits are based on each employee's term of service.
Carver's policy is to fund the plan with contributions which equal the maximum
amount deductible for federal income tax purposes. The plan was curtailed during
the fiscal year ended March 31, 2001. The following table sets forth the plan's
changes in benefit obligation, changes in plan assets and funded status and
amounts recognized in Carver's consolidated financial statements:
March 31,
--------------------
2001 2000
-------- --------
(In thousands)
--------------------
Change in benefit obligation during the year
Benefit obligation at the beginning of year .......... $ 2,846 $ 3,145
Service cost ......................................... 121 162
Interest cost ........................................ 207 188
Actuarial gain ....................................... (84) (488)
Benefits paid ........................................ (243) (161)
Curtailment .......................................... $ (320) $--
-------- --------
Benefit obligation at end of year .................... $ 2,527 $ 2,846
======== ========
Change in fair value of plan assets during the year
Fair value of plan assets at beginning of year ....... $ 3,791 $ 3,625
Actual return on plan assets ......................... 46 251
Employer contributions ............................... -- 76
Benefits paid ........................................ (243) (161)
-------- --------
Fair value of plan assets at end of year ............. $ 3,594 $ 3,791
======== ========
Funded status ........................................ $ 1,067 $ 945
Contributions ........................................ -- --
Unrecognized transition obligation ................... -- 259
Unrecognized gain .................................... (1,074) (1,336)
Unrecognized past service liability .................. -- 14
-------- --------
Accrued pension cost ................................. $ (7) $ (118)
======== ========
Net periodic pension cost included the following components:
Year Ended March 31,
--------------------------
2001 2000 1999
------ ------ ------
(In thousands)
Service cost ..................................... $ 121 $ 159 $ 162
Interest cost .................................... 207 191 188
Expected return on plan assets ................... (298) (284) (260)
Amortization of:
Unrecognized transition (benefit) obligation .. 36 36 36
Unrecognized gain (loss) ...................... (96) (62) (46)
Unrecognized past service liability ........... 2 2 2
Curtailment credit ............................... (84) -- --
------ ------ ------
Net periodic pension (benefit) cost .............. $ (112) $ 42 $ 82
====== ====== ======
Significant actuarial assumptions used in determining plan benefits are:
YEAR ENDED MARCH 31,
------------------------
2001 2000 1999
---- ---- ----
Annual salary increase ................. 4.75% 5.50% 4.50%
Long-term return on assets ............. 8.00% 8.00% 8.00%
Discount rate used in measurement of
benefit obligations .................... 7.25% 8.00% 6.50%
F-24
Savings Incentive Plan
The Bank has a savings incentive plan, pursuant to Section 401(k) of the
Code, for all eligible employees of the Bank. Employees may elect to defer up to
the lesser of 15% or the maximum amount allowed under law of their compensation
and may receive a 50% matching contribution from the Bank up to the maximum
allowed by law through December 31, 2000. Effective January 1, 2001, the plan
was modified. In connection with this modification, Carver will make an annual
non-elective contribution to the 401(k) plan on behalf of each eligible employee
equal to 2% of the employee's annual pay. This 2% Carver contribution will be
made regardless of whether or not the employee makes a contribution to the
401(k) plan. To be eligible for the 2% Carver contribution, the employee must
have completed at least one year of service and be employed as of the last day
of the plan year or December 31st of each year. In addition, effective January
1, 2001, Carver matches contributions to the plan equal to 100% of the pre-tax
contributions made by each employee up to a maximum of 4% of their pay. All such
matching contributions to the plan will be fully vested and non-forfeitable at
all times regardless of the years of service. However, the 1 to 5 year vesting
schedule that previously applied to matching contributions will apply to the new
2% Carver contribution. Total incentive plan expenses for the years ended March
31, 2001, 2000 and 1999 were $45,000, $56,000 and $68,000 respectively.
Directors' Retirement Plan
Concurrent with the conversion to the stock form of ownership, the Bank
adopted a retirement plan for non-employee directors. The plan was curtailed
during the fiscal year ended March 31, 2001. The benefits are payable based on
the term of service as a director.
