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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, 2002
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 Identification No.)
incorporation or organization)
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, 2002, there were 2,316,358 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 $12.25 per
share of the registrant's common stock on May 31, 2002) was approximately $28.4
million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the annual meeting of
stockholders for the fiscal year ended March 31, 2002 (the "Proxy Statement")
are incorporated by reference into Part III.
CARVER BANCORP, INC.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1. Business..................................................... 1
Item 2. Properties................................................... 28
Item 3. Legal Proceedings............................................ 28
Item 4. Submission of Matters to a Vote of Security Holders.......... 30
Part II
Item 5. Market for Carver Bancorp, Inc. Common
Equity and Related Stockholder Matters..................... 31
Item 6. Selected Financial Data...................................... 32
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk... 43
Item 8. Financial Statements and Supplementary Data.................. 44
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 44
Part III
Item 10. Directors and Executive Officers of Carver Bancorp, Inc...... 44
Item 11. Executive Compensation....................................... 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 44
Item 13. Certain Relationships and Related Transactions............... 44
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................... 44
SIGNATURES ............................................................ 45
CONSOLIDATED FINANCIAL STATEMENTS OF CARVER
BANCORP INC. AND SUBSIDIARIES............................ F-1
EXHIBIT INDEX.......................................................... E-1
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, including expanding its
product line, achieving greater operating efficiencies and successfully opening
its new branch, 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, the ability of the Company to realize cost efficiencies and the
economic effects of the September 11, 2001 terrorist attacks. The Company
assumes no obligation to update the forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements.
PART I
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 a 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. 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
subsidiary, the Bank.
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 (the "FHLB") of New York. 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 at a price of $10
per share.
Carver Federal was founded as an African-American operated institution to
provide residents of under-served communities with the ability to invest their
savings and obtain credit. Carver Federal's principal business consists of
attracting deposit accounts through its branch offices and investing those funds
in mortgage loans and other investments permitted to federal savings banks.
Based on asset size as of March 31, 2002, Carver Federal is the largest
African-American operated financial institution in the United States.
Recent Terrorist Attack on the World Trade Center
On September 11, 2001, a terrorist attack destroyed the World Trade Center
towers and several other buildings in the New York City financial district.
While the Bank does not have significant real estate loans in the New York City
financial district, the overall effects of the terrorist attack and the
resultant disruption of business may adversely impact our business. This adverse
impact may be realized in the form of problem loans or deposit outflows
resulting from reductions in customer income levels. At this time we cannot
estimate the impact, if any, that this event will have on Carver's results of
operations and business.
1
LENDING ACTIVITIES
General. Carver Federal's principal lending activity is the origination of
mortgage loans for the purpose of purchasing or refinancing one- to four-family
residential, multifamily residential, and commercial properties. Carver Federal
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 Federal
originates home equity loans and consumer loans secured by deposits.
Carver Federal 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, 2002 ("fiscal 2002"), which
accounted for 41.2% of loan additions. Loan purchases are used to complement
retail originations. Gross loans receivable increased by $9.1 million, or 3.2%,
to $297.5 million at March 31, 2002, compared to $288.4 million at March 31,
2001. Carver Federal's net loan portfolio as a percentage of total assets
decreased to 64.3% at March 31, 2002, compared to 66.8% at March 31, 2001.
Loan Portfolio Composition. One- to four-family mortgage loans decreased
by $35.0 million, or 22.2%, to $122.8 million at March 31, 2002, compared to
$157.8 million at March 31, 2001. During fiscal 2002, multifamily real estate
loans increased by $35.0 million, or 41.8%, to $118.6 million at March 31, 2002,
compared to $83.6 million at March 31, 2001. One- to four-family mortgage loans
totaled $122.8 million, or 41.3% of Carver Federal's total gross loan portfolio,
multifamily loans totaled $118.6 million, or 39.9% of total gross loans,
non-residential real estate loans (including church loans) totaled $40.1
million, or 13.5% of total gross loans, and construction loans totaled $13.7
million, or 4.6% of total gross loans. Consumer (credit card loans, personal
loans, automobile loans, home equity loans and home improvement loans) and
business loans totaled $2.3 million, or 0.8% of total gross loans.
Non-residential real estate loans (including church loans) increased by $4.0
million, or 11.0%, to $40.1 million at March 31, 2002, compared to $36.1 million
at March 31, 2001. Construction loans increased by $6.6 million, or 92.6%, to
$13.7 million at March 31, 2002, compared to $7.1 million at March 31, 2001.
Consumer and business loans decreased by $1.5 million, or 38.4%, to $2.3 million
at March 31, 2002, compared to $3.8 million at March 31, 2001. The decrease in
consumer and business loans reflect the Bank'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.
Premiums on loans are paid when the effective yield on the loans being
purchased is greater than the current market rate for comparable loans. These
premiums are amortized as the loan is repaid. It is possible that in a declining
interest rate environment the rate or speed at which loans repay may increase
which may have the effect of accelerating the amortization of the premium and
therefore reduce the effective yield of the loan. Premium on loans increased by
$201,000, or 28.5%, to $906,000 at March 31, 2002, compared to $705,000 at March
31, 2001 primarily reflecting increased premiums paid on loans purchased, which
was offset, in part, by the repayment of loans purchased at a premium.
Loans in process increased by $2.6 million, or 207.5%, to $3.9 million at
March 31, 2002, compared to $1.3 million at March 31, 2001. Allowance for loan
losses increased by $577,000, or 16.2%, to $4.1 million at March 31, 2002,
compared to $3.6 million at March 31, 2001, 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 Federal's loan portfolio by type of loan at the dates indicated.
2
At March 31,
------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
(Dollars in thousands)
Real estate loans:
One- to four-family $ 122,814 41.28% $ 157,767 54.71% $ 152,458 55.54% $ 181,320 65.39% $ 188,761 66.85%
Multifamily 118,589 39.86 83,620 29.00 86,184 31.40 52,366 18.89 49,289 17.46
Non-residential 40,101 13.48 36,113 12.52 22,721 8.28 23,093 8.33 12,789 4.53
Construction 13,678 4.60 7,101 2.46 6,393 2.33 11,047 3.98 15,993 5.66
Consumer and business (1) 2,328 0.78 3,781 1.31 6,725 2.45 9,450 3.41 15,536 5.50
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total gross loans 297,510 100.00% 288,382 100.00% 274,481 100.00% 277,276 100.00% 282,368 100.00%
====== ====== ====== ====== ======
Add:
Premium on loans 906 705 582 1,014 1,555
Less:
Loans in process (2) (3,936) (1,280) (1,062) (2,636) (4,752)
Deferred fees and loan
discounts (1,238) (819) (918) (1,110) (1,080)
Allowance for loan losses (4,128) (3,551) (2,935) (4,020) (3,137)
--------- --------- --------- --------- ---------
Net loan portfolio $ 289,114 $ 283,437 $ 270,148 $ 270,524 $ 274,954
========= ========= ========= ========= =========
(1) Includes automobile loans, personal loans, credit card loans, home equity,
home improvement loans and business loans.
(2) Represents undisbursed portion of of outstanding construction loans.
One- to Four-Family Residential Lending. Traditionally, Carver Federal's
lending activity has been the origination of loans secured by first mortgages on
existing one- to four-family residences in Carver Federal's market area. During
fiscal 2002, the Bank continued its practice of purchasing portfolios of first
mortgage loans on existing one- to four-family residences to augment
originations.
Carver Federal originates and purchases one- to four-family residential
mortgage loans in amounts that range between $35,000 and $750,000. Approximately
72% of Carver Federal's one-to four-family residential mortgage loans at March
31, 2002 had adjustable rates and approximately 28% had fixed rates.
Carver Federal'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 that 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, consisting 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, the LTV ratio may go to 97%.
Carver Federal'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. From time to time the Bank has sold such loans to
Fannie Mae and to SONYMA. 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 Federal
uses several sub-servicing firms to service mortgage loans, whether held in
portfolio or sold with the servicing retained. At March 31, 2002, the Bank,
through its sub-servicers, was servicing $2.9 million of loans for Fannie Mae
and FHLMC.
Carver Federal 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.
3
The retention of adjustable-rate loans in Carver Federal'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
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.
Multifamily Real Estate Lending. At March 31, 2002, multi-family loans
totaled $118.6 million, or 39.9% of Carver Federal's gross loan portfolio. The
largest of these loans outstanding was a $1.8 million loan secured by a 72 unit,
multifamily apartment building located in Brooklyn, New York. This loan was
performing at March 31, 2002. The Bank intends to continue to emphasize its
multifamily mortgage loan program, which has enabled the Bank to expand its
presence in the multifamily lending market in the New York City area. Carver
Federal offers competitive rates with flexible terms which make the product
attractive to borrowers. Multifamily property lending entails additional risks
compared to 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
multifamily residential units.
Carver Federal's multifamily product guidelines generally require that the
maximum LTV not exceed 75% while "cash out" refinances are limited to 65% LTV
based on 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, with certain restrictions the Bank limits its maximum amount for an
individual loan to $2.0 million pursuant to an Office of Thrift Supervision
("OTS") limitation. See "Regulation and Supervision--Federal Banking
Regulation--Loans to One Borrower Limitations". The regulatory maximum for loans
to one borrower is $5.5 million without this limitation. Carver Federal
originates multi-family mortgage loans, the predominance of which are adjustable
rate 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 Federal 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.
Non-residential Real Estate Lending. At March 31, 2002, non-residential
real estate mortgage loans (including loans to churches) totaled $40.1 million,
or 13.5% of the gross loan portfolio. Carver Federal originates non-residential
real estate first mortgage loans in its market area. At March 31, 2002, the
largest non-residential loan outstanding was a $3.9 million loan secured by a
retail/office building located in New York, New York. This loan was performing
at March 31, 2002. Carver Federal's non-residential real estate lending activity
consists predominantly of loans for the purpose of purchasing or refinancing
office, retail and church buildings in its market area. Non-residential 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 Federal's maximum LTV on non-residential real
estate mortgage loans is 75%, and "cash out" refinances are limited to 65% LTV
based on the appraised value. The Bank generally requires a DCR of at least 1.3.
Assignment of rents of all tenants leases in the subject property is a Bank
requirement.
To help ensure continued collateral protection and asset quality for the
term of the non-residential real estate loans, Carver Federal employs (with the
assistance of an independent consulting firm) a risk-rating system. Under the
risk-rating system, all non-residential real estate loans with balances over
$250,000 are risk rated. Independent third party non-residential loan portfolio
reviews are performed at least annually resulting in written management summary
reports.
4
Historically, Carver Federal has been a New York City area leader in the
origination of loans to churches. At March 31, 2002, loans to churches totaled
$8.0 million, or 2.7% of the Bank's gross loan portfolio. These loans generally
have five-, seven- 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, 2002, the largest permanent church
loan was a $1.6 million loan secured by a building located in New York, New
York. This loan was performing at March 31, 2002. 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 Federal 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 Federal's history. Management believes that Carver
Federal 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 affordable housing programs.
Carver Federal 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 Federal 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 that 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, 2002, the Bank had $13.7 million (including $3.9 million of
committed but undisbursed funds) in construction loans outstanding, comprising
4.6% of the Bank's total gross loan portfolio. At March 31, 2002, the largest
construction loan was on a retail building for $2.0 million located in New York,
New York. At March 31, 2002, this loan was performing.
Consumer and Business Loans. At March 31, 2002, the Bank had approximately
$2.3 million in consumer and business loans, or 0.8% of the Bank's gross loan
portfolio. The secured loans in this portfolio were either secured by deposits
at the Bank, homes or automobiles. At March 31, 2002, $500,000, or 21.7% of all
consumer and business loans, were secured and $1.8 million, or 78.3%, were
unsecured.
5
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 Federal and a borrower may be able to assert claims
and defenses against Carver Federal which it has against the seller of the
underlying 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. In underwriting consumer loans, Carver Federal
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. See
"Asset Quality--Non-performing Assets."
At March 31, 2002, the Bank had $275,000 in unsecured business loans.
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 that are secured in full by passbook and/or
certificate of deposit accounts.
Loan Processing. Carver Federal'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. All applications are forwarded to
the Lending Department located in the main office.
Carver Federal has established underwriting standards for multi-family and
non-residential real estate. A non-residential real estate loan application is
completed for all multi-family and non-residential properties which the Bank
finances. Prior to loan approval, the property is inspected by a non-residential
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 the financial capacity of the
applicant(s).
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 an independent fee appraiser approved by the Bank.
It is Carver Federal'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 must be obtained. 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. Except for loans in excess of $1.5 million, mortgage loan
approval authority has been delegated by the Bank's Board of Directors ("Board")
to the Bank's Management Loan Committee, which consists of certain members of
executive management, and to the Bank's Asset Liability and Interest Rate Risk
Committee. All one- to four-family mortgage loans that conform to Fannie Mae
standards and limits may be approved by the Residential Mortgage Loan
Underwriter. Loans above $1.5 million must be approved by the full Board.
Loans to One Borrower. Under the loans-to-one-borrower limits of the OTS,
with certain limited exceptions, loans and extensions of credit to a single or
related group of borrowers outstanding at one time generally may not exceed 15%
of the unimpaired capital and surplus of a savings bank. See "Regulation and
Supervision-Federal Banking Regulation-Loans to One Borrower Limitations." At
March 31, 2002, the maximum loan under this test would be $5.5 million. The Bank
currently limits its maximum loans to one borrower to $2.0 million without prior
OTS approval pursuant to OTS restriction. At March 31, 2002 there were four loan
relationships that exceeded $2.0 million and none that exceed the $5.5 million
limit. All of the loans are performing.
Loan Sales. Originations of one- to four-family real estate loans are
generally made on properties located within the New York City metropolitan area,
although Carver Federal does occasionally fund loans secured by property in
other areas. All such loans, however, satisfy the Bank'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
6
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 Federal purchased a total of $45.2 million of
mortgage loans consisting of performing multi-family and cooperative
adjustable-rate mortgage loans to supplement its origination of one- to
four-family first mortgage loans during fiscal 2002. This represented 41.2% of
Carver Federal's net addition to its loan production at March 31, 2002. The Bank
purchases loans in order to increase interest income and to manage its interest
rate risk. The Bank 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 non-residential real estate mortgage loans as well
as to increase its participation in multi-family and non-residential real estate
mortgage loans with New York area lenders. Loans purchased in fiscal 2002
increased $14.3 million, or 46.3%, from loan purchases of $30.9 million during
the fiscal year ended March 31, 2001 ("fiscal 2001").
The following table sets forth certain information with respect to Carver
Federal's loan originations, purchases and sales during the periods indicated.
Year Ended March 31,
----------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- --------------------
Amount Percent Amount Percent Amount Percent
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Loans originated:
One- to four-family $ 4,144 3.78% $ 2,274 3.70% $ 2,082 3.07%
Multifamily 27,225 24.80 15,747 25.70 319 0.47
Non-residential 25,583 23.31 12,182 19.88 988 1.46
Construction 8,910 8.12 -- 0.00 1,000 1.47
Consumer and business (1) 53 0.05 320 0.52 232 0.34
--------- --------- --------- --------- --------- ---------
Total loans originated 65,915 60.06 30,523 49.80 4,621 6.81
Loans purchased (2) 45,203 41.18 30,922 50.46 63,282 93.19
Loans sold (3) (1,361) (1.24) (160) (0.26) -- --
--------- --------- --------- --------- --------- ---------
Net additions to loan portfolio $ 109,757 100.00% $ 61,285 100.00% $ 67,903 100.00%
========= ========= ========= ========= ========= =========
(1) Comprised of auto, credit card, personal and home equity.
(2) Comprised primarily of one- to four-family and multi-family mortgage
loans.
(3) Comprise primarily of one- to four-family mortgage loans and student
loans.
Loan originations increased $35.4 million in fiscal 2002 to $65.9 million,
compared to $30.5 million in fiscal 2001 as a result of a continued 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, 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 that secure the purchased loans are located are
subject to economic and real estate market conditions that may significantly
differ from those experienced in Carver Federal'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. A Lending Department officer monitors the inspection and confirms the
review of each purchased loan. Carver Federal 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 Federal 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
7
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.
Carver Federal 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 Federal receives fees for
servicing loans for others, which in turn generally are sub-serviced for Carver
Federal 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, 2002 regarding the dollar amount of loans maturing in Carver Federal'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 Federal's
actual repayment experience to differ significantly from that shown below.