March 31,
----------------
2001 2000
------ ------
(In thousands)
Change in benefit obligation during the year
Benefit obligation at beginning of year ............... $ 670 $ 795
Service cost .......................................... -- --
Interest cost ......................................... 35 51
Actuarial loss (gain) ................................. 14 (151)
Benefits paid ......................................... (51) (25)
Curtailment ........................................... $ (372) $ --
------ ------
Benefit obligation at end of year ................. $ 296 $ 670
====== ======
Change in fair value of plan assets during the year
Fair value of plan assets at beginning of year ........ $ -- --
Actual return on plan assets .......................... -- --
Employer contributions ................................ 51 25
Benefits paid ......................................... (51) (25)
------ ------
Fair value of plan assets at end of year .............. $ -- $ --
====== ======
Funded Status ......................................... $ (296) $ (670)
Contributions ......................................... -- 6
Unrecognized loss ..................................... 21 166
Unrecognized past service liability ................... -- 55
------ ------
Accrued pension cost .................................. $ (275) $ (443)
====== ======
Net periodic pension cost for the years ended March 31, 2001, 2000 and 1999
included the following:
2001 2000 1999
------ ------ ------
(In thousands)
Service cost ............................. $ -- $ -- $ 42
Interest cost ............................ 35 51 32
Expected return on plan assets ........... -- -- --
Amortization of:
Unrecognized gain ..................... 4 27 4
Unrecognized past service liability ... 23 55 55
Curtailment credit .................... (179) -- --
------ ------ ------
Net periodic pension (benefit) cost ...... $ (117) $ 133 $ 133
====== ====== ======
F-25
The actuarial assumptions used in determining plan benefits include annual
fee increases of 4.75%, 5.50% and 4.50%, and a discount rate of 7.25%, 8.00% and
6.50%, for the years ended March 31, 2001, 2000 and 1999, respectively.
Management Recognition Plan
The Management Recognition Plan (the "MRP") provides for automatic grants
of restricted stock to certain employees as of the September 12, 1995 adoption
of the MRP. In addition, the MRP provides for additional discretionary grants of
restricted stock to those employees selected by the committee established to
administer the MRP. Awards generally vest in three to five equal annual
installments commencing on the first anniversary date of the award, provided the
recipient is still an employee of the Holding Company or the Bank on such date.
Awards will become 100% vested upon termination of service due to death or
disability. When shares become vested and are distributed, the recipients will
receive an amount equal to any accrued dividends with respect thereto. Pursuant
to the MRP, the Bank recognized $178,000 and $62,000 as expense for the years
ended March 31, 2000 and 1999, respectively.
NOTE 19. EMPLOYEE STOCK OWNERSHIP PLAN
Effective upon conversion, an ESOP was established for all eligible
employees. The ESOP used $1,821,320 in proceeds from a term loan obtained from a
third-party institution to purchase 182,132 shares of Bank common stock in the
initial public offering. The term loan principal is payable over forty equal
quarterly installments through September 2004. Interest on the term loan is
payable quarterly, at a rate of 3.00% over the average federal funds rate. Each
year, the Bank intends to make discretionary contributions to the ESOP, which
will be equal to principal and interest payments required on the term loan less
any dividends received by the ESOP on unallocated shares.
Shares purchased with the loan proceeds were initially pledged as
collateral for the term loan and are held in a suspense account for future
allocation among the participants on the basis of compensation, as described by
the Plan, in the year of allocation.
Accordingly, the ESOP shares pledged as collateral are reported as unearned
ESOP shares in the consolidated statements of financial condition. As shares are
committed to be released from collateral, the Bank reports compensation expense
equal to the current market price of the shares, and the shares become
outstanding for net income per common share computations. ESOP compensation
expense was $298,000, $326,000 and $171,000 for the years ended March 31, 2001,
2000 and 1999 respectively.
The ESOP shares at March 31, 2001 and 2000 are as follows:
March 31,
------------------------------------
2001 2000
--------------- -----------------
(In thousands except for share data)
------------------------------------
Allocated shares ....................... 149 117
Shares committed to be released ........ -- --
Unreleased shares ...................... 33 65
------ ------
Total ESOP shares ...................... 182 182
====== ======
Fair value of unreleased shares ........ $ 293 $ 570
NOTE 20. COMMITMENTS AND CONTINGENCIES
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.
These financial instruments primarily include commitments to extend credit
and to sell loans. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount
F-26
recognized in the statements of financial condition. The contract amounts of
those instruments reflect the extent of involvement the Bank has in particular
classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Bank
uses the same credit policies making commitments as it does for on-balance-sheet
instruments.
The Bank has outstanding various loan commitments as follows:
MARCH 31,
--------------------
2001 2000
-------- --------
(In thousands)
--------------------
Commitments to originate loan mortgages .. $ 6,137 $ 2,472
Commitments to purchase loan mortgages ... -- 15,000
Consumer loans ........................... 3,380 4,488
-------- --------
Total .................................... $ 9,517 $ 21,960
======== ========
At March 31, 2001, of the $6,137,000 in outstanding commitments to
originate mortgage loans, $3,382,000 represented commitments to originate
multi-family mortgage loans at fixed rates within a range of 7.38% to 7.88%,
1,475,000 represented the undisbursed balance of all other real estate loans at
a rate of 8.50% and $1,280,000 represented construction loans at 9.69%.
At March 31, 2001, undisbursed funds from approved consumer lines of
credit, primarily credit cards, totaled $3,380,000. Such lines consist of
unsecured and secured lines of credit of $3,117,000 and $263,000 respectively.
All such lines carry adjustable rates.
At March 31, 2001, undisbursed funds from approved unsecured commercial
lines of credit totaled $51,000.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the counter-party.
Collateral held consists primarily of residential real estate, but may
include income-producing commercial properties.
Rentals, including real estate taxes, under long-term operating leases for
certain branch offices aggregated approximately $191,000, $273,000, and $266,000
for the years ended March 31, 2001, 2000 and 1999, respectively. As of March 31,
2001, minimum rental commitments under all noncancellable leases with initial or
remaining terms of more than one year and expiring through 2012 are as follows:
F-27
YEAR ENDED MINIMUM
MARCH 31, RENTAL
---------- --------------
(In thousands)
2002 $ 185
2003 189
2004 192
2005 195
2006 199
Thereafter 1,132
--------------
$ 2,092
==============
The Bank also has, in the normal course of business, commitments for
services and supplies. Management does not anticipate losses on any of these
transactions.
Legal Proceedings
From time to time, Carver Federal is a party to various legal proceedings
incident to its business. Certain claims, suits, complaints and investigations
involving the Company, arising in the ordinary course of business, have been
filed or are pending. The Company is of the opinion, after discussion with legal
counsel representing the Company in these proceedings, that the aggregate
liability or loss, if any, arising from the ultimate disposition of these
matters would not have a material adverse effect on the Company's consolidated
financial position or results of operations. At March 31, 2001, except as set
forth below, there were no material legal proceedings to which Carver Federal or
its subsidiaries was a party, or to which any of their property was subject.
On or about April 29, 1999, plaintiff Reginald St. Rose ("St. Rose"), a
former Carver employee filed suit against Carver Federal in the Supreme Court of
the State of New York, County of New York (the "St. Rose Action"). On or about
January 12, 1999, Carver and St. Rose entered into an agreement (the
"Agreement") providing that St. Rose would resign from Carver on the terms and
conditions set forth in the Agreement. In the St. Rose Action, St. Rose alleged
the following causes of action, which relate to the Agreement and St. Rose's
separation from Carver: (1) breach of contract; (2) promissory estoppel; and (3)
fraudulent misrepresentation. St. Rose seeks damages in an amount not less than
$50,000 with respect to the breach of contract cause of action and seeks
undisclosed damages with respect to the promissory estoppel and fraudulent
misrepresentation causes of action. On or about August 18, 1999, Carver moved to
dismiss St. Rose's fraudulent misrepresentation cause of action and the Court
granted Carver's motion. Carver has not filed an answer in the St. Rose Action.
By written stipulation of the parties, Carver's time to file an answer to St.
Rose's complaint has been extended without date. Carver has unasserted
counterclaims against St. Rose for, among other claims, payment of certain
financial obligations to Carver. The parties have had intermittent settlement
discussions, but have not reached an agreement.
The action brought by Ralph Williams (the "Williams Action") and the action
brought by Janice Pressley (the "Presley Action" and, together with the Williams
Action, the "Actions") arise out of events concerning the Northeastern
Conference Federal Credit Union ("Northeastern"). Plaintiff Williams is a former
member of the Board of Directors, and plaintiff Pressley is a former treasurer,
of Northeastern, a federal credit union that maintained accounts with Carver and
other banks in the New York metropolitan area. Plaintiffs' complaints (which are
virtually identical) allege that the National Credit Union Administration (the
"NCUA") acted improperly when it placed Northeastern into conservatorship and
subsequent liquidation. On or about November 22, 2000, Williams filed his pro se
complaint against the NCUA, Carver, Chase Manhattan Bank ("Chase"), Astoria
Federal Savings and Loan Association and Reliance Federal Savings Bank (Carver
with the last three defendants, collectively the "Bank Defendants") seeking
damages in the amount of $1 million plus certain additional unspecified amounts.