Due During the Year Ending March 31,
------------------------------------
Due three Due five Due ten Due after
to five to ten to twenty twenty
2003 2004 2005 years years years years Total
-------- -------- -------- --------- -------- --------- --------- --------
(In thousands)
Real estate loans:
One- to four-family $ 25 $ 11 $ 21 $ 214 $ 9,083 $ 11,075 $102,385 $122,814
Multi-family 653 -- 132 25,162 43,937 26,354 22,351 118,589
Non-residential 2,810 -- -- 8,506 18,067 6,404 4,314 40,101
Construction 13,678 -- -- -- -- -- -- 13,678
Consumer and business loans 219 -- -- 2,109 -- -- -- 2,328
-------- -------- -------- -------- -------- --------- -------- --------
Total $ 17,385 $ 11 $ 153 $ 35,991 $ 71,087 $ 43,833 $129,050 $297,510
======== ======== ======== ======== ======== ======== ======== ========
The following table sets forth amounts in each loan category at March 31,
2002 that are contractually due after March 31, 2003, and whether such loans
have fixed rates or adjustable interest rates. Scheduled contractual principal
repayments of loans do not necessarily reflect the actual lives 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 Federal 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.
8
Due After March 31, 2003
------------------------------------------
Fixed Adjustable Total
---------- ---------- ----------
(In thousands)
Real estate loans:
One- to four-family $ 34,357 $ 88,432 $ 122,789
Multifamily 86,906 31,030 117,936
Non-residential 25,956 11,335 37,291
Consumer and business 151 1,958 2,109
---------- ---------- ----------
Total $ 147,370 $ 132,755 $ 280,125
========== ========== ==========
ASSET QUALITY
General. One of the Bank's key operating objectives has been and continues
to be to maintain a high level of asset quality. Through a variety of
strategies, including, but not limited to, borrower workout arrangements and
marketing of foreclosed properties, the Bank has been proactive in addressing
problem and non-performing assets which, in turn, has helped to build the
strength of the Bank's financial condition. Such strategies, as well as the
Bank's concentration on one- to four-family and multifamily mortgage lending,
the maintenance of sound credit standards for new loan originations and a strong
real estate market, have resulted in the Bank maintaining a low level of
non-performing assets.
The underlying credit quality of the Bank's loan portfolio is dependent
primarily on each borrower's ability to continue to make required loan payments
and, in the event a borrower is unable to continue to do so, the value of the
collateral should be adequate to secure the loan. A borrower's ability to pay
typically is dependent primarily on employment and other sources of income
which, in turn, is impacted by general economic conditions, although other
factors, such as unanticipated expenditures or changes in the financial markets
may also impact the borrower's ability to pay. Collateral values, particularly
real estate values, are also impacted by a variety of factors, including general
economic conditions, demographics, maintenance and collection or foreclosure
delays.
Non-performing Assets. When a borrower fails to make a payment on a
mortgage loan, immediate steps are taken by Carver Federal'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 Federal
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 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 Federal'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.
9
The following table sets forth information with respect to Carver
Federal's non-performing assets at the dates indicated. Loans generally are
placed on non-accrual status when they become 90 days delinquent.
At March 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a non-accrual basis (1):
Real estate:
One- to four-family $ 756 $ 947 $ 966 $ 392 $1,134
Multifamily 253 978 870 1,051 258
Non-residential 1,754 565 -- -- --
Construction 23 23 122 560 3,089
Consumer and business 37 6 168 414 1,087
------ ------ ------ ------ ------
Total non-accrual loans 2,823 2,519 2,126 2,417 5,568
------ ------ ------ ------ ------
Accruing loans contractually past due 90 days or more:
Real estate:
One- to four-family -- -- -- 568 1,049
Multifamily -- -- -- 804 --
Construction -- -- -- 530 --
Consumer and business -- -- -- 183 226
------ ------ ------ ------ ------
Total accruing 90-day past due loans -- -- -- 2,085 1,275
------ ------ ------ ------ ------
Total of non-accrual and accruing 90-day past due loans 2,823 2,519 2,126 4,502 6,843
------ ------ ------ ------ ------
Other non-performing assets (2):
Real estate:
One- to four-family -- -- 127 185 82
Multi-family -- 27 27 -- --
Non-residential -- 449 768 -- --
Consumer and business -- -- 16 99 --
------ ------ ------ ------ ------
Total other non-performing assets -- 476 938 284 82
------ ------ ------ ------ ------
Total non-performing assets (3) $2,823 $2,995 $3,064 $4,786 $6,925
====== ====== ====== ====== ======
Non-performing loans to total loans 0.96% 0.88% 0.79% 1.66% 2.47%
Non-performing assets to total assets 0.63% 0.71% 0.73% 1.15% 1.58%
Troubled debt restructuring (4):
Real estate:
Multifamily and commercial $ -- $ -- $ -- $ -- $ 807
====== ====== ====== ====== ======
(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, 2002, gross interest
income of $288,000 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 Bank 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) Total non-performing assets consist of non-accrual loans, accruing loans
90 days or more past due and property acquired in settlement of loans.
(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, 2002, total non-performing assets decreased by $172,000, or
5.7%, to $2.8 million, compared to $3.0 million at March 31, 2001.
10
Loans accounted for on a non-accrual basis increased $304,000, or 12.1%,
to $2.8 million at March 31, 2002, compared to $2.5 million at March 31, 2001.
The increase primarily reflects an increase in non-performing non-residential
real estate loans partially offset by decreases in non-performing one- to
four-family and multifamily real estate loans.
There were no accruing loans contractually past due 90 days or more at
March 31, 2002 and March 31, 2001, 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.
There were no other non-performing assets at March 31, 2002, compared to
$476,000 at March 31, 2001. The decrease reflects the sale of real estate
acquired in settlement of loans.
Asset Classification and Allowances for Losses. Federal regulations and
the Bank's policies require the classification of 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 the current value 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 uncollectible,
even if a partial recovery could be expected in the future. The regulations also
provide for a "special mention" designation, described as assets that 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, 2002, Carver Federal had $2.8 million of loans classified as
substandard which represented 0.6% of the Bank's total assets and 7.7% of the
Bank's tangible regulatory capital at March 31, 2002. There were no loans
classified as doubtful or loss at March 31, 2002.
The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan losses 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
Federal has established its existing loss allowances in accordance with
generally accepted accounting principles, there can be no assurance that
regulators, in reviewing Carver Federal"s assets, will not require Carver
Federal to increase its loss allowance, thereby negatively affecting Carver
Federal's reported financial condition and results of operations.
Carver Federal'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. The Internal Asset Quality
Review Committee conducts 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 Federal'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.
11
Carver Federal's Internal Asset Quality Review Committee reviews its
assets on a quarterly basis to determine whether any assets require
classification or re-classification. The Bank has a centralized loan servicing
structure that relies upon outside servicers, each of which generates a monthly
report of delinquent loans. The Board has designated the Internal Asset Quality
Review Committee to perform quarterly reviews of the Bank's asset quality, and
their report is submitted to the Board for review. The Asset Liability and
Interest Rate Risk Committee, a committee of the Board of Directors, establishes
policy relating to internal classification of loans and also provides input to
the Internal Asset Quality Review Committee in its review of classified assets.
In originating loans, Carver Federal 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 Federal as a result of its
purchased loans in such states. See "Lending Activities-Loan Purchases." Carver
Federal 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. Any amount
of cost in excess of fair value is charged-off against the allowance for loan
losses. Carver Federal 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. At
March 31, 2002, the Bank had no real estate acquired in settlement of loans. See
Note 1 of Notes to Consolidated Financial Statements.
12
The following table sets forth an analysis of Carver Federal's allowance
for loan losses for the periods indicated.
Year Ended March 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at beginning of period $3,551 $2,935 $4,020 $3,138 $2,246
------ ------ ------ ------ ------
Loans charged off:
Real estate:
One- to four-family -- 252 138 -- --
Non-residential -- 194 171 -- --
Consumer and business 500 931 2,260 3,229 367
------ ------ ------ ------ ------
Total charge-offs 500 1,377 2,569 3,229 367
------ ------ ------ ------ ------
Recoveries:
Construction -- -- -- 45 --
One- to four-family 3 -- 31 -- --
Multifamily -- -- 40 -- --
Non-residential -- -- 22 -- --
Consumer and business 174 200 292 37 --
------ ------ ------ ------ ------
Total recoveries 177 200 385 82 --
------ ------ ------ ------ ------
Net loans charged off 323 1,177 2,184 3,147 367
Provision for losses 900 1,793 1,099 4,029 1,259
------ ------ ------ ------ ------
Balance at end of period $4,128 $3,551 $2,935 $4,020 $3,138
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans
outstanding 0.11% 0.42% 0.84% 1.17% 0.15%
Ratio of allowance to total loans 1.41% 1.24% 1.07% 1.48% 1.11%
Ratio of allowance to non-performing assets (1) 146.23% 118.56% 95.79% 85.60% 45.30%
(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,
------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------- ------------------- ------------------- ------------------- -------------------
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 to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------- ----------- ------ ----------- ------ -----------
(Dollars in thousands)
Loans:
Real estate
One- to four-family $ 429 41.28% $1,198 54.71% $1,050 55.54% $ 957 65.39% $1,691 66.85%
Multifamily 1,468 39.86 748 29.00 764 31.40 902 18.89 400 17.46
Non-residential 729 13.48 353 12.52 202 8.28 251 8.33 111 4.53
Construction 76 4.60 290 2.46 272 2.33 424 3.98 340 5.66
Consumer and business 377 0.78 962 1.31 647 2.45 1,486 3.41 596 5.50
Unallocated 1,049 -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total allowance for loan
losses $4,128 100.00% $3,551 100.00% $2,935 100.00% $4,020 100.00% $3,138 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
13
Investment Activities
General. The Bank utilizes mortgage-backed and other investment securities
in virtually all aspects of its asset/liability management strategy. In making
investment decisions, the Board considers, among other things, the Bank's yield
and interest rate objectives, its interest rate and credit risk position and its
liquidity and cash flow.
The Bank must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. The Bank's liquidity policy requires that
cash flow projections are regularly reviewed and updated to assure that adequate
liquidity is maintained.
Generally, the investment policy of the Bank is to invest funds among
categories of investments and maturities based upon the Bank's asset/liability
management policies, investment quality, loan and deposit volume, liquidity
needs and performance objectives. SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, requires that securities be
classified into three categories: trading, held-to-maturity, and
available-for-sale. Securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and are reported at fair value with unrealized gains and losses included in
earnings. Debt securities for which the Bank has the positive intent and ability
to hold to maturity are classified as held-to-maturity and reported at amortized
cost. All other securities not classified as trading or held-to-maturity are
classified as available-for-sale and reported at fair value with unrealized
gains and losses included, on an after-tax basis, in a separate component of
stockholders' equity. At March 31, 2002, the Bank had no securities classified
as trading. At March 31, 2002, $89.8 million, or 85.1% of the Bank's
mortgage-backed and other investment securities, was classified as
available-for-sale. The remaining $15.6 million, or 14.9%, was classified as
held-to-maturity.
Mortgage-Backed Securities. The Bank has invested in mortgage-backed
securities in order to supplement loan production and achieve its
asset/liability management goals. At March 31, 2002, mortgage-backed securities
constituted 14.7% of total assets, as compared to 10.1% of total assets at March
31, 2001. Carver Federal 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
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 Federal 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 Federal's CMOs are primarily
adjustable-rate CMOs issued by the Resolution Trust Corporation ("RTC"). Carver
Federal 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 Federal 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--Federal Banking
Regulation--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, 2002 constituted $52.3 million, or
79.1% of the mortgage-backed securities portfolio. Mortgage-backed securities,
however, expose Carver Federal to certain unique risks. In a declining rate
environment, accelerated prepayments of loans underlying these securities expose
Carver Federal 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.
14
The following table sets forth the carrying value of Carver Federal's
mortgage-backed securities at the dates indicated. At the beginning of fiscal
2002 the Bank transferred $45.7 million of mortgage-backed securities from
held-to-maturity to available-for-sale.
At March 31,
--------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
Available-for-Sale:
GNMA $ 10,584 $ -- $ --
Fannie Mae 11,451 -- --
FHLMC 28,249 -- --
CMO 136 -- --
-------- -------- --------
Total available-for-sale 50,420 -- --
Held-to-Maturity:
GNMA 3,448 5,774 6,516
Fannie Mae 5,607 21,633 26,222
FHLMC 6,149 14,672 18,780
SBA 439 594 760
CMO -- 193 1,951
-------- -------- --------
Total held to maturity 15,643 42,866 54,229
-------- -------- --------
Total mortgage-backed securities $ 66,063 $ 42,866 $ 54,229
======== ======== ========
The following table sets forth the scheduled maturities, carrying values
and fair values for Carver Federal's mortgage-backed securities at March 31,
2002. 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.
Carrying Fair
Value Value
--------- ---------
(In thousands)
Available-for-sale:
One through five years $ 237 $ 247
Five through ten years 2,568 2,670
After ten years 47,137 47,503
--------- ---------
$ 49,942 $ 50,420
========= =========
Held-to-maturity:
One through five years $ -- $ --
Five through ten years 513 526
After ten years 15,130 15,190
--------- ---------
$ 15,643 $ 15,716
========= =========
Other Investment Securities. In addition to mortgage-backed securities,
the Bank also invests in high-quality assets (primarily government and agency
obligations) with short and intermediate terms (typically seven years or less)
to maturity. Carver Federal 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.
15
The following table sets forth the carrying value of Carver Federal's
other securities available-for-sale and held-to- maturity at the date indicated.
At March 31,
-----------------------------
2002 2001 2000
------- ------- -------
(In thousands)
U.S. Government and Agency securities:
Available-for-sale $39,401 $19,926 $24,952
Held-to-maturity -- 24,996 24,996
------- ------- -------
Total other securities $39,401 $44,922 $49,948
======= ======= =======
The following table sets forth the scheduled maturities, carrying values
and fair values for Carver Federal's investments at March 31, 2002.
Carrying Fair
Value Value
---------- ----------
(In thousands)
Available-for-sale:
One year or less $ 15,018 $ 15,018
One through five years 24,645 24,383
---------- ----------
$ 39,663 $ 39,401
========== ==========
Other Earning Assets. 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-- Federal Banking Regulation--Liquidity."
The following table sets forth the carrying value of Carver Federal's
investment in FHLB stock and liquid assets at the dates indicated.
At March 31,
------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
FHLB stock $ 3,763 $ 5,755 $ 5,755
Federal funds sold 21,100 23,700 11,300
Deposit Activity and Other Sources of Funds
General. Deposits are the primary source of Carver Federal's funds for
lending and other investment purposes. In addition to deposits, Carver Federal
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. Borrowed money
may be used to supplement the Bank's available funds, and from time to time the
Bank has borrowed funds from the FHLB and through repurchase agreements.
Deposits. Carver Federal 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 Federal also offers Individual Retirement Accounts. Carver
Federal'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 Federal also holds deposits from various governmental
agencies or authorities and corporations. Although the Board has authorized
accepting brokered deposits, it has been the Bank's practice not to obtain these
types of deposits, however, it may be considered as a source of funds if deemed
necessary.
16
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 Bank's funds
acquisition and liquidity requirements, the rates paid by the Bank's
competitors, the Bank's growth goals and applicable regulatory restrictions and
requirements.
During fiscal 2002, the Bank sold its branch located in East New York. As
a result of this sale the Bank transferred approximately $16.4 million of
deposits to the purchaser, City National Bank of New Jersey. During fiscal 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.
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by Carver Federal between the dates
indicated. Included in the net increase (decrease) in deposits before interest
credited is the amount of deposits sold during the year ended March 31, 2002 and
2001 of $16.4 and $22.5 million, respectively.
Year Ended March 31,
--------- --------- ---------
2002 2001 2000
--------- --------- ---------
(Dollars in thousands)
Deposits at beginning of period $ 279,424 $ 281,941 $ 276,999
Net increase (decrease) before interest credited 37,403 (10,973) (3,670)
Interest credited 8,127 8,456 8,612
--------- --------- ---------
Deposits at end of period $ 324,954 $ 279,424 $ 281,941
========= ========= =========
Net increase (decrease) during the year:
Amount $ 45,530 $ (2,517) $ 4,942
========= ========= =========
Percent 16.3% -0.9% 1.8%
========= ========= =========
The following table sets forth the distribution of the Bank's deposit
accounts and the related weighted average interest rates at the dates indicated.