On or about November 22, 2000, plaintiff Pressley filed her pro se action
against the same defendants seeking unspecified compensatory and punitive
damages.
F-28
While the bulk of the complaints relate to the action of the NCUA Board,
the plaintiffs allege that the Bank Defendants "collaborated with the NCUA
Board" in violating unspecified constitutional and privacy rights and that they
engaged in discrimination.
On or about December 15, 2000, defendant Chase moved to consolidate the
Williams Action and Pressley Action. In anticipation of that consolidation, the
Bank Defendants filed a joint motion to dismiss both complaints. The Bank
Defendants' motion to dismiss was denied without prejudice insofar as it applied
to the Williams Action solely for the reason that it was a motion addressed to
both Actions prior to the issuance of an order consolidating the cases. The Bank
Defendants have refilled their motion to dismiss the Williams Action and it is
sub judice. The Bank Defendants' original motion to dismiss is still sub judice
insofar as it applies to the Pressley Action. If the motions to dismiss are not
granted, Carver intends to defend both Actions vigorously.
NOTE 21. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is defined as the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than a forced or liquidation sale. Significant estimations were
used by the Bank for the purpose of this disclosure. Estimated fair values have
been determined by the Bank using the best available data and estimation
methodology suitable for each category of financial instrument. For those loans
and deposits with floating interest rates, it is presumed that estimated fair
values generally approximate their recorded book balances. The estimation
methodologies used and the estimated fair values and carrying values of the
Bank's financial instruments are set forth below:
Cash and cash equivalents and accrued interest receivable
The carrying amounts for cash and cash equivalents and accrued interest
receivable approximate fair value because they mature in three months or less.
Securities
The fair values for securities available for sale, mortgage-backed
securities held to maturity and investment 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.
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.
Deposits
The fair value of demand, savings and club accounts is equal to the amount
payable on demand at the reporting date. The fair value of certificates of
deposit is estimated using rates currently offered for deposits of similar
remaining maturities. 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.
F-29
Borrowings
The fair values of advances from Federal Home Loan Bank of New York,
securities sold under agreement to repurchase and other borrowed money are
estimated using the rates currently available to the Bank for debt with similar
terms and remaining maturities.
Commitments
The fair market value of unearned fees associated with financial
instruments with off-balance sheet risk at March 31, 2001 approximates the fees
received. The fair value is not considered material.
The carrying amounts and estimated fair values of the Company's financial
instruments at March 31, 2001 and 2000 are as follows:
AT MARCH 31,
---------------------------------------------
2001 2000
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(In thousands)
Financial Assets:
Cash and cash equivalents ................. $ 31,758 $ 31,758 $ 22,202 $ 22,202
Securities available for sale ............. $ 19,926 $ 19,926 $ 24,952 $ 24,952
Investment securities held to maturity .... $ 24,996 $ 26,089 $ 24,996 $ 24,309
Mortgage backed securities ................ $ 42,866 $ 42,842 $ 54,229 $ 51,939
Loans receivable .......................... $283,437 $290,140 $270,148 $254,439
Accrued interest receivable ............... $ 2,541 $ 2,541 $ 2,653 $ 2,653
Financial Liabilities:
Deposits .................................. $279,424 $258,920 $281,941 $279,773
Securities sold under
agreements to purchase ................... $ 4,930 $ 4,930 $ 31,337 $ 31,337
Advances from Federal Home
Loan Bank of New York ..................... $100,299 $105,421 $ 66,688 $ 66,688
Other borrowed money ...................... $ 371 $ 371 $ 553 $ 553
Commitments .......................................... $ -- $ -- $ -- $ --
Limitations
The fair value estimates are made at a discrete point in time based on
relevant market information about the financial instruments. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the entire holdings of a particular financial instrument. Because no
quoted market value exists for a significant portion of the Bank's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
In addition, the fair value estimates are based on existing off balance
sheet financial instruments without attempting to value anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets and liabilities include premises and equipment and
advances from borrowers for taxes and insurance. In addition, the tax
ramifications related to the realization of unrealized gains and losses can have
a significant effect on fair value estimates and have not been considered in any
of the estimates.