At March 31,
---------------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------- ------------------------------- -------------------------------
Percent of Weighted Percent Weighted Percent Weighted
Total Average of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
-------- ---------- -------- -------- --------- -------- -------- -------- --------
(Dollars in thousands)
Non-interest-bearing demand $ 13,463 4.1% --% $ 11,409 4.1% --% $ 12,337 4.4% --%
NOW accounts 18,095 5.6 1.24 14,757 5.3 1.71 18,873 6.7 1.66
Savings and club 126,779 39.0 1.71 132,645 47.5 2.32 145,277 51.5 2.51
Money Market savings account 15,232 4.7 1.78 15,718 5.6 2.62 19,418 6.9 3.25
Certificates of deposit 151,385 46.6 2.73 104,895 37.5 4.55 86,036 30.5 4.70
-------- ------ -------- -------- -------- -------- -------- -------- --------
Total $324,954 100.0% 2.18% $279,424 100.0% 3.04% $281,941 100.0% 3.06%
======== ====== ======== ======== ======== ========
17
The following table sets forth the amount and maturities of time
deposits in specified weighted average interest rate categories at March 31,
2002.
At March 31, 2002 Total at
Period to Maturity March 31,
--------------------------------------------------------------------------- -----------------------
Less Than After Percent
One Year 1-2 Years 2-3 Years 3 Years Total of Total 2001 2000
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
1%-1.99% $ 22,138 $ -- $ -- $ -- $ 22,138 14.6% $ -- $ --
2%-3.99% 58,390 26,638 10,495 -- 95,523 63.1 752 5,129
4%-5.99% -- -- -- 33,724 33,724 22.3 104,143 80,907
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 80,528 $ 26,638 $ 10,495 $ 33,724 $ 151,385 100.0% $ 104,895 $ 86,036
========== ========== ========== ========== ========== ========== ========== ==========
Carver Federal's certificates of deposit of $100,000 or more were $90.6
million as of March 31, 2002.
Borrowed Money. Savings deposits historically have been the primary source
of funds for Carver Federal's lending, investment and general operating
activities. Carver Federal 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 Federal 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
maturities. Advances from the FHLB are secured by Carver Federal's stock in the
FHLB and a blanket pledge of Carver Federal's mortgage loan and mortgage-backed
securities portfolios.
One of the elements of Carver Federal'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 borrowed money with the
repricing cycle of the mortgage loans on the balance sheet. At March 31, 2002,
Carver Federal had outstanding $75.3 million in FHLB advances and no Repos.
The following table sets forth certain information regarding Carver
Federal's borrowed money at the dates and for the periods indicated:
At or for the Year Ended
March 31,
------------------------
2002 2001
-------- --------
(Dollars in thousands)
Amounts outstanding at the end of period:
FHLB advances $ 75,262 $100,299
Repos -- 4,930
Weighted average rate paid at period end:
FHLB advances 4.18% 5.84%
Repos --% 6.70%
Maximum amount of borrowing outstanding at any month end:
FHLB advances $100,094 $102,314
Repos 14,930 31,337
Approximate average amounts outstanding for period:
FHLB advances $ 76,141 $ 80,591
Repos 2,888 17,165
Approximate weighted average rate paid during period:
FHLB advances 5.50% 5.72%
Repos 5.91% 5.99%
18
Subsidiary Activities
The Holding Company is the parent of two wholly owned subsidiaries, Carver
Federal and Alhambra.
On March 8, 1995, the Bank formed CFSB Realty Corp. as a wholly owned
subsidiary to hold real estate acquired through foreclosure pending eventual
disposition. At March 31, 2002, this subsidiary had $221,000 in total capital
and net operating income of $63,000. At March 31, 2002 there was no real estate
owned pending disposition. The Bank also owns CFSB Credit Corp., currently an
inactive subsidiary originally formed to undertake the Bank's credit card
issuance.
Market Area and Competition
The Bank'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, Manhattan, Queens and Richmond counties, together comprising New
York City, and lower Westchester County, New York. See "Item 2 - Properties."
Although Carver Federal's branches are located in areas that have been
historically underserved by other financial institutions, Carver Federal 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. The Bank's competition for loans comes
principally from mortgage banking companies, commercial banks, savings banks and
savings and loan associations. The Bank's most direct competition for deposits
comes from commercial banks, savings banks, savings and loan associations and
credit unions. Competition for deposits also comes from money market mutual
funds and other corporate and government securities funds as well as from other
financial intermediaries such as brokerage firms and insurance companies. Many
of Carver Federal's competitors have substantially greater resources than Carver
Federal and offer a wider array of financial services and products than Carver
Federal. At times, these larger financial institutions 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 Federal 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.
Employees
As of March 31, 2002, Carver had 100.5 full-time equivalent employees,
none of whom was represented by a collective bargaining agreement. The Bank
considers its employees relations to be satisfactory.
REGULATION AND SUPERVISION
General
The Bank is subject to extensive regulation, examination, and supervision
by its primary regulator, the OTS. The Bank's deposit accounts are insured up to
applicable limits by the FDIC, and it is a member of the FHLB. The Bank must
file reports with the OTS 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
Holding Company, as a savings association holding company, is subject to
regulation, examination, and supervision by the OTS and 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. Any change in such laws and regulations whether by the
OTS, the FDIC or through legislation could have a material adverse impact on the
Bank and the Holding Company and their operations and stockholders.
On November 12, 1999, landmark financial services legislation, titled the
Gramm-Leach-Bliley Act ("Gramm-Leach") became law. Gramm-Leach repeals
historical restrictions, and eliminates many federal and state law barriers to,
affiliations among banks and securities firms, insurance companies and other
financial service providers.
19
Federal Banking Regulation
Activity Powers. The Bank derives its lending and investment powers from
the Home Owner's Loan Act, as amended ("HOLA"), and the regulations of the OTS.
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. The Bank's authority to invest in certain
types of loans or other investments is limited by federal law.
Loans to One Borrower Limitations. The Bank is generally subject to the
same limits on loans to one borrower as a national bank. With specified
exceptions, the Bank's total loans or extension of credit to a single borrower
or group of related borrowers may not exceed 15% of the Bank's unimpaired
capital and surplus, which does not include accumulated other comprehensive
income. The Bank may lend additional amounts up to 10% of its unimpaired capital
and surplus if the loans or extensions of credit are fully secured by readily
marketable collateral. At March 31, 2002, the Bank's limit on loans to one
borrower based on its unimpaired capital and surplus was $5.5 million. Following
a field visit that concluded on December 2, 1998, because of their review of the
potential negative impact of possible write-offs that might have impacted
capital levels at that time, the Bank was directed by the OTS to abstain from
originating new loans that individually or in the aggregate exceed $2.0 million
to one borrower or group of related borrowers without prior approval from the
OTS. The Bank plans to seek revision of this limitation. The Bank currently
complies with applicable loans to one borrower limitations.
QTL Test. Under federal law, the Bank must comply with a qualified thrift
lender ("QTL") test. Under the QTL test, the Bank 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) goodwill and other intangible
assets and (c) the value of property used to conduct the Bank'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, 2002, the Bank maintained approximately 76.0% 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.
If the Bank fails the QTL test, it must either operate under certain
restrictions on its activities or convert to a bank charter.
Capital Requirements. OTS regulations require the Bank to meet three
minimum capital standards:
(1) a tangible capital ratio requirement of 1.5% of total assets, as
adjusted under OTS regulations;
(2) a leverage ratio requirement of 8% of core capital to such adjusted
total assets; and
(3) a risk-based capital ratio requirement of 8% of core and
supplementary capital to total risk-weighted assets.
The minimum leverage capital ratio for any other depository institution
that does not have a composite rating of 1 will be 4%, unless a higher leverage
capital ratio is warranted by the particular circumstances or risk profile of
the depository institution. In determining compliance with the risk based
capital requirement, the Bank must compute its risk-weighted assets by
multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the U.S. government or
its agencies to 100% for consumer and commercial loans, as assigned by the OTS
capital regulation based on the risks that the OTS believes are inherent in the
type of asset.
Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain mortgage
servicing rights) and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank.
Core capital is defined similarly to tangible capital, but core capital
also includes certain qualifying supervisory goodwill and certain purchased
credit card relationships. Supplementary capital includes cumulative and other
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses. In
addition, up to 45% of unrealized gains on available-for-sale equity securities
with a readily determinable fair value may be included in supplementary capital.
The allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital.
20
At March 31, 2002, the Bank met each of its capital requirements.
Limitation on Capital Distributions. The OTS imposes various restrictions
or requirements on the Bank's ability to make capital distributions, including
cash dividends. A savings institution that is the subsidiary of a savings and
loan holding company, such as the Bank, must file an application or a notice
with the OTS at least 30 days before making a capital distribution. The Bank
must file an application for prior approval if the total amount of its capital
distributions, including the proposed distribution, for the applicable calendar
year would exceed an amount equal to the Bank's net income for that year plus
the Bank's retained net income for the previous two years. In other cases, as a
savings association subsidiary of a savings and loan holding company, the Bank
will have to file a notice.
The OTS may disapprove of a notice or application if:
o the Bank would be undercapitalized following the distribution;
o the proposed capital distribution raises safety and soundness
concerns; or
o the capital distribution would violate a prohibition contained in
any statute, regulation or agreement.
Liquidity. The Bank maintains liquidity levels to meet operational needs.
In the normal course of business, the levels of liquid assets during any given
period are dependent on operating, investing and financing activities. Cash and
due from banks, federal funds sold and repurchase agreements with maturities of
three months or less are the Bank's most liquid assets. The Bank maintains a
liquidity policy that sets minimum requirements to maintain sufficient liquidity
to ensure its safe and sound operation. At March 31, 2002, the Bank's liquidity
ratio was 7.99% of liquid assets to total assets which is in excess of minimum
requirements.
Branching. Subject to certain limitations, federal law permits federally
chartered savings associations to establish branches in any state of the United
States. 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 federal law and OTS regulations
preempts any state law purporting to regulate branching by federal savings
associations.
Community Reinvestment. Under the CRA, as implemented by OTS regulations,
the Bank has a continuing and affirmative obligation 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 the
Bank nor does it limit the Bank'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 the Bank, to assess the Bank's record of meeting the credit needs
of its community and to take such record into account in its evaluation of
certain applications by the Bank. The CRA also requires all institutions to make
public disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA
rating in its most recent examination conducted in 2001.
CRA regulations rate an institution based on its actual performance in
meeting community needs. In particular, the system focuses on three tests:
o a lending test, to evaluate the institution's record of making
loans in its assessment areas;
o 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
o a service test, to evaluate the institution's delivery of services
through its branches, ATMs and other offices.
Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by OTS regulations and by Sections
23A and 23B of the Federal Reserve Act ("FRA"). In general, these transactions
must be on terms which are as favorable to the Bank as comparable transactions
with non-affiliates. Additionally, certain types of these transactions are
restricted to an aggregate percentage of the Bank's capital. Collateral in
specified amounts must usually be provided by affiliates in order to receive
loans from the Bank. In addition, OTS regulations prohibit a savings association
from lending to any of its affiliates that is engaged in activities that are not
permissible for bank holding companies and from purchasing the securities of any
affiliate other than a subsidiary.
The Bank's authority to extend credit to its directors, executive
officers, and 10% shareholders, as well as to
21
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. 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 Bank's capital. In addition, extensions of credit in
excess of certain limits must be approved by the Bank's board of directors.
Enforcement. The OTS has primary enforcement responsibility over the Bank.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease and desist orders and to remove directors
and officers. In general, these enforcement actions may be initiated in response
to violations of laws and regulations and unsafe or unsound practices.
Standards for Safety and Soundness. The OTS has adopted 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. In addition, OTS regulations authorize, but do not require, the OTS
to order an institution that has been given notice that it is not satisfying
these 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
federal law. 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.
Prompt Corrective Action Regulations. Under the OTS prompt corrective
action regulations, the OTS is authorized and, in some cases, required to take
supervisory actions against undercapitalized savings associations. For this
purpose, a savings association would be placed in one of the following four
categories based on the association's regulatory capital:
o well-capitalized;
o adequately capitalized;
o undercapitalized; or
o critically undercapitalized.
As of March 31, 2002, the Bank was considered well-capitalized by the OTS.
When appropriate, the OTS can require corrective action by a savings association
holding company under the "prompt corrective action" provisions of federal law.
Insurance of Deposit Accounts. The Bank is a member of the Savings
Association Insurance Fund ("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. Under federal law, 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 assigns an institution to one of three capital categories based
on the institution's financial information as of the quarter ending three months
before the beginning of the assessment period. 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 FDIC is
authorized to raise the assessment rates as necessary to maintain the required
reserve ratio of the deposit insurance fund to 1.25%.
In addition, all FDIC insured institutions are required to pay assessments
to the FDIC at an annual rate of approximately .0212% of insured deposits to
fund interest payments on the bonds issued by the Financing Corporation, an
agency of the federal government established to recapitalize the predecessor to
the SAIF. These assessments will continue until the Financing Corporation bonds
mature in 2017.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York ("FHLB-NY"), which is
22
one of the regional FHLBs composing the FHLB System. Each FHLB provides a
central credit facility primarily for its member institutions. The Bank is
required to acquire and hold shares of capital stock in the FHLB-NY in an amount
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations, but
not less than $500 or 5% of its outstanding advances from the FHLB. The Bank was
in compliance with this requirement with an investment in the capital stock of
the FHLB at March 31, 2002 of $3.8 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.
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. If dividends were reduced, or
interest on future FHLB advances increased, the Bank's net interest income would
be adversely affected.
Under Gramm-Leach, membership in the FHLB system is now voluntary for all
federally-chartered savings associations such as the Bank. Gramm-Leach also
replaces the existing redeemable stock structure of the FHLB system with a
capital structure that requires each FHLB to meet a leverage limit and a
risk-based permanent capital requirement. Two classes of stock are authorized:
Class A (redeemable on 6-months notice) and Class B (redeemable on 5-years
notice).
Federal Reserve System. Under the Federal Reserve Board's regulations, the
Bank is required to maintain non-interest-earning reserves against its
transaction accounts. Federal Reserve Board regulations generally require that
(a) reserves of 3% must be maintained against aggregate transaction accounts of
$41.3 million or less, subject to adjustment by the Federal Reserve Board, and
(b) a reserve of $1.2 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) must be maintained against that portion of
total transaction accounts in excess of $41.3 million. The first $5.7 million of
otherwise reservable balances are exempted from the reserve requirements. The
Bank is in compliance with these 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 to the extent that the requirement exceeds vault
cash.
Privacy Protection. Effective July 1, 2001, financial institutions,
including Carver Federal, became subject to OTS regulations implementing the
privacy protection provisions of Gramm-Leach. These regulations require the Bank
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. The regulations also require the
Bank to provide its customers with initial and annual notices that accurately
reflect its privacy policies and practices. In addition, to the extent its
sharing of such information is not exempted, the Bank is required to provide its
customers with the ability to "opt-out" of having the Bank share their nonpublic
personal information with unaffiliated third parties. The implementation of
these regulations did not have a material adverse effect on our 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 we cannot
predict whether any of them will become law or what impact, if any, these bills
will have if enacted into law.
On February 1, 2001, the OTS and other federal banking agencies adopted
guidelines establishing standards for safeguarding customer information to
implement certain provisions of Gramm-Leach. The 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 Bank developed a policy to comply
with the guidelines prior to their effective date of July 1, 2001, and
implementation of such policy is not expected to have a material adverse effect
on the Bank's operations.
23
Holding Company Regulation. The Holding Company is a savings and loan
holding company regulated by the OTS. As such, the Holding Company is registered
with and is subject to OTS examination and supervision, as well as certain
reporting requirements. In addition, the OTS has enforcement authority over the
Holding Company and its subsidiaries. Among other things, this authority permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the financial safety, soundness or stability of a subsidiary savings
institution. Unlike bank holding companies, federal savings and loan holding
companies are not subject to any regulatory capital requirements or to
supervision by the Federal Reserve Board.