Finally, reasonable comparability between financial institutions may not be
likely due to the wide range of permitted valuation techniques and numerous
estimates which must be made given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
introduces a greater degree of subjectively to these estimated fair values.
F-30
NOTE 22. QUARTERLY FINANCIAL DATA (UNAUDITED)
YEAR ENDED MARCH 31, 2001,
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(In thousands)
Interest income ........................ $ 7,082 $ 7,082 $ 7,197 $ 6,946
Interest expense ....................... (3,393) (3,497) (3,745) (3,643)
-------- -------- -------- --------
Net interest income .................... 3,689 3,585 3,452 3,303
Provision for loan losses .............. (443) (450) (450) (450)
Non-interest income .................... 681 1,264 498 491
Non-interest expense ................... (3,754) (3,941) (3,942) (3,824)
Income tax (expense) benefit ........... (24) (178) 45 59
-------- -------- -------- --------
Net income (loss) ...................... $ 149 $ 280 $ (397) $ (421)
======== ======== ======== ========
Net income (loss) per common share ..... $ 0.04 $ 0.10 $ (0.20) $ (0.21)
======== ======== ======== ========
YEAR ENDED MARCH 31, 2000,
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(In thousands)
Interest income ........................ $ 6,865 $ 6,694 $ 6,960 $ 6,848
Interest expense ....................... (3,580) (3,563) (3,500) (3,366)
-------- -------- -------- --------
Net interest income .................... 3,285 3,131 3,460 3,482
Provision for loan losses .............. (150) (230) (225) (494)
Non-interest income .................... 475 513 539 1,012
Non-interest expense ................... (2,824) (3,155) (3,202) (6,642)
Income tax expense ..................... -- -- (23) (87)
-------- -------- -------- --------
Net income (loss) ...................... $ 786 $ 259 $ 549 $ (2,729)
======== ======== ======== ========
Net income (loss) per common share ..... $ .35 $ .11 $ .25 $ (1.23)
======== ======== ======== ========
NOTE 23. CARVER BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31,
-------------------
2001 2000
-------- --------
(In thousands)
ASSETS
Cash on deposit with the Bank ............................ $ 2,128 $ 2,068
Investment in the Bank ................................... 30,360 29,532
Investment in Alhambra Holding Corp. ..................... -- 2,137
Accounts receivable from Alhambra Realty Holding ......... -- 3
Promissory note receivable from Alhambra Realty Holding .. -- 50
-------- --------
Total assets ............................................. $ 32,488 $ 33,790
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable to the Bank ............................. $ 118 $ 73
Other liabilities ........................................ 274 1,076
-------- --------
Total liabilities ........................................ 392 1,149
Stockholders' equity ..................................... 32,096 32,641
-------- --------
Total liabilities and stockholders' equity ............... $ 32,488 $ 33,790
======== ========
F-31
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
INCOME
Equity in net income (loss) from the Bank ............ $ 624 $ (413) $ (4,735)
Equity in net income (loss) from Alhambra Holding .... -- 720 --
Interest income from deposit with the Bank ........... 48 77 292
Interest income from promissory note ................. -- 12 --
Other income ......................................... -- 13 14
-------- -------- --------
Total income ..................................... 672 409 (4,429)
EXPENSES
Salaries and employee benefits ....................... 64 113 6
Legal expense ........................................ 233 659 10
Shareholder expense .................................. 510 432
Other ................................................ 156 340 8
-------- -------- --------
Total expense .................................... 963 1,544 24
Loss before income taxes ............................. (291) (1135) (4,453)
Income tax expense ................................... 98 -- --
-------- -------- --------
Net loss ............................................. $ (389) $ (1,135) $ (4,453)
======== ======== ========
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .............................................. $ (389) $ (1,135) $ (4,453)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Equity in net (income) loss of the Bank ............... (624) 413 4,735
Equity in net income of Alhambra Holding .............. -- (720) --
Decrease (increase) in accounts receivable ............ 3 (3) --
Decrease (increase) in promissory note receivable ..... 50 (50) --
Increase in accounts payable to Bank .................. 45 73 --
(Increase) decrease in other liabilities .............. (802) 914 41
MRP activity .......................................... (95) -- --