Gramm-Leach restricts the powers of new unitary savings and loan 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 Carver, 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
holding companies.
Restrictions Applicable to All Savings and Loan Holding Companies. Federal
law prohibits a savings and loan holding company, including the Holding Company,
directly or indirectly, from acquiring:
o control (as defined under HOLA) of another savings institution (or
a holding company parent) without prior OTS approval;
o through merger, consolidation, or purchase of assets, another
savings institution or a holding company thereof, or acquiring all
or substantially all of the assets of such institution (or a holding
company), without prior OTS approval; or
o control of any depository institution not insured by the FDIC
(except through a merger with and into the holding company's savings
institution subsidiary that is approved by the OTS).
A savings and loan holding company may not acquire as a separate subsidiary an
insured institution that has a principal office outside of the state where the
principal office of its subsidiary institution is located, except:
o in the case of certain emergency acquisitions approved by the
FDIC;
o if such holding company controls a savings institution subsidiary
that operated a home or branch office in such additional state as of
March 5, 1987; or
o if the laws of the state in which the savings institution to be
acquired is located specifically authorize a savings institution
chartered by that state to be acquired by a savings institution
chartered by the state where the acquiring savings institution or
savings and loan holding company is located or by a holding company
that controls such a state chartered association.
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").
Delaware Corporation Law. The Holding Company is incorporated under the
laws of the State of Delaware. Thus, it is subject to regulation by the State of
Delaware and the rights of its 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.
24
Other Federal Regulation. In response to the events of September 11, 2001,
President George W. Bush signed into law the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act
of 2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives
the federal government new powers to address terrorist threats through enhanced
domestic security measures, expanded surveillance powers, increased information
sharing, and broadened anti-money laundering requirements. By way of amendments
to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures
intended to encourage information sharing among bank regulatory agencies and law
enforcement bodies. Further, certain provisions of Title III impose affirmative
obligations on a broad range of financial institutions, including banks,
thrifts, brokers, dealers, credit unions, money transfer agents and parties
registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must
establish anti-money laundering programs that include, at
minimum: (i) internal policies, procedures, and controls, (ii)
specific designation of an anti-money laundering compliance
officer, (iii) ongoing employee training programs, and (iv) an
independent audit function to test the anti-money laundering
programs.
o Section 326 of the Act authorizes the Secretary of the
Department of Treasury, in conjunction with the other bank
regulators, to issue regulations by October 26, 2002 that
provide for minimum standards with respect to customer
identification at the time new accounts are opened.
o Section 312 of the Act requires financial institutions that
establish, maintain, administer, or manage private banking
accounts or correspondent accounts in the United States for
non-United States persons or their representatives (including
foreign individuals visiting the United States) to establish
appropriate, specific, and, where necessary, enhanced due
diligence policies, procedures, and controls designed to
detect and report money laundering.
o Effective December 25, 2001, financial institutions are
prohibited from establishing, maintaining, administering or
managing correspondent accounts for foreign shell banks
(foreign banks that do not have a physical presence in any
country), and will be subject to certain recordkeeping
obligations with respect to correspondent accounts of foreign
banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on
Federal Reserve Act and Bank Merger Act applications.
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 in particular 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
25
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 exceed its AMTI (determined without regard to this
adjustment and prior to reduction for net operating losses).
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 2001 and 2002 are 10% and
9.36%, 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 as of May 31, 2002. Each of the persons listed below is an
executive officer of the Holding Company and the Bank, holding the same office
in each.
26
Name Age Position
- ------------------------- --- --------------------------------------------------------------
Deborah C. Wright 44 President and Chief Executive Officer, Director
Frank Deaton 33 Senior Vice President and Chief Auditor
Linda J. Dunn 46 Senior Vice President, General Counsel and Corporate Secretary
William Gray 47 Senior Vice President and Chief Financial Officer
Margaret Peterson 51 Senior Vice President and Chief Administrative Officer
Devon W. Woolcock 36 Senior Vice President and Chief of Retail Banking
Deborah C. Wright is currently President and Chief Executive Officer and a
Director of the Holding Company 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 Kraft Foods, Inc., The Lower Manhattan 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.
Frank Deaton is Senior Vice President and Chief Auditor. He joined Carver
in May 2001. Mr. Deaton was previously Vice President and Risk Review Manager
with Key Bank in Cleveland, Ohio. He joined Key Bank in 1990 and was responsible
for developing the scope and overseeing completion of credit, operational and
regulatory compliance audits for a variety of business units. Mr. Deaton is a
Certified Bank Auditor and a member of the Institute of Internal Auditors.
Linda J. Dunn is Senior Vice President, General Counsel and Corporate
Secretary. She joined Carver in June 2001. Ms. Dunn had been a corporate
associate at the law firm Paul, Weiss, Rifkind, Wharton & Garrison since 1994.
She was an Assistant Vice President in the Consumer Products Division of
Chemical Bank from 1987 to 1991. From 1983 to 1987, she was employed at
American/National Can Company where she held various positions from Financial
Analyst to Manager of Performance Analysis in the Specialty Food Products
Division. Ms. Dunn earned A.B., M.B.A. and J.D. degrees from Harvard University.
William Gray is Senior Vice President and Chief Financial Officer. He
joined Carver in February 2002. Mr. Gray had been a Vice President at the Dime
Savings Bank of New York. He was responsible for accounting, reporting,
budgeting and forecasting for the Retail Banking, Commercial Real Estate,
Consumer Lending and Business Banking divisions of Dime. Mr. Gray earned a B.A.
in accounting from Adelphi University in 1986.
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 in October
1999. She 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. In addition to her 12 years in Human
Resources, Ms. Peterson has ten years of Systems and Technology experience from
various positions held at each of JP Morgan and Chase Manhattan Bank. Ms.
Peterson is a member of the Board of Friends of Columbia University's Double
Discovery Center. Ms. Peterson earned a Bachelors Degree from Pace University,
an M.B.A. from Columbia University as a Citicorp Fellow, and has been designated
a Certified Compensation Professional by the American Compensation Association.
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. He joined Citibank in 1995 where he managed several
South Florida branches, before moving to New York City. Mr. Woolcock began his
career with Barnett Bank in Florida, holding positions including Head Teller,
Division Operations Manager, and Branch Manager. Mr. Woolcock attended college
at the University of Houston and Bethune Cookman College.
27
Changes in Executive Management
In May 2001, James Boyle resigned as Chief Financial Officer of the
Company. William Schult, Vice President and Controller, served as Acting Chief
Financial Officer from June 2001 to February 2002 when he left the Company.
Walter Bond and J. Kevin Ryan left the Company in December 2001 and March 2002,
respectively. Frank Deaton was appointed Senior Vice President and Chief Auditor
of the Company in May 2001, Linda J. Dunn was appointed Senior Vice President,
General Counsel and Secretary of the Company in June 2001 and William Gray was
appointed Senior Vice President and Chief Financial Officer of the Company in
February 2002. For a description of the business experience of the executive
officers, see "Executive Officers of the Holding Company."
Catherine A. Papayiannis joined Carver as Executive Vice President and
Chief Operating Officer in June 2002. Ms. Papayiannis was previously Senior Vice
President/Director of Community Banking at Atlantic Bank of New York, where she
oversaw the regional retail distribution network, the offsite ATM network,
wealth and cash management services, residential and consumer lending and small
business banking.
ITEM 2. PROPERTIES.
The following table sets forth certain information regarding Carver
Federal's offices and other material properties at March 31, 2002.
Lease
Year Owned or Expiration Net Book
Opened Lease Date Value
--------------------------------------------------
(In thousands)
MAIN OFFICE
75 West 125th Street 1996 Owned $ 5,489
New York, NY
BRANCH OFFICES:
1281 Fulton Street
Brooklyn, NY 1989 Owned 1,244
(Bedford-Stuyvesant Office)
1009-1015 Nostrand Avenue
Brooklyn, NY 1975 Owned 200
(Crown Heights Office)
115-02 Merrick Boulevard
Jamaica, NY 1982 Leased 2/28/2011 268
(St Alban's Office)
130 Malcolm X Boulevard
New York, NY 2001 Leased 5/31/2006 599
(Malcolm X Blvd. Office)
-------
Total $ 7,800
=======
The net book value of Carver Federal's investment in premises and
equipment totaled approximately $10.3 million at March 31, 2002.
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 Bank 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, 2002, except as set forth below,
there were no material legal proceedings to which the Company or its
subsidiaries was a party, or to which any of their property was subject.
28
On or about April 29, 1999, plaintiff Reginald St. Rose ("St. Rose"), a
former Carver Federal 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 Federal and St. Rose entered into an agreement
(the "Agreement") providing that St. Rose would resign from Carver Federal 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 Federal: (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 Federal moved to dismiss St. Rose's
fraudulent misrepresentation cause of action and the Court granted Carver
Federal's motion to dismiss. Carver Federal has not filed an answer in the St.
Rose Action. By written stipulation of the parties, Carver Federal's time to
file an answer to St. Rose's complaint has been extended without date. Carver
Federal plans to assert claims against St. Rose for, among other claims, payment
of certain financial obligations to Carver Federal, 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 Federal intends to continue to defend the St. Rose
Action vigorously.
Carver Federal is also a defendant in an action brought by Ralph Williams
(the "Williams Action") and an action brought by Janice Pressley (the "Pressley
Action" and, together with the Williams Action, the "Actions"), both of which
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 Federal 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 Federal, Chase Manhattan Bank ("Chase"),
Astoria Federal Savings and Loan Association and Reliance Federal Savings Bank
(Carver Federal 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 refiled their motion to dismiss the
Williams Action and it is sub judice. If the motion to dismiss is not granted,
Carver Federal intends to defend the Williams Action vigorously. On September
20, 2001 the court granted the Bank Defendants' motion to dismiss the Pressley
Action. Pressley has appealed the dismissal. Carver Federal is vigorously
opposing the appeal.
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 Federal 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 and in November 2001 the court dismissed
the breach of contract action against the individual defendants and the
equitable estoppel and estoppel by contract claims against all defendants.
Carver Federal appealed the failure to dismiss the breach of contract claims. If
Carver Federal does not prevail in the appeal, Carver Federal intends to
vigorously defend this action.
On or about January 28, 2002, plaintiff Monique Barrow, a former employee,
filed suit against Carver Federal in the United States District Court for the
Southern District of New York alleging pregnancy discrimination in violation of
the Family Medical Leave Act, New York State and New York City laws. The
plaintiff seeks compensatory damages in an amount not less than $5 million,
punitive, liquidated and other compensatory damages in an amount not less than
$10
29
million, as well as reinstatement to her former position. Carver Federal has
answered the complaint denying any liability, and in the opinion of management,
after consultation with legal counsel, the lawsuit is without merit and the
ultimate outcome of this matter is not expected to have a material adverse
effect on the Company's results of operations, business operations or
consolidated financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Holding Company held its Annual Meeting on February 26, 2002 for the
fiscal year ended March 31, 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; and
2. The ratification of the appointment of KPMG, LLP as independent
auditors of the Holding Company for the fiscal year ended March 31,
2002.
The results of voting were as follows:
Proposal 1: Election of Directors:
Holding Company Nominees
David L. Hinds For 2,133,173
Withheld 16,326
Pazel G. Jackson, Jr. For 2,133,198
Withheld 16,301
Deborah C. Wright For 2,131,537
Withheld 17,962
Proposal 2: Ratification of Appointment of Independent For 2,142,717
Auditors Against 5,255
Abstain 1,527
In addition to the nominees elected at the Annual Meeting, the following
persons' terms of office as directors continued after the Annual Meeting:
Frederick O. Terrell, Kevin Cohee, Robert Holland, Jr., Teri Williams and
Strauss Zelnick.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Holding Company's 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, 2002, there were 2,316,358 shares of the common stock outstanding, held
by approximately 1,140 stockholders of record. The following table shows the
high and low per share sales prices of the common stock and the dividends
declared for the quarters indicated.
High Low Dividend High Low Dividend
------ ------ -------- ------ ------ --------
Fiscal Year 2002 Fiscal Year 2001
June 30, 2001 $ 9.18 $ 8.60 $ -- June 30, 2000 $10.94 $ 7.50 $ --
September 30, 2001 $10.13 $ 8.15 $ -- September 30, 2000 $11.13 $ 7.88 $ --
December 31, 2001 $ 9.80 $ 8.64 $ -- December 31, 2000 $ 9.75 $ 7.00 $ --
March 31, 2002 $11.49 $ 9.60 $ 0.05 March 31, 2001 $10.60 $ 8.60 $ 0.05
On January 29, 2002, the Holding Company's Board of Directors declared a
cash dividend of $0.05 per common share, payable on March 5, 2002, to common
stockholders of record at the close of business on February 15, 2002. The
30
Board of Directors of the Holding Company has not determined to establish a
regular dividend at this time, but will review the Company's position
periodically for the possible declaration of additional dividends. The timing
and amount of future dividends will be within the discretion of the Holding
Company's Board and will depend on the earnings of the Holding 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 regulatory capital would be reduced below applicable
regulatory capital requirements or if its stockholders' equity would be reduced
below 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, after not less
than 30 days prior notice to the OTS, 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 11 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.
31
ITEM 6. SELECTED FINANCIAL DATA
At or for the Fiscal Year Ended March 31,
-------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- --------- --------- --------- --------
(Dollars in thousands, except per share data)
Selected Financial Condition Data:
Assets $449,710 $ 424,500 $ 420,119 $ 416,483 $437,458
Loans, net 289,114 283,437 270,148 270,522 274,954
Securities 105,464 87,788 104,177 96,502 119,524
Cash and cash equivalents 34,851 31,758 22,202 21,321 15,120
Deposits 324,954 279,424 281,941 276,999 274,894
Borrowed funds 75,651 105,600 98,578 102,038 124,946
Stockholders' equity 36,742 32,096 32,641 31,175 35,534
Number of Deposit accounts 41,200 44,751 54,597 58,113 51,550
Number of offices 5 5 7 7 7
Operating Data:
Interest income 28,254 28,307 27,367 28,473 27,828
Interest expense 12,047 14,278 14,009 14,815 15,019
-------- --------- --------- --------- --------
Net interest income 16,207 14,029 13,358 13,658 12,809
Provision for loan losses 900 1,793 1,099 4,029 1,260
-------- --------- --------- --------- --------
Net interest income after provision for loan losses 15,307 12,236 12,259 9,629 11,549
Non-interest income 4,485 2,934 2,539 2,382 2,351
Non-interest expenses 14,198 15,461 15,823 17,963 11,651
-------- --------- --------- --------- --------
Income (loss) before income taxes 5,594 (291) (1,025) (5,952) 2,249
Income tax (benefit) 881 98 110 (1,499) 1,203
-------- --------- --------- --------- --------
Net income (loss) $ 4,713 $ (389) $ (1,135) $ (4,453) $ 1,046
======== ========= ========= ========= ========
Diluted earnings (loss) per common share $ 1.89 $ (0.26) $ (0.53) $ (2.02) $ 0.48
======== ========= ========= ========= ========
Selected Statistical Data:
Return on average assets (1)(3) 1.11% (0.07)% (0.27)% (1.05)% 0.25%
Return on average equity (2)(3) 13.78 (0.89) (3.29) (12.70) 3.00
Net interest margin (4) 4.05 3.61 3.47 3.43 3.27
Average interest rate spread (5) 3.92 3.48 3.38 3.29 3.14
Efficiency ratio (3) (6) 77.89 96.93 104.31 112.02 76.85
Operating expense to average assets (3) (7) 3.33 3.72 3.82 4.22 2.80
Equity to total assets at end of period 8.17 7.56 7.77 7.49 8.12
Average equity to average assets 8.03 7.85 8.33 8.24 8.39
Dividend payout ratio (8) 2.55 (17.24) (5.17) (2.60) 11.06
Asset Quality Ratios:
Non-performing assets to total assets (9) 0.63% 0.71% 0.73% 1.15% 1.58%
Non-performing assets to total loans receivable (9) 0.96 1.04 1.12 1.66 2.47
Allowance for loan losses to total loans receivable 1.41 1.24 1.07 1.48 1.11
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) For fiscal 1999, excluding non-recurring expenses 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%.
(4) Net interest income divided by average interest-earning assets.
(5) The difference between the weighted average yield on interest-earning
assets and the weighted average cost of interest-bearing liabilities.