Allocation of ESOP Stock .............................. 298 341 196
Other, net ........................................... (203) (25) (416)
-------- -------- --------
Net cash provided by operating activities ............. (1,717) (192) 103
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the disposition of Alhambra Building .... 2,136 -- --
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of preferred stock ............. -- 2,366 --
Purchase of treasury stock - net ...................... (61) -- --
Dividends paid ........................................ (298) (106) (116)
Decrease in unrealized loss on investments ............ -- -- 13
-------- -------- --------
Net cash (used in) provided by financing activities ... (359) 2,260 (103)
-------- -------- --------
Net increase in cash .................................. 60 2,068 --
Cash and cash equivalents - beginning ................. 2,068 -- --
-------- -------- --------
Cash and cash equivalents - ending .................... $ 2,128 $ 2,068 $ --
======== ======== ========
F-32
NOTE 24. STOCK OPTION PLAN
During 1995, Carver adopted the 1995 Stock Option Plan (the "Plan") to
advance the interests of the Bank through providing select key employees and
directors of the Bank and its affiliates. The number of shares reserved for
issuance under the plan was 138,862. At March 31, 2001, there were 112,963
options outstanding and 89,663 were exercisable. Options are granted at the fair
market value of Carver common stock at the time of the grant for a period not to
exceed ten (10) years. Under the Plan, as amended, option grants generally vest
on an annual basis ratably over either three (3) or five (5) years, commencing
after one (1) year of service. In some instances, portions of option grants vest
at the time of the grant. All options are exercisable immediately upon a
participant's disability, death or a change in control, as defined in the Plan.
Information regarding stock options as of and for the years ended March 31,
2001, 2000, and 1999 follows:
2001 2000 1999
-------------------- -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- -------- -------- -------- -------- --------
Outstanding, beginning of year .... 58,463 $ 9.57 79,115 $ 10.74 79,115 $ 10.76
Granted ........................... 56,000 8.94 31,000 8.21 --
Exercised ......................... -- -- -- --
Forfeited ......................... (1,500) 16.13 (51,652) 10.55 -- 10.86
-------- -------- --------
Outstanding, end of year .......... 112,963 9.17 58,463 9.57 79,115 10.74
======== ======== ========
Exercisable at year end ........... 89,663 34,470 -- 31,450 --
======== ======== ========
The following table summarizes information about stock options at March 31,
2001:
Options Outstanding Options Exercisable
------------------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Range of Remaining Exercise Exercise
Exercise Prices Shares Life Price) Shares Price
- ------------------- -------- -------- -------- -------- --------
$ 8.00 $ 8.99 71,000 8 years $ 8.24 66,000 8.17
9.00 9.99 9,000 8 years 9.60 1,000 9.11
10.00 10.99 25,463 6 years 10.36 20,663 10.38
12.00 12.99 5,000 8 years 12.49 400 12.94
13.00 13.99 1,000 6 years 13.81 400 13.81
16.00 16.99 1,500 7 years 16.13 1,200 16.13
-------- --------
Total 112,963 89,663
======== ========
Carver applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for our
stock-based Plan under which there is no charge to earnings for stock option
awards and the dilutive effect of outstanding options is reflected as additional
share dilution in the computation of earnings per share.
Alternatively, Carver could have accounted for under the Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS No. 123), under which compensation cost for stock option
awards would be calculated and recognized over the service period (generally
equal to the vesting period). Had Carver applied SFAS No. 123 for its Plan, net
income and earnings per common share would have been to the pro forma amounts
indicated below:
F-33
Year Ended March 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(Dollars in thousands, except per share data)
Net loss available to common stockholders:
As reported ............................. $ 585 $ 1,180 $ 4,453
Pro forma ............................... $ 759 1,268 4,453
Basic loss per share:
As reported ............................. $ 0.26 0.53 $ 2.02
Pro forma ............................... $ 0.34 0.57 $ 2.02
Weighted average number of shares outstanding .. 2,256,441 2,238,846 2,206,133
The fair value of the option grants was estimated on the date of the grant
using the Black-Scholes option pricing model applying the following weighted
average assumptions: risk-free interest rate of 5.50%, volatility of 30%,
expected dividend yield of 0.60%, and an expected life of five (5) years.