(6) Non-interest expense (other than real estate owned expenses) divided by
the sum of net interest income and non-interest income (other than net
security gains and losses and other non-recurring income).
(7) Non-interest expense less real estate owned expenses, divided by average
total assets.
(8) Dividends paid to common stockholders as a percentage of net income (loss)
available to common stockholders.
(9) Non performing assets consist of non-accrual loans, loans accruing 90 days
or more past due, and property acquired in settlement of loans.
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
presented elsewhere in this report.
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 Carver 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 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 Bank 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 Bank'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 Carver's
interest-bearing liabilities and virtually all of Carver's interest-earning
assets are located at the Bank, virtually all of Carver's interest rate risk
("IRR") 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 IRR by monitoring and controlling the variation
in repricing intervals between its assets and liabilities. To a lesser extent,
Carver 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
33
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 25.43% of total
rate-sensitive assets at March 31, 2002, 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, 2002. Maturity repricing dates
have been projected by applying prepayment rates which management believes are
appropriate. 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.
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 Mortgage Backed Securities(1) $ 14 $ 17,385 $ 438 $ 35,990 $ 74,338 $235,422 $363,587
Federal Funds Sold 21,100 -- -- -- -- -- 21,100
Investment Securities 6,999 8,019 16,858 7,525 -- 3,763 43,164
-------- --------- --------- --------- --------- -------- --------
Total interest-earning assets $ 28,113 $ 25,404 $ 17,296 $ 43,515 $ 74,338 $239,185 $427,851
======== ========= ========= ========= ========= ======== ========
Rate Sensitive Liabilities:
NOW accounts $ 1,629 $ 2,170 $ 4,706 $ 2,353 $ 3,619 $ 3,618 $ 18,095
Savings Accounts 5,071 6,403 10,921 20,278 39,855 44,251 126,779
Money market accounts 2,894 8,987 1,522 1,219 305 305 15,232
Certificate of Deposits 28,204 91,460 18,874 12,847 -- -- 151,385
Borrowings 15,000 500 29,889 29,974 -- 288 75,651
-------- --------- --------- --------- --------- -------- --------
Total interest-bearing liabilities $ 52,798 $ 109,520 $ 65,912 $ 66,671 $ 43,779 $ 48,462 $387,142
======== ========= ========= ========= ========= ======== ========
Interest Sensitivity Gap $(24,685) $ (84,117) $ (48,616) $ (23,156) $ 30,560 $190,723 $ 40,709
Cumulative Interest Sensitivity Gap $(24,685) $(108,801) $(157,417) $(180,573) $(150,014) $ 40,709 --
Ratio of Cumulative Gap to Total Rate
Sensitive assets -5.77% -25.43% -36.79% -42.20% -35.06% 9.51% --
(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 that 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 that
restrict the periodic change in interest rate.
Net Portfolio Value ("NPV") Analysis. As part of its efforts to maximize
net interest income and manage the
34
risks associated with changing interest rates, management uses the NPV
methodology.
Under this methodology, IRR exposure is assessed by reviewing the
estimated changes in net interest income ("NII") and NPV that 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, 2002, is an analysis of the Bank's 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.
Net Portfolio Value NPV as a % of PV of Assets
-------------------------------------------------------- --------------------------------------
Change in Rate $ Amount $ Change % Change NPV Ratio Change
-------------------- ----------------- ------------------ ------------------ ------------------ ------------------
(Dollars in thousands)
+300 bp 56,403 -10,126 -15% 12.23% -166 bp
+200 bp 60,599 -5,930 -9% 12.96% - 94 bp
+100 bp 64,051 -2,478 -4% 13.52% - 37 bp
0 bp 66,529 -- -- 13.89% --
(100) bp 67,623 1,094 2% 14.00% + 11 bp
March 31, 2002
------------------
Risk Measures: +200 BP Rate Shock
Pre-Shock NPV Ratio: NPV as % of PV of Assets 13.89%
Post-Shock NPV Ratio 12.96%
Sensitivity Measure; Decline in NPV Ratio -94 bp
Certain shortcomings are inherent in the methodology used in the above IRR
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 Carver'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 Carver's IRR 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
Carver'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 profitability
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
35
interest-bearing liabilities, any positive interest rate spread will generate
net interest income.
At March 31, 2002 Year Ended March 31, 2002
------------------------ --------------------------------------
Average Average
Balance Yield Balance Interest Yield
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Interest-earning Assets:
Loans (1) $ 289,114 6.98% $ 297,130 $ 22,586 7.60%
Investment securities (2) 43,164 3.81% 38,505 2,324 6.04%
Mortgage-backed securities 66,063 5.58% 50,450 2,918 5.78%
Federal funds 21,100 0.89% 13,662 426 3.12%
---------- ---------- ---------- ---------- ----------
Total interest-earning assets 419,441 6.13% 399,747 28,254 7.07%
Non-interest-earning assets 30,269 26,177
---------- ----------
Total assets $ 449,710 $ 425,924
========== ==========
Interest-bearing Liabilities:
Deposits:
Checking 18,095 1.24% 21,114 237 1.12%
Savings and clubs 126,779 1.71% 126,065 2,342 1.86%
Money market accounts 15,232 1.78% 16,181 302 1.87%
Certificates of deposit 151,385 2.73% 133,624 5,246 3.93%
---------- ---------- ---------- ---------- ----------
Total deposits 311,491 2.18% 296,984 8,127 2.74%
Borrowed money 75,651 3.95% 78,153 3,920 5.02%
---------- ---------- ---------- ---------- ----------
Total deposits and interest-bearing liabilities 387,142 2.53% 375,137 12,047 3.21%
Non-interest-bearing liabilities:
Checking 13,463 7,781
Other liabilities 12,363 8,809
---------- ----------
Total liabilities 412,968 391,727
Stockholders' equity 36,742 34,197
Total liabilities and stockholders' equity $ 449,710 $ 425,924
========== ==========
Net interest income $ 16,207
==========
Average interest rate spread 3.60% 3.86%
========== ==========
Net interest margin 3.75% 4.05%
========== ==========
Ratio of average interest-earning assets to
interest-bearing liabilities 108.34% 106.56%
========== ==========
36
Year Ended March 31,
----------------------------------------------------------------------------------
2001 2000
-------------------------------------- ---------------------------------------
Average Average
Balance Interest Yield Balance Interest Yield
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Interest-earning Assets:
Loans (1) $ 278,264 $ 21,398 7.69% $ 259,408 $ 19,443 7.50%
Investment securities (2) 43,350 2,874 6.63% 57,357 3,593 6.26%
Mortgage-backed securities 48,899 3,012 6.16% 55,075 3,641 6.61%
Federal funds 18,256 1,023 5.60% 13,000 690 5.31%
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 388,769 28,307 7.28% 384,840 27,367 7.12%
Non-interest-earning assets 27,127 29,220
---------- ----------
Total assets $ 415,896 $ 414,060
========== ==========
Interest-bearing Liabilities:
Deposits:
Checking 15,926 253 1.59% 18,032 314 1.74%
Savings and clubs 137,305 3,051 2.22% 143,908 3,650 2.54%
Money market accounts 17,598 412 2.34% 19,578 631 3.22%
Certificates of deposit 94,006 4,740 5.04% 86,316 4,017 4.65%
---------- ---------- ---------- ---------- ---------- ----------
Total deposits 264,835 8,456 3.19% 267,834 8,612 3.22%
Borrowed money 99,783 5,822 5.84% 95,769 5,397 5.64%
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 364,618 14,278 3.92% 363,603 14,009 3.85%
Non-interest-bearing liabilities:
Checking 11,568 11,388
Other liabilities 7,072 4,596
---------- ----------
Total liabilities 383,258 379,587
Stockholders' equity 32,638 34,473
---------- ----------
Total liabilities and stockholders' equity $ 415,896 $ 414,060
========== ==========
Net interest income $ 14,029 $ 13,358
========== ==========
Interest rate spread 3.36% 3.27%
========== ==========
Net interest margin 3.61% 3.47%
========== ==========
Ratio of avg interest-earning assets to
interest-bearing liabilities 106.62% 105.84%
========== ==========
(1) Includes non-accrual loans.
(2) Includes FHLB stock.
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 Federal'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.
37
Year Ended March 31,
-------------------------------------------------------------------------
2002 vs. 2001 2001 vs. 2000
Increase (Decrease) due to Increase (Decrease) due to
---------------------------------- ----------------------------------
Volume Rate Total Volume Rate Total
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Interest-earning assets:
Loans $ 1,434 ($ 246) $ 1,188 $ 1,420 $ 535 $ 1,955
Investment securities (a) (292) (258) (550) (859) 140 (719)
Mortgage-backed securities 89 (184) (94) (408) (221) (629)
Federal funds (143) (454) (597) 283 50 333
-------- -------- -------- -------- -------- --------
Total interest earning assets 1,088 (1,142) (53) 436 504 940
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Checking 58 (74) (16) (37) (24) (61)
Savings and clubs (209) (500) (709) (167) (432) (599)
Money Market accounts (26) (84) (110) (64) (155) (219)
Certificates of deposit 1,555 (1,049) 506 358 365 723
-------- -------- -------- -------- -------- --------
Total deposits 1,378 (1,707) (329) 90 (246) (156)
Borrowed money (1,085) (817) (1,902) 227 198 425
-------- -------- -------- -------- -------- --------
Total deposits and interest-bearing liabilities 293 (2,524) (2,231) 317 (48) 269
-------- -------- -------- -------- -------- --------
Net change in net interest income $ 795 $ 1,382 $ 2,178 $ 119 $ 552 $ 671
======== ======== ======== ======== ======== ========
Comparison of Financial Condition at March 31, 2002 and 2001
At March 31, 2002, total assets increased by $25.2 million, or 5.9%, to
$449.7 million, compared to $424.5 million at March 31, 2001. The increase in
total assets was primarily attributable to increases in securities
available-for-sale and loans. Total securities at March 31, 2002 increased $17.8
million to $105.5 million from $87.8 million at March 31, 2001, reflecting a
$69.9 million increase in available-for-sale securities substantially offset by
a $52.2 million decrease in held-to-maturity securities. At the beginning of
fiscal 2002, the Bank transferred $45.7 million of mortgage-backed and other
securities from held-to-maturity to available-for-sale upon the adoption of FAS
No.133 "Accounting for Derivative Instruments and Hedging Activities." The
increase in available-for-sale securities, excluding securities transferred from
held-to-maturity, primarily reflects purchases of $134.7 million and a $217,000
increase in the market value of the portfolio substantially offset by $79.2
million in principal repayments, maturities and calls and $32.7 million in
sales. The decrease in held-to-maturity securities, excluding securities
transferred to available-for-sale, primarily reflects principal payments,
maturities and calls of $6.4 million. Available-for-sale securities represented
85.2% of the total securities portfolio at March 31, 2002, compared to 22.7% at
March 31, 2001.
Loans receivable, net, increased by $5.7 million, or 2.0%, to $289.1
million, compared to $283.4 million one year ago. The loan growth during fiscal
2002 represented loan originations of $62.6 million, loan purchases of $45.2
million, offset by principal repayments of $100.3 million, loans sold of $1.3
million, and an increase in the allowance for loan losses of $577,000.
At March 31, 2002, total liabilities increased $20.6 million, or 5.2%, to
$413.0 million, compared to $392.4 million at March 31, 2001. Deposit
liabilities increased $45.6 million, or 16.3%, to $325.0 million at March 31,
2002 from $279.4 million at March 31, 2001. The increase in deposits was
primarily attributable to a New York State deposit of $50.0 million, partially
offset in part by the sale of deposits from the Bank's East New York branch
during fiscal 2002. The branch had $18.4 million in deposits at March 31, 2001.
Funds from the deposit growth were used to pay down higher cost borrowed money,
which decreased $29.9 million to $75.7 million at March 31, 2002 from $105.6
million at March 31, 2001. This decrease was attributable to decreases of $25.0
million in advances from FHLB and $4.9 million in securities sold under
agreement to repurchase.
At March 31, 2002, stockholders' equity increased $4.6 million, or 14.5%,
to $36.7 million, compared to $32.1 million at March 31, 2001. The increase in
stockholders' equity was primarily attributable to net income retained after
payment of dividends for fiscal 2002. The Bank's capital levels meet regulatory
requirements of a well capitalized financial institution.
38
Comparison of Operating Results For The Years Ended March 31, 2002 and 2001
Net Income
The Bank reported net income for fiscal 2002 of $4.7 million, compared to
a net loss of $389,000 for the same period the prior year. Net income available
to common stockholders for fiscal 2002 was $4.5 million, or $1.89 per diluted
common share, compared to a loss of $586,000, or $0.26 per diluted common share,
for fiscal 2001. The increase in the net income was primarily due to a $2.2
million improvement in net interest income, a gain on the sale of securities of
$1.4 million, a $1.2 million reduction in non-interest expense, and a $893,000
decrease in the provision for loan losses, partially offset by a $783,000
increase in income taxes.
Interest Income
Interest income for fiscal 2002 amounted to $28.3 million, a decrease of
$53,000, or 0.2%, from the prior year. The decrease in interest income was
primarily attributable to a decline in the average yield on interest-earning
assets to 7.07% for fiscal 2002, compared to 7.28% for fiscal 2001.
Interest income on loans increased by $1.2 million, or 5.6%, to $22.6
million for fiscal 2002 compared to $21.4 million for fiscal 2001. The increase
in interest income from loans reflects an increase of $18.9 million, or 6.8%, in
the average balance of loans to $297.1 million for fiscal 2002 compared to
$278.3 million for fiscal 2001, partially offset by a nine basis point decrease
in the average rate earned on loans to 7.60% for fiscal 2002 from 7.69% for the
prior year.
Interest income on mortgage-backed securities decreased by $94,000, or
3.1%, to $2.9 million for fiscal 2002, compared to $3.0 million for the prior
year reflecting a 38 basis point decrease in the average rate earned on
mortgage-backed securities to 5.78% from 6.16%, partially offset by an increase
of $1.6 million in the average balance of mortgage-backed securities to $50.5
million for fiscal 2002, compared to $48.9 million for fiscal 2001.
Interest income on investment securities decreased by approximately
$550,000, or 19.1%, to $2.3 million for fiscal 2002, compared to $2.9 million
for the prior year, reflecting a decrease of $4.9 million in the average balance
of investment securities to $38.5 million for fiscal 2002 compared to $43.4
million for fiscal 2001, coupled with a 59 basis point decrease in the average
rate earned on investment securities to 6.04% from 6.63%.
Interest income on federal funds decreased $597,000, to $426,000 for
fiscal 2002, compared to $1.0 million for the prior year. The decrease is
attributable to a 248 basis point decrease in the average rate earned on federal
funds, as well as a $4.6 million decrease in the average balance of federal
funds.
Interest Expense
Interest expense decreased by $2.3 million, or 15.6%, to $12.0 million for
fiscal 2002, compared to $14.3 million for the prior year. The decrease in
interest expense reflects an improvement of 71 basis points in the average cost
of interest-bearing liabilities, slightly offset by a $10.5 million increase in
the average balance of interest-bearing liabilities.
Interest expense on deposits decreased $329,000, or 3.9%, to $8.1 million
for fiscal 2002, compared to $8.5 million for the prior year. This decrease is
attributable to a 45 basis point decrease in the cost of average deposits
partially offset by a $32.2 million, or 12.2%, increase in the average balance
of interest-bearing deposits to $297.0 million for fiscal 2002, compared to
$264.8 million for fiscal 2001.
Interest expense on borrowed money decreased by $1.9 million, or 32.7%, to
$3.9 million for fiscal 2002, compared to $5.8 million for the prior year. Funds
from deposit growth were used to pay down borrowed money. The decrease in
interest expense on borrowed money for fiscal 2002 reflects a $21.6 million
decline in the average balance of borrowed money coupled with an 82 basis points
decrease in the average cost of borrowed money.
39
Net Interest Income
Net interest income before the provision for loan losses increased $2.2
million, or 15.5%, to $16.2 million for fiscal 2002 compared to $14.0 million
for the prior year. Net interest income benefited from a general interest rate
decline, a reduction in borrowed money, as well as an increase in deposits, loan
originations and average loan balances. This benefit was partially offset by
accelerated prepayments of mortgage-backed securities and the sale of lower cost
deposits in a non-strategic branch that were replaced by comparatively higher
cost certificates of deposit. The 71 basis point decrease in the cost of
interest-bearing liabilities used to fund interest-earning assets coupled with a
21 basis point decrease in the return on average interest-earning assets
contributed to a 50 basis point increase in the interest rate spread to 3.86%
for fiscal 2002, compared to 3.36% for the prior year. The net interest margin
increased to 4.05% for fiscal 2002, compared to 3.61% for fiscal 2001.
Provision for Loan Losses
Provision for loan losses decreased by $893,000 or 49.8%, to $900,000, for
fiscal 2002, compared to $1.8 million for fiscal 2001. The Bank records
provisions for loan losses, which are charged to earnings, in order to maintain
the allowance for loan losses at a level that is considered appropriate to
absorb probable losses inherent in the existing loan portfolio. The provision in
each period reflects management's evaluation of the adequacy of the allowance
for loan losses. Factors considered include the volume and type of lending
conducted, the Bank's previous loan loss experience, the known and inherent
risks in the loan portfolio, adverse situations that may affect the borrowers'
ability to repay, the estimated value of any underlying collateral, trends in
the local and national economy and trends in the real estate market.
During fiscal 2002, the Bank charged-off approximately $303,000 of loans
as compared to $1.2 million for fiscal 2001. At March 31, 2002, non-performing
loans totaled $2.8 million, or 1.0% of total loans, compared to $2.5 million, or
0.9% of total loans, at March 31, 2001. At March 31, 2002, the Bank's allowance
for loan losses was $4.1 million compared to $3.6 million at March 31, 2001,
resulting in a ratio of the allowance to non-performing loans of 146.2% at March
31, 2002, compared to 141.0% at March 31, 2001, and a ratio of allowance for
possible loan losses to total loans of 1.41% and 1.24% at March 31, 2002 and
March 31, 2001, 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 $1.6 million, or 54.2%, to $4.5 million for fiscal 2002, compared to
$2.9 million for fiscal 2001. The increase in non-interest income is primarily
due to non-recurring income of $1.4 million relating to the sale of securities
and to a lesser extent a $316,000 increase in other non-interest income,
partially offset by a $101,000 loss in connection with the sale of the Bank's
automobile loan portfolio during fiscal 2002. Excluding non-recurring income
from sales of securities, loans and deposits, total non-interest income
increased by $305,000, or 16.1%, compared to fiscal 2001.
Non-Interest Expense
Non-interest expense decreased by $1.2 million, or 8.0%, to $14.2 million
for fiscal 2002, compared to $15.4 million for the prior fiscal year. The
decrease in non-interest expense was primarily attributable to decreases of $1.0
million in other non-interest expenses and $279,000 in net occupancy and
equipment expenses, slightly offset by an increase of $61,000 in salaries and
employee benefits. The decreases in non-interest expense were attributable in
part to cost reductions as a result of branch sales and decreases in
professional fees and FDIC deposit insurance costs.
Income Tax Expense
Income tax expense was approximately $881,000 for fiscal 2002, an increase
from $98,000 for fiscal 2001, reflecting higher pre-tax income in fiscal 2002 as
compared to a pre-tax loss in fiscal 2001. During the fourth quarter of fiscal
year 2002, the Bank fully utilized its tax loss carryforward resulting from
prior period losses and began to accrue for federal taxes. The effective tax
rate in fiscal 2002 was 15.7% as compared to (33.7%) in fiscal 2001.
40
Comparison of Operating Results For The Years Ended March 31, 2001 and 2000
Net Loss
The Bank reported a net loss for fiscal 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.
Interest Income
Interest income increased by $941,000, or 3.4%, to $28.3 million for
fiscal 2001, compared to $27.4 million for fiscal 2000. The increase in interest
income was primarily attributable to an improvement in the average yield on
interest-earning assets from 7.12% for fiscal 2000, compared to 7.28% for fiscal
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 fiscal 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 fiscal 2001, compared to $3.6 million for the
prior year, reflecting a decrease of $6.2 million in the average balance of
mortgage-backed securities to $48.9 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 $3.0 million, or 1.1%, decrease in the average balance of
interest-bearing deposits to $264.8 million for fiscal 2001, compared to $267.8
million for fiscal 2000, and, to a lesser extent, to a three 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 16 basis point increase in the return on average
interest-earning assets coupled with the seven basis point increase in the cost
of interest-bearing liabilities used to fund interest-earning assets contributed
to a nine basis point increase in the interest rate spread to 3.36% for fiscal
2001, compared to 3.27% for the prior year. The net interest margin increased to
3.61% 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.
41
Provision for Loan Losses
Provision for loan losses increased by $694,000, or 63.2%, to $1.8
million, for fiscal 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 Bank'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 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 1.24% 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 $369,000, or 14.5%, 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 Holding Company's subsidiary, Alhambra. 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 $84,000, or 4.6%, compared to fiscal 2000.
Non-Interest Expense
Non-interest expense decreased by $388,000, or 2.5%, to $15.4 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 $777,000 in
other non-interest expenses, $62,000 in net occupancy expenses and $57,000 in
equipment expense, offset in part by an increase of $508,000 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 carryforward 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.
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. As a result of the
elimination of the liquidity requirement the Bank manages its liquidity through
a Board approved liquidity policy. At March 31, 2002, the Bank's liquidity ratio
was 7.99%.
42
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 and
investing activities during any given period. At March 31, 2002, and 2001,
assets qualifying for short-term liquidity, including cash and short-term
investments, totaled $50.0 million for both years.
The Consolidated Statements of Cash Flows present the change in cash from
operating, investing and financing activities. During fiscal 2002, cash and cash
equivalents increased by $3.1 million. Net cash provided by operating activities
was $8.9 million, representing primarily the results of operations adjusted for
depreciation and amortization and the provision for loan losses. Net cash used
in investing activities was $22.0 million, which was primarily the result of
purchases of securities available-for-sale. Net cash provided by financing
activities was $16.2 million, reflecting primarily a net increase in deposits,
partially offset by repayment of borrowed money.
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--Federal Banking Regulation--Capital Requirements."
The Bank presently exceeds all capital requirements as currently
promulgated. At March 31, 2002, the Bank had tangible, core, and risk-based
capital ratios of 8.1%, 8.1%, and 18.3%, respectively.
The following table reconciles the Bank's stockholders' equity at March
31, 2002, under accounting principles generally accepted in the United States of
America to regulatory capital requirements.
Regulatory Capital Requirements
-----------------------------------------------
GAAP Tangible Tier 1/Core Risk-Based
Capital Capital Capital Capital
-------- -------- -------- ---------
(In thousands)
Stockholders' Equity at March 31, 2002 (1) $ 36,949 $ 36,949 $ 36,949 $ 36,949
Add:
General valuation allowances -- -- 2,698
Deduct:
Unrealized loss(gain) on securities available for sale, net (116) (116) (116)
Excess of cost over net assets acquired (391) (391) (391)
-------- -------- --------
Regulatory Capital 36,442 36,442 39,140
Minimum Capital requirement 6,744 17,984 17,153
-------- -------- --------
Regulatory Capital Excess $ 29,698 $ 18,458 $ 21,987
======== ======== ========
(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 Federal'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
Federal'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.
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.
43
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 ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding directors and executive officers who are not
directors of the Registrant, will be presented under the headings "Executive
Officers," "Information With Respect To Nominees and Continuing Directors,"
"Nominees for Election As Directors," "Continuing Directors" and "Board and
Committee Meetings" in the definitive Proxy Statement for Carver's Annual
Meeting of Stockholders for the fiscal year ended March 31, 2002, which will be
filed with the SEC, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to executive (and director) compensation will be
included under the headings "Summary Compensation Table," "Option/SAR Grants in
Last Fiscal Year," "Fiscal Year End Option/SAR Values," "Pension Plan,"
"Directors' Compensation," "Employment Agreements," "Management Recognition
Plan," "Option Plan" and "Compensation Committee Interlocks and Insider
Participation" and in portions of the "Compensation Committee Report" in the
definitive Proxy Statement for Carver's Annual Meeting of Stockholders for the
fiscal year ended March 31, 2002, which will be filed with the SEC, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to security ownership of certain beneficial owners
and management will be included under the headings "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" in the
definitive Proxy Statement for Carver's Annual Meeting of Stockholders for the
fiscal year ended March 31, 2002, which will be filed with the SEC, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions will
be included under the headings "Transactions with Certain Related Persons" and
"Compensation Committee Interlocks and Insider Participation" in the definitive
Proxy Statement for Carver's Annual Meeting of Stockholders for the fiscal year
ended March 31, 2002, which will be filed with the SEC, and is incorporated
herein by reference.
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, 2002 - None.
(c) Exhibits required by Item 601 of Regulation S-K:
See Index of Exhibits on page E-1.
44
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 25, 2002 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, 2002 by the following persons on
behalf of the registrant and in the capacities indicated.
/s/ Deborah C. Wright President, Chief Executive Officer and Director
- -------------------------- (Principal Executive Officer)
Deborah C. Wright
/s/ William Gray Senior Vice President and Chief Financial
- -------------------------- Officer (Principal Financial and Accounting
William Gray Officer)
/s/ Frederick O. Terrell
- --------------------------
Frederick O. Terrell Chairman
/s/ Kevin Cohee
- --------------------------
Kevin Cohee Director
/s/ David L. Hinds
- --------------------------
David L. Hinds Director
/s/ Robert Holland, Jr.
- --------------------------
Robert Holland, Jr. Director
/s/ Pazel G. Jackson, Jr.
- --------------------------
Pazel G. Jackson, Jr. Director
/s/ Teri Williams
- --------------------------
Teri Williams Director
- --------------------------
Strauss Zelnick Director
CONSOLIDATED FINANCIAL STATEMENTS OF
CARVER BANCORP INC. AND SUBSIDIARIES
INDEX
Page
Consolidated Financial Statements as of March 31, 2002, 2001 and 2000
KPMG LLP Independent Auditor's Report....................................F-2
Management's Report......................................................F-3
Consolidated Statements of Financial Condition as of March 31, 2002
and 2001...............................................................F-4
Consolidated Statements of Operations for the years ended March 31,
2002, 2001 and 2000....................................................F-5
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the years ended March 31, 2002, 2001
and 2000...............................................................F-6
Consolidated Statements of Cash Flows for the years ended March 31,
2002, 2001 and 2000....................................................F-7
Notes to Consolidated Financial Statements...............................F-8
F-1
LETTERHEAD OF KPMG LLP
Independent Auditor's Report
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, 2002 and 2001 and the related consolidated statements of operations, changes
in stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended March 31, 2002. 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.
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, 2002 and 2001, and the results of its operations and its cash
flows for each of the years in the three-year period ended March 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
KPMG LLP
May 10, 2002
F-2
MANAGEMENT'S REPORT
Management is responsible for the preparation and integrity of the
consolidated financial statements and other information presented in this annual
report. The consolidated financial statements have been prepared in conformity
with the generally accepted accounting principles and reflect management's
judgments and estimates with respect to certain events and transactions.
Management is responsible for maintaining a system of internal control.
The purpose of the system is to provide reasonable assurance that transactions
are recorded in accordance with management's authorization; that assets are
safeguarded against loss or unauthorized use; and that the underlying financial
records support the preparation of financial statements. The system includes the
communication of written policies and procedures, selection of qualified
personnel, appropriate segregation of responsibilities and the ongoing internal
audit function.
The Board of Directors meets periodically with Company management, the
internal auditor, and the independent auditors, KPMG LLP, to review matters
relative to the quality of financial reporting, internal controls, and the
nature, extent and results of audit efforts.
The independent auditors conduct an annual audit to enable them to express
an opinion on the Company's consolidated financial statements. In connection
with the audit, the independent auditors consider the Company's internal
controls to the extent they consider necessary to determine the nature, timing
and extent of their audit procedures.
/s/ Deborah C. Wright /s/ William C. Gray
Deborah C. Wright William C. Gray
President and Chief Executive Officer Senior Vice President and Chief
Financial Officer
F-3
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
March 31,
-----------------------
2002 2001
--------- ---------
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 13,751 $ 8,058
Federal Funds sold 21,100 23,700
--------- ---------
Total cash and cash equivalents 34,851 31,758
--------- ---------
Securities:
Available-for-sale, at fair value (including pledged as collateral of
$76,720 at March 31, 2002 and $0 at March 31, 2001) 89,821 19,926
Held-to-maturity, at amortized cost (including pledged as collateral of
$15,549 at March 31, 2002 and $26,398 at March 31, 2001)
(fair value of $15,716 at March 31, 2002 and $68,931 at March 31, 2001) 15,643 67,862
--------- ---------
Total securities 105,464 87,788
--------- ---------
Loans receivable:
Real estate mortgage loans 290,914 283,022
Consumer and commercial business loans 2,328 3,966
Allowance for loan losses (4,128) (3,551)
--------- ---------
Total loans receivable, net 289,114 283,437
--------- ---------
Office properties and equipment, net 10,251 10,421
Federal Home Loan Bank of New York stock, at cost 3,763 5,755
Accrued interest receivable 2,804 2,541
Excess of cost over net assets acquired, net 391 603
Other assets 3,072 2,197
--------- ---------
Total assets $ 449,710 $ 424,500
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 324,954 $ 279,424
Securities sold under agreements to repurchase -- 4,930
Advances from the Federal Home Loan Bank of New York and other borrowed money 75,651 100,670
Other liabilities 12,363 7,380
--------- ---------
Total liabilities 412,968 392,404
--------- ---------
Stockholders' equity:
Preferred stock (par value $0.01 per share; 1,000,000
shares authorized; 100,000 issued and outstanding) 1 1
Common stock (par value $0.01 per share: 5,000,000
shares authorized; 2,314,275 shares issued) 23 23
Additional paid-in capital 23,756 23,769
Retained earnings 13,194 8,793
Unallocated common stock held by employee stock ownership plan ("ESOP") (152) (334)
Unamortized awards of common stock under management recognition plan ("MRP") (58) (95)
Treasury stock, at cost (15,489 shares at March 31, 2002 and 7,989 at March 31, 2001) (138) (61)
Accumulated other comprehensive income 116 --
--------- ---------
Total stockholders' equity 36,742 32,096
--------- ---------
Total liabilities and stockholders' equity $ 449,710 $ 424,500
========= =========
See accompanying notes to consolidated financial statements.
F-4
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the Year Ended March 31,
----------------------------------
2002 2001 2000
-------- -------- --------
Interest income:
Loans $ 22,586 $ 21,398 $ 19,443
Mortgage-backed securities 2,918 3,012 3,641
Investment securities 2,324 2,874 3,593
Federal funds sold 426 1,023 690
-------- -------- --------
Total interest income 28,254 28,307 27,367
-------- -------- --------
Interest expense:
Deposits 8,127 8,456 8,612
Advances and other borrowed money 3,920 5,822 5,397
-------- -------- --------
Total interest expense 12,047 14,278 14,009
-------- -------- --------
Net interest income 16,207 14,029 13,358
Provision for loan losses 900 1,793 1,099
-------- -------- --------
Net interest income after provision for loan losses 15,307 12,236 12,259
-------- -------- --------
Non-interest income:
Loan fees and service charges 319 330 353
Gain on sale of investment securities 1,399 -- --
Income from sale of branches 987 1,013 --
Loss from sale of loans (101) -- --
Proceeds from sale of Alhambra Building -- -- 728
Other 1,881 1,565 1,458
-------- -------- --------
Total non-interest income 4,485 2,908 2,539
-------- -------- --------
Non-interest expense:
Compensation and benefits 6,291 6,230 5,722
Net occupancy expense 1,144 1,401 1,463
Equipment 1,272 1,294 1,351
Other 5,491 6,510 7,287
-------- -------- --------
Total non-interest expense 14,198 15,435 15,823
-------- -------- --------
Income (loss) before income taxes 5,594 (291) (1,025)
Income taxes/(benefits) 881 98 110
-------- -------- --------
Net income (loss) $ 4,713 $ (389) $ (1,135)
======== ======== ========
Dividends applicable to preferred stock $ 197 $ 197 $ 45
Net income (loss) available to common stockholders $ 4,516 $ (586) $ (1,180)
======== ======== ========
Earnings (loss) per common share:
Basic $ 1.98 $ (0.26) $ (0.53)
======== ======== ========
Diluted $ 1.89 $ (0.26) $ (0.53)
======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(In thousands)
ACCUMULATED COMMON COMMON TOTAL
ADDITIONAL OTHER STOCK STOCK STOCK-
PREFERRED COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED BY ACQUIRED HOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK INCOME ESOP BY MRP EQUITY
--------- ------ ---------- --------- -------- ------------- ----------- -------- ---------
Balance--March 31, 1999 $ -- $23 $ 21,424 $ 10,721 $ -- $ -- $(993) $ -- $ 31,175
Comprehensive income (loss):
Net loss -- -- -- (1,135) -- -- -- -- (1,135)
------- --- -------- -------- ----- ---- ----- ---- --------
Comprehensive income (loss),
net of taxes (1,135)
Preferred stock issued 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
Comprehensive income (loss):
Net loss -- -- -- (389) -- -- -- -- (389)
------- --- -------- -------- ----- ---- ----- ---- --------
Comprehensive income (loss),
net of taxes (389)
Dividends paid -- -- -- (298) -- -- -- -- (298)
Purchase of treasury stock -- -- -- -- (61) -- -- -- (61)
Allocation of ESOP Stock -- -- (20) -- -- -- 318 -- 298
Purchase of shares for MRP -- -- -- -- -- -- -- (95) (95)
------- --- -------- -------- ----- ---- ----- ---- --------
Balance--March 31, 2001 1 23 23,769 8,793 (61) -- (334) (95) 32,096
Comprehensive income (loss):
Net income -- -- -- 4,713 -- -- -- -- 4,713
Change in net unrealized
gain (loss) on
available-for-sale
securities, net of taxes -- -- -- -- -- 116 -- -- 116
------- --- -------- -------- ----- ---- ----- ---- --------
Comprehensive income (loss),
net of taxes 4,829
Dividends paid -- -- -- (312) -- -- -- -- (312)
Purchase of treasury stock -- -- (5) -- (77) -- -- -- (82)
Allocation of ESOP Stock -- -- (8) -- -- -- 182 -- 174
Purchase of shares for MRP -- -- -- -- -- -- -- 37 37
------- --- -------- -------- ----- ---- ----- ---- --------
Balance--March 31, 2002 $ 1 $23 $ 23,756 $ 13,194 $(138) $116 $(152) $(58) $ 36,742
======= === ======== ======== ===== ==== ===== ==== ========
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,
-------------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 4,713 $ (389) $ (1,135)
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 900 1,793 1,099
ESOP and MRP expense 206 203 341
Depreciation and amortization expense 1,155 1,142 1,222
Amortization of intangibles 213 214 213
Other accretion and amortization 625 (719) 355
Loss from sale of loans 101 -- --
Gain from sale of Alhambra -- -- (728)
Gain on sale of branches (987) (1,013) --
Gain on sale of foreclosed real estate (77) (24) --
Impairment of foreclosed real estate -- 90 --
Net gain on sales of available-for-sale securities (1,399) -- --
Charge-off of branch improvements and related items, net -- 222 --
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (77) 112 207
(Increase) decrease in other assets (1,451) 549 2,776
Increase in other liabilities 5,589 802 675
(Decrease) increase in accrued interest payable (606) (381) 12
--------- --------- ---------
Net cash provided by operating activities 8,905 2,601 5,037
--------- --------- ---------
Cash flows from investing activities:
Purchases of securities:
Available-for-sale (134,721) (166,227) (460,000)
Held-to-maturity -- -- (25,000)
Proceeds from principal payments, maturities and calls of securities:
Available-for-sale 79,233 172,254 465,000
Held-to-maturity 6,357 11,077 12,209
Proceeds from sales of available-for-sale securities 32,676 -- --
Disbursements for loan originations (62,594) (30,180) (6,387)
Loans purchased from third parties (45,881) (31,265) (62,850)
Principal collections on loans 100,306 46,207 68,272
Redemption of FHLB stock 1,992 -- --
Proceeds from loans sold 1,260 160 --
Proceeds from sale of Alhambra building -- -- 1,369
Proceeds from sale of other real estate owned 553 380 --
Additions to premises and equipment (1,172) (610) (512)
--------- --------- ---------
Net cash used in investing activities (21,991) 1,796 (7,899)
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposits 61,900 19,960 4,942
Repayment of securities repurchase agreements (4,930) (26,407) (4,000)
(Repayment of) proceeds from FHLB advances and other borrowed money (25,019) 33,429 541
Common stock repurchased (77) (61) --
Proceeds from issuance of Preferred stock -- -- 2,366
Cash paid to fund sale of deposits (15,383) (21,464) --
Dividends paid (312) (298) (106)
--------- --------- ---------
Net cash provided by financing activities 16,179 5,159 3,743
--------- --------- ---------
Net increase in cash and cash equivalents 3,093 9,556 881
Cash and cash equivalents at beginning of the period 31,758 22,202 21,321
--------- --------- ---------
Cash and cash equivalents at end of the period $ 34,851 $ 31,758 $ 22,202
========= ========= =========
Supplemental information:
Noncash Transfers-
Loan receivable transferred to real estate owned $ -- $ -- $ 738
Securities transferred from held-to-maturity to available-for-sale 45,700 -- --
Change in unrealized gain/(loss) on valuation of
investments available-for-sale, net 116 -- --
Cash paid for-
Interest paid $ 12,685 $ 13,897 $ 13,506
Income taxes paid 473 238 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
Nature of operations
Carver Bancorp, Inc. ("Carver" or the "Holding Company"), was incorporated
in May 1996 and its principal wholly owned subsidiary is Carver Federal Savings
Bank (the "Bank" or "Carver Federal"). CFSB Realty Corp. and CFSB Credit Corp.
are wholly owned subsidiaries of the Bank. CFSB Credit Corp. is currently
inactive. 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 2,314,275 shares of its common stock, par value
$0.01 per share. On October 17, 1996, the Bank completed its reorganization into
a holding company structure (the "Reorganization") and became a wholly owned
subsidiary of the 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 11.
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 by federal savings banks. The
Bank has five branches located throughout the City of New York that primarily
serve the communities in which they operate.
Basis of consolidated financial statement presentation
The consolidated financial statements include the accounts of the Holding
Company, the Bank, the Bank's wholly owned subsidiaries CFSB Realty Corp. and
CFSB Credit Corp., and Alhambra Holding Corp., a subsidiary of the Holding
Company which is inactive. 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.
F-8
Securities
The Bank 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 securities 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 accumulated other comprehensive income, a component of
Stockholders' Equity.
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.
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.
The Bank 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 90
days 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 Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan" ("SFAS 114"), when it is probable that Carver Federal will be unable
to collect all principal and interest amounts due according to the contractual
terms of the loan agreement. Carver Federal tests loans covered under SFAS 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 SFAS 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 is responsible for determining
the adequacy of the allowance for loan losses and the periodic provisioning for
estimated losses included in the consolidated financial statements. The
evaluation process is undertaken on a quarterly basis, but may increase in
frequency should conditions arise that would require management's prompt
attention,
F-9
such as business combinations and opportunities to dispose of non-performing and
marginally performing loans by bulk sale or any development which may indicate
an adverse trend.
The methodology employed for assessing the appropriateness of the
allowance consists of the following criteria:
o Establishment of reserve amounts for all specifically
identified criticized loans, that have been designated as
requiring attention by management's internal loan review
program, bank regulatory examinations or the external
auditors.
o An average loss factor is applied to smaller balance
homogenous types of loans not subject to specific review.
These loans include residential 1-4 family, multifamily,
nonresidential and construction properties, which also
includes consumer and business loans.
o An allocation to the remaining loans giving effect to
historical loss experience over several years and linked to
cyclical trends.
Recognition is also given to the changed risk profile brought about by
business combinations, customer knowledge, the results of ongoing credit quality
monitoring processes and the cyclical nature of economic and business
conditions. An important consideration in applying these methodologies is the
concentration of real estate related loans located in the New York metropolitan
area.
The initial allocation or specific-allowance methodology commences with
loan officers and underwriters grading the quality of their loans on an
eight-category risk classification scale. Loans identified from this process as
below investment grade are referred to the Internal Asset Review Committee (ARC)
for further analysis and identification of those factors that may ultimately
affect the full recovery or collectibility of principal and/ or interest. These
loans are subject to continuous review and monitoring while they remain in the
criticized category. Additionally, ARC is responsible for performing periodic
reviews of the loan portfolio that are independent from the identification
process employed by loan officers and underwriters. Gradings that fall into
criticized categories are further evaluated and reserve amounts are established
for each loan.
The second allocation or loss factor approach to common or homogeneous
loans is made by applying the average loss factor to the outstanding balances in
each loan category.
The final allocation of the allowance is made by applying several years of
loss experience to categories of loans. It gives recognition to the loss
experience of acquired businesses, business cycle changes and the real estate
components of loans. Since many loans depend upon the sufficiency of collateral,
any adverse trend in the real estate markets could seriously affect underlying
values available to protect against loss.
Other evidence used to support the amount of the allowance and its
components are as follows:
o Regulatory examinations
o Amount and trend of criticized loans
o Actual losses
o Peer comparisons with other financial institutions
o Economic data associated with the real estate market in the
Company's market area
o Opportunities to dispose of marginally performing loans for
cash consideration
Carver Federal 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
F-10
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 principal 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 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 are 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 15 years using the straight-line method. The Bank 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.
F-11
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.
Comprehensive income
SFAS 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 and Comprehensive
Income.
Earnings (loss) per common share
Basic earnings per share ("EPS") is computed by dividing income available
to common stockholders 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.
Treasury Stock
Treasury stock is recorded at cost and is presented as a reduction of
stockholders' equity.
Pension Plans
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"). 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.
Stock-Based Compensation Plans
Compensation expense is recognized for the Bank's ESOP equal to the fair
value of shares committed to be released for allocation to participant accounts.
Any difference between the fair value at that time and the ESOP's original
acquisition cost is charged or credited to stockholders' equity (additional
paid-in capital). The cost of unallocated ESOP shares (shares not yet committed
to be released) is reflected as a reduction of stockholders' equity.
The Holding Company accounts for its stock option plan in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees. Accordingly, compensation expense is recognized only if the
exercise price of the option is less than the fair value of the underlying stock
at the grant date. SFAS 123, Accounting for Stock-Based Compensation, encourages
entities to recognize the fair value of all stock-based awards (measured on the
grant date) as compensation expense over the vesting period. Alternatively, SFAS
123 allows entities to apply the provisions of APB Opinion No. 25 and provide
pro forma disclosures of net income and earnings per share as if the
fair-value-based method defined in SFAS 123 had been applied. The Holding
Company has elected to apply the provisions of APB Opinion No. 25 and provide
these pro forma disclosures.
F-12
The Holding Company's management recognition and retention plan ("MRP") is
also accounted for in accordance with APB Opinion No. 25. The fair value of the
shares awarded, measured at the grant date, is recognized as unearned
compensation (a deduction from stockholders' equity) and amortized to
compensation expense as the shares become vested. When MRP shares become vested,
the Company records a credit to additional paid-in capital for tax benefits
attributable to any MRP deductions for tax purposes in excess of the grant-date
fair value charged to expense for financial reporting purposes.
Reclassifications
Certain amounts in the consolidated financial statements presented for
prior periods have been reclassified to conform with the current year
presentation.
NOTE 2. SECURITIES
The following is a summary of securities at March 31, 2002:
Gross Unrealized
--------------------
Carrying Estimated
Value Gains Losses Fair Value
-------- -------- -------- ----------
(Dollars in thousands)
Available-for-Sale:
Mortgage-backed securities:
Pass-through certificates:
Government National Mortgage Association $ 10,531 $ 55 $ (2) $ 10,584
Federal Home Loan Mortgage Corporation 27,840 416 (7) 28,249
Federal National Mortgage Association 11,435 88 (72) 11,451
Collateralized Mortgage Obligations 136 -- -- 136
-------- -------- -------- --------
Total mortgage-backed securities 49,942 559 (81) 50,420
U.S. Government Agency Securities 39,663 1 (263) 39,401
-------- -------- -------- --------
Total available-for-sale 89,605 560 (344) 89,821
-------- -------- -------- --------
Held-to-Maturity:
Mortgage-backed securities:
Pass-through certificates:
Government National Mortgage Association 3,448 24 -- 3,472
Federal Home Loan Mortgage Corporation 6,149 23 (53) 6,119
Federal National Mortgage Association 5,607 74 (2) 5,679
Small Business Administration 439 7 -- 446
-------- -------- -------- --------
Total mortgage-backed securities 15,643 128 (55) 15,716
-------- -------- -------- --------
U.S. Government Agency Securities -- -- -- --
-------- -------- -------- --------
Total held-to-maturity 15,643 128 (55) 15,716
-------- -------- -------- --------
Total securities $105,248 $ 688 $ (399) $105,537
======== ======== ======== ========
F-13
The following is a summary of securities at March 31, 2001:
Gross Unrealized
--------------------
Carrying Estimated
Value Gains Losses Fair Value
-------- -------- -------- ----------
(Dollars in thousands)
Available-for-Sale:
U.S. Government Agency Securities $ 19,926 $ -- $ -- $ 19,926
-------- -------- -------- --------
Total available-for-sale 19,926 -- -- 19,926
-------- -------- -------- --------
Held-to-Maturity:
Mortgage-backed securities:
Pass-through certificates:
Government National Mortgage Association 5,774 81 -- 5,855
Federal Home Loan Mortgage Corporation 14,672 143 (179) 14,636
Federal National Mortgage Association 21,633 132 (143) 21,622
Small Business Administration 594 -- (52) 542
Collateralized Mortgage Obligations 193 -- (6) 187
-------- -------- -------- --------
Total mortgage-backed securities 42,866 356 (380) 42,842
-------- -------- -------- --------
U.S. Government Agency Securities 24,996 1,093 -- 26,089
-------- -------- -------- --------
Total held-to-maturity 67,862 1,449 (380) 68,931
-------- -------- -------- --------
Total securities $ 87,788 $ 1,449 $ (380) $ 88,857
======== ======== ======== ========
F-14
The net unrealized gain on available-for-sale securities was $216,000
($116,000 after taxes) at March 31, 2002. There was no net unrealized gain on
available-for-sale securities at March 31, 2001. Changes in unrealized holding
gains and losses resulted in an after-tax increase in stockholders' equity of
$116,000. These gains and losses will continue to fluctuate based on changes in
the portfolio and market conditions.
Sales of available-for-sale securities resulted in gross realized gains
during the fiscal year ended March 31, 2002 of $1.4 million. There were no sales
of securities in the fiscal years ended March 31, 2001("fiscal 2001") and 2000
("fiscal 2000").
The following is a summary of the carrying value (amortized cost) and fair
value of securities at March 31, 2002, by remaining period to contractual
maturity (ignoring earlier call dates, if any). Actual maturities may differ
from contractual maturities because certain security issuers have the right to
call or prepay their obligations.
Carrying Fair
Value Value
-------- --------
(Dollars in thousands)
Available-for-sale:
Due in one year or less $ 15,018 $ 15,018
One through five years 24,882 24,630
Five through ten years 2,568 2,670
After ten years 47,137 47,503
-------- --------
$ 89,605 $ 89,821
======== ========
Held-to-maturity:
Five through ten years $ 513 $ 526
After ten years 15,130 15,190
-------- --------
$ 15,643 $ 15,716
======== ========
NOTE 3. LOANS RECEIVABLE, NET
March 31,
--------------------------------------------------
2002 2001
----------------------- -----------------------
Amount Percent Amount Percent
--------- --------- --------- ---------
(Dollars in thousands)
Real estate loans:
One- to four-family $ 122,814 41.28% $ 157,767 54.71%
Multi-family 118,589 39.86 83,620 29.00
Non-residential 40,101 13.48 36,113 12.52
Construction 13,678 4.60 7,101 2.46
Consumer and business 2,328 0.78 3,781 1.31
--------- --------- --------- ---------
Total gross loans 297,510 100.00% 288,382 100.00%
========= =========
Add:
Premium on loans 906 705
Less:
Loans in process (3,936) (1,280)
Deferred fees and loan discounts (1,238) (819)
Allowance for loan losses (4,128) (3,551)
--------- ---------
Net loan portfolio $ 289,114 $ 283,437
========= =========
F-15
At March 31, 2002, the Company's real estate loans receivable were
principally secured by properties located in the State of New York (82.8%).
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 $2.9 million, $2.1million and $2.8
million at March 31, 2002, 2001 and 2000, respectively. Custodial escrow
balances, maintained in connection with the foregoing loan servicing, were
approximately $28,000, $34,000 and $56,000 at March 31, 2002, 2001 and 2000,
respectively. During the year ended March 31, 2002 the Bank sold $481,000 in
automobile loans and recognized a loss of $101,000.
The following is an analysis of the allowance for loan losses:
Year ended March 31,
-------------------------------
2002 2001 2000
------- ------- -------
(Dollars in thousands)
Balance-beginning $ 3,551 $ 2,935 $ 4,020
Provision charged to operations 900 1,793 1,099
Recoveries of amounts previously charged off 177 200 385
Loans charged-off (500) (1,377) (2,569)
------- ------- -------
Balance-ending $ 4,128 $ 3,551 $ 2,935
======= ======= =======
Non-accrual loans consist of loans for which the accrual of interest has
been discounted as a result of such loans becoming 90 days 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 repay their loans under the
original contractual terms.
At March 31, 2002, 2001and 2000 the recorded investment in impaired loans was
$2.8 million, $2.5 million and $2.1 million, respectively all of which
represented non-accrual loans. The related allowance for credit losses was
approximately $146,000 and $291,000 at March 31, 2002 and 2001, respectively.
The impaired loan portfolio is primarily collateral dependent. The average
recorded investment in impaired loans during the fiscal years ended March 31,
2002, 2001 and 2000 was approximately $2.3 million, $3.2 million and $2.3
million, respectively. For the years ended March 31, 2002, 2001 and 2000, the
Company did not recognize any interest income on these impaired loans. Interest
income of $288,000, $202,000 and $345,000, respectively, for the years ended
March 31, 2002, 2001 and 2000 would have been recorded on impaired loans had
they performed in accordance with the original contract.
At March 31, 2002 and 2001, there were no loans to officers.
NOTE 4. PREMISES AND EQUIPMENT, NET
The detail of premises and equipment is as follows:
March 31,
----------------------
2002 2001
------- -------
(Dollars in thousands)
Land $ 415 $ 451
Buildings and improvements 8,074 8,556
Leasehold improvements 934 335
Furniture and equipment 6,992 6,469
------- -------
16,415 15,811
Less accumulated depreciation and amortization 6,164 5,390
------- -------
$10,251 $10,421
======= =======
F-16
Depreciation and amortization charged to operations for the years ended
March 31, 2002, 2001 and 2000 were $1.2 million, $1.2 million and $1.0 million
respectively.
NOTE 5. ACCRUED INTEREST RECEIVABLE
The detail of accrued interest receivable is as follows:
March 31,
----------------------
2002 2001
------- ------
(Dollars in thousands)
Loans receivable $1,735 $1,632
Mortgage-backed securities 517 788
Investments and other interest bearing assets 552 121
------ ------
Total accrued interest receivable $2,804 $2,541
====== ======
NOTE 6. EXCESS OF COST OVER NET ASSETS ACQUIRED, NET
The excess of cost over net assets acquired relates to the acquisition of
the Bedford-Stuyvesant Branch office. The detail is as follows:
March 31,
----------------------
2002 2001
------ ------
(Dollars in thousands)
Core deposit premium $ 377 $ 581
Acquisition costs 14 22
------ ------
$ 391 $ 603
====== ======
NOTE 7. DEPOSITS
Deposit balances and weighted average stated interest rates at March 31
are summarized as follows:
2002 2001
------------------------------- --------------------------------
Percent of Weighted Percent Weighted
Total Average of Total Average
Amount Deposits Rate Amount Deposit Rate
-------- ---------- -------- -------- --------- --------
(Dollars in thousands)
Non-interest -bearing demand $ 13,463 4.1% --% $ 11,409 4.1% --%
NOW accounts 18,095 5.6 1.24 14,757 5.3 1.71
Savings and club 126,779 39.0 1.71 132,645 47.5 2.32
Money Market savings account 15,232 4.7 1.78 15,718 5.6 2.62
Certificates 151,385 46.6 2.73 104,895 37.5 4.55
-------- -------- -------- --------
Total $324,954 100.0% 2.18% $279,424 100.0% 3.04%
======== ======== ======== ========
F-17
The scheduled maturities of certificates of deposits are as follows:
March 31,
------------------------
2002 2001
-------- --------
(In thousands)
Certificates of deposit by remaining
term to contractual maturity:
Within one year $ 80,528 $ 28,449
After one but within two years 26,638 22,067
After two but within three years 10,495 10,682
After three years 33,724 43,697
-------- --------
Total $151,385 $104,895
======== ========
The aggregate amount of certificates of deposit with minimum denominations
of $100,000 or more was approximately $90.6 million and $16.3 million at March
31, 2002 and 2001, respectively.
Interest expense on deposits for the year ended March 31 consists of the
following:
2002 2001 2000
------- ------- -------
(In thousands)
Demand $ 237 $ 253 $ 314
Savings and club 2,342 3,081 3,650
Money Market 302 412 631
Certificates of deposit 5,263 4,739 4,047
------- ------- -------
8,144 8,485 8,642
Penalty for early withdrawal of
certificates of deposit (17) (29) (30)
------- ------- -------
Total interest expense $ 8,127 $ 8,456 $ 8,612
======= ======= =======
NOTE 8. BORROWED MONEY
2002 2001
---------------------- ---------------------
(Dollars in thousands)
Maturing
Year Ended
March 31, Rate Amount Rate Amount
- ----------- ------- -------- ------ --------
2002 --% $ -- 5.86% $ 96,500
2003 2.41 15,500 -- --
2004 4.28 3,500 -- --
2005 4.05 26,000 -- --
2006 5.29 10,490 5.44 3,490
2007 5.17 19,484 -- --
2012 3.50 288 3.50 309
------- -------- ------ --------
4.18% $ 75,262 5.84% $100,299
======= ======== ====== ========
FHLB Advances. FHLB advances and weighted average interest rates at
March 31 are summarized as follows, by remaining period to maturity:
F-18
As a member of the FHLB, the Bank may have outstanding FHLB borrowings in
a combination of term advances and overnight funds of up to 25% of its total
assets, or approximately $112.4 million at March 31, 2002. Borrowings are
secured by the Bank's investment in FHLB stock and by a blanket security
agreement. This agreement requires the Bank to maintain as collateral certain
qualifying assets (principally securities and residential mortgage loans) not
otherwise pledged. At March 31, 2002 and 2001, the advances were secured by
pledges of the Bank's investment in the capital stock of the Federal Home Loan
Bank totaling $3.8 million and $5.8 million, respectively, and a blanket
assignment of the Bank's unpledged qualifying mortgage, mortgage-backed
securities and investment portfolios.
Securities Sold Under Agreements to Repurchase. In securities sold under
agreements to repurchase, the Bank borrows funds through the transfer of debt
securities to the FHLB, as counterparty, and concurrently agrees to repurchase
the identical securities at a fixed price on a specified date. Repurchase
agreements are collateralized by the securities sold and, in certain cases, by
additional margin securities. At March 31, 2002 there were no securities sold
under agreements to repurchase outstanding. At March 31, 2001 securities sold
under agreements to repurchase amounted to $4.9 million. The following table
sets forth certain information regarding Carver's borrowed money at the dates
and for the periods indicated:
At or for the Year Ended
March 31,
------------------------
2002 2001
--------- --------
(Dollars in thousands)
Amounts outstanding at the end of period:
FHLB advances $ 75,262 $100,299
Repos -- 4,930
Weighted average rate paid at period end:
FHLB advances 4.18% 5.84%
Repos --% 6.70%
Maximum amount of borrowing outstanding at any month end:
FHLB advances $100,094 $102,314
Repos 14,930 31,337
Approximate average amounts outstanding for period:
FHLB advances $ 76,141 $ 80,591
Repos 2,888 17,165
Approximate weighted average rate paid during period:
FHLB advances 5.50% 5.72%
Repos 5.91% 5.99%
F-19
NOTE 9. INCOME TAXES
The components of income tax expense for the years ended March 31 are as
follows:
2002 2001 2000
-------- -------- --------
(In thousands)
Federal income tax expense (benefit):
Current $ 569 $ -- $ --
Deferred 1,792 -- --
-------- -------- --------
2,361 -- --
-------- -------- --------
State and local income tax expense:
Current 913 98 110
Deferred 46 -- --
-------- -------- --------
959 98 110
-------- -------- --------
Valuation allowance (2,439) -- --
Total provision for income tax expense $ 881 $ 98 $ 110
======== ======== ========
The reconciliation of the expected federal tax rate to the consolidated
effective tax rate for the years ended March 31 is as follows:
2002 2001 2000
--------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Statutory Federal income tax $ 1,902 34.0% $ (99) 34.0% $ (349) 34.0%
State and local income taxes, net of Federal
tax benefit 632 11.3 98 (33.6) 110 (10.7)
Change in valuation allowance (2,439) (43.6) 157 (54.0) 298 (29.0)
Other 786 14.0 (58) 19.9 51 (5.0)
-------- -------- -------- -------- -------- --------
Total income tax expense $ 881 15.7% $ 98 (33.7)% $ 110 (10.7)%
======== ======== ======== ======== ======== ========
At March 31, 2001, Carver had net operating loss carryforwards for federal
income tax purposes of approximately $5.7 million. These net operating loss
carryforwards were fully utilized during the year ended March 31, 2002.
Carver's stockholders' equity includes approximately $4.2 million and $3.6
million at March 31, 2002 and 2001, 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 at
March 31 are as follows:
2002 2001
-------- --------
(In thousands)
Deferred tax assets
Net operating loss carryforward $ -- $ 1,939
Allowance for loan losses 1,235 1,649
Deferred loan fees 607 354
Employees' pension plan 132 132
Reserves for losses on other assets 38 --
Contributions carryforward 95 67
-------- --------
Total deferred tax assets before
valuation allowance 2,107 4,141
Valuation allowance -- (2,439)
-------- --------
Total deferred tax assets 2,107 1,702
-------- --------
Deferred tax liabilities
Unrealized gain on available-for-sale securities 100 --
Excess of cost over net assets acquired 168 250
Depreciation 315 430
-------- --------
Total deferred tax liabilities 583 680
-------- --------
Net deferred tax assets $ 1,524 $ 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 $4.5 million
of future taxable income to realize this asset. Therefore, a valuation allowance
against the deferred tax assets at March 31, 2002 is not considered necessary.
Accordingly, during 2002, the valuation allowance was reduced by $2,439.
NOTE 10. EARNINGS PER COMMON SHARE
The following table reconciles the earnings (loss) available to common
shareholders (numerator) and the weighted average common stock outstanding
(denominator) for both basic and diluted EPS for the periods presented:
Year Ended March 31,
----------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
Net income (loss) $ 4,713 $ (389) $ (1,135)
Preferred stock dividends (197) (196) (45)
-------- -------- --------
Net income (loss) - basic 4,516 (585) (1,180)
Impact of potential conversion of convertible preferred stock
to common stock 197 196 45
-------- -------- --------
Net income (loss) - diluted $ 4,713 $ (389) $ (1,135)
======== ======== ========
Weighted average common shares outstanding - basic 2,277 2,256 2,239
Effect of dilutive securities convertible preferred stock 218 208 46
-------- -------- --------
Weighted average common shares outstanding - diluted 2,495 2,464 2,285
======== ======== ========
F-21
NOTE 11. STOCKHOLDERS' EQUITY
Conversion and Stock Offering. On October 24, 1994, the Bank issued in an
initial public offering 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 $2.5 million (unaudited),
and $3.0 million (unaudited) at March 31, 2002 and 2001, 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 Holding Company's common stock were outstanding. The Bank is not
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.
Convertible Preferred Stock. On January 11, 2000, the Holding Company
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 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. The Holding Company 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, 2002 unpaid accrued dividends related to the Preferred Stock
amounted to $57,000.
Regulatory Capital. The operations and profitability of the Bank are
significantly affected by legislation and the policies of the various regulatory
agencies. The Office of Thrift Supervision ("OTS") has 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, 2002 and 2001, the Bank exceeded all of its regulatory capital
requirements.
F-22
The following is a summary of the Bank's actual capital amounts and ratios
as of March 31, 2002 and 2001, compared to the OTS requirements for minimum
capital adequacy and for classification as a well-capitalized institution:
Minimum Capital Classification as
Bank Actual Adequacy Well Capitalized
----------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
March 31, 2002
Tangible capital $ 36,442 8.1% $ 6,744 1.5% N/A N/A
Tier I (core)capital 36,442 8.1 17,984 4.0 $ 22,480 5.0%
Risk-based capital:
Tier I 36,442 17.0 N/A N/A 12,865 6.0
Total 39,140 18.3 17,153 8.0 21,442 10.0
March 31, 2001
Tangible capital $ 30,360 7.0% $ 6,360 1.5% N/A N/A
Tier I (core)capital 30,360 7.0 16,960 4.0 $ 21,200 5.0%
Risk-based capital:
Tier I 30,360 14.5 N/A N/A 12,310 6.0
Total 32,333 15.8 16,413 8.0 20,516 10.0
The following table reconciles the Bank's stockholders' equity at March
31, 2002, in accordance with accounting principles generally accepted in the
U.S. to regulatory capital requirements:
Regulatory Capital Requirements
-----------------------------------------------
GAAP Tangible Tier 1/Core Risk-Based
Capital Capital Capital Capital
-------- --------- ----------- ----------
(In thousands)
Stockholders' Equity at March 31, 2002 (1) $ 36,949 $ 36,949 $ 36,949 $ 36,949
Add:
General valuation allowances -- -- 2,698
Deduct:
Unrealized loss (gain) on securities available-for-sale, net (116) (116) (116)
Excess of cost over net assets acquired (391) (391) (391)
-------- -------- --------
Regulatory Capital 36,442 36,442 39,140
Minimum Capital requirement 6,744 17,984 17,153
-------- -------- --------
Regulatory Capital Excess $ 29,698 $ 18,458 $ 21,987
======== ======== ========
(1) Reflects Bank only.
Comprehensive Income. Comprehensive income represents net income and
certain amounts reported directly in stockholders' equity, such as the net
unrealized gain or loss on securities available for sale. The Holding Company
has reported its comprehensive income for fiscal 2002, 2001 and 2000 in the
consolidated statements of changes in stockholders' equity and comprehensive
income. Carver's other comprehensive income or loss (other than net income),
which is attributable to gains and losses on securities available-for-sale, for
the year ended March 31, 2002 was $116,000. There was no other comprehensive
income or loss for the years ended March 31, 2001 and 2000.
NOTE 12. EMPLOYEE BENEFIT AND STOCK COMPENSATION 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
F-23
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 at March 31:
2002 2001
-------- --------
(In thousands)
Change in projected benefit obligation during the year
Projected benefit obligation at the beginning of year $ 2,527 $ 2,846
Service cost -- 121
Interest cost 182 207
Actuarial gain 154 (84)
Benefits paid (240) (243)
Curtailment -- (320)
-------- --------
Projected benefit obligation at end of year $ 2,623 $ 2,527
======== ========
Change in fair value of plan assets during the year
Fair value of plan assets at beginning of year $ 3,594 $ 3,791
Actual return on plan assets 15 46
Employer contributions -- --
Benefits paid (240) (243)
-------- --------
Fair value of plan assets at end of year $ 3,369 $ 3,594
======== ========
Funded status $ 746 $ 1,067
Contributions -- --
Unrecognized transition obligation -- --
Unrecognized gain (600) (1,074)
Unrecognized past service liability -- --
-------- --------
Accrued pension cost $ 146 $ (7)
======== ========
Net periodic pension cost included the following components for the years
ended March 31 are:
2002 2001 2000
-------- -------- --------
(In thousands)
Service cost $ -- $ 121 $ 159
Interest cost 182 207 191
Expected return on plan assets (279) (298) (284)
Amortization of:
Unrecognized transition (benefit) obligation -- 36 36
Unrecognized gain (loss) (56) (96) (62)
Unrecognized past service liability -- 2 2
Curtailment credit -- (84) --
-------- -------- --------
Net periodic pension (benefit) cost $ (153) $ (112) $ 42
======== ======