NOTE 25. SUBSEQUENT EVENTS (UNAUDITED)
On June 15, 2001, the Holding Company completed the sale of the Bank's
branch in East New York (the "Branch"), to City National Bank of New Jersey
("CNBNJ"). CNBNJ assumed approximately $16.6 million of deposit liabilities and
acquired the related Branch assets consisting of cash, land and building, other
fixed assets and loans secured by deposits.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
statement also requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and those
instruments at fair value. This statement, as amended, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of
this statement is not anticipated to have a material impact on the financial
position or results of operations. As permitted by SFAS No. 133, on April 1,
2001, Carver transferred investment securities and mortgage-backed securities
with a book value of approximately $45.7 million from the classification of
held-to-maturity to available for sale.
F-34
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation of Carver Bancorp, Inc.(1)
3.2 Bylaws of Carver Bancorp, Inc.(1)
4.1 Stock certificate of Carver Bancorp, Inc.(1)
4.2 Federal Stock Charter of Carver Federal Savings Bank(1)
4.3 Bylaws of Carver Federal Savings Bank(1)
4.4 Amendments to Bylaws of Carver Federal Savings Bank(3)
4.5 Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock (5)
4.6 Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock (5)
10.1 Carver Bancorp, Inc. 1995 Stock Option Plan, effective as of
September 12, 1995(1)
10.2 Carver Federal Savings Bank Retirement Income Plan, as
amended and restated effective as of January 1, 1989(1)
10.3 Carver Federal Savings Bank 401(k) Savings Plan in RSI
Retirement Trust, as amended and restated effective as of
May 1, 1993(1)
10.4 Carver Bancorp, Inc. Employee Stock Ownership Plan,
effective as of January 1, 1993(1)
10.5 Carver Federal Savings Bank Deferred Compensation Plan,
effective as of August 10, 1993(1)
10.6 Carver Federal Savings Bank Retirement Plan for Nonemployee
Directors, effective as of October 24, 1994(1)
10.7 Carver Bancorp, Inc. Management Recognition Plan, effective
as of September 12, 1995(1)
10.8 Carver Bancorp, Inc. Incentive Compensative Plan, effective
as of September 12, 1995(1)
10.9 Employment Agreement by and between Carver Federal Savings
Bank and Thomas L. Clark, entered into as of April 1,
1997(2)
10.10 Employment Agreement by and between Carver Bancorp, Inc. and
Thomas L. Clark, entered into as of April 1, 1997(2)
10.11 Employment Agreement by and between Carver Federal Savings
Bank and Deborah C. Wright, entered into as of June 1,
1999(4)
10.12 Employment Agreement by and between Carver Bancorp, Inc. and
Deborah C. Wright, entered into as of June 1, 1999(4)
10.13 Securities Purchase Agreement by and among Carver Bancorp,
Inc., Morgan Stanley & Co. Incorporated and Provender
Opportunities Fund L.P.(6)
E-1
10.14 Registration Rights Agreement by and among Carver Bancorp,
Inc., Morgan Stanley & Co. Incorporated and Provender
Opportunities Fund L.P.(6)
10.15 Settlement Agreement and Mutual Release by and among BBC
Capital Market, Inc., The Boston Bank of Commerce, Kevin
Cohee and Teri Williams; Carver Bancorp, Inc., Deborah C.
Wright, David N. Dinkins, Linda H. Dunham, Robert J. Franz,
Pazel G. Jackson, Jr., Herman Johnson and David R. Jones;
Morgan Stanley & Co., Incorporated; and Provender
Opportunities Fund, L.P. and Frederick O. Terrell.(6)
10.16 Amendment to the Carver Bancorp. Inc. 1995 Stock Option
Plan.(7)
10.17 Amended and Restated Employment Agreement by and between
Carver Federal Savings Bank and Deborah C. Wright, entered
into as of June 1, 1999.
10.18 Amended and Restated Employment Agreement by and between
Carver Bancorp, Inc. and Deborah C. Wright, entered into as
of June 1, 1999.
10.19 Form of Letter Employment Agreement between Executive
Officers and Carver Bancorp, Inc.
21.1 Subsidiaries of the Registrant(6)
23.1 Consent of Mitchell & Titus LLP
23.2 Consent of KPMG LLP
- ----------
(1) Incorporated herein by reference to Registration Statement No. 333-0559
on Form S-4 of Carver Bancorp. Inc., filed with the Securities and Exchange
Commission during July 1997, as amended.
(2) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
(3) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1998.
(4) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1999.
(5) Incorporated herein by reference to the Exhibits to the Registrant's
Current Report on Form 8-K, dated January 14, 2000.
(6) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 2000.
(7) Incorporated herein by reference to the Registrant's Proxy Statement,
dated January 25, 2001.
E-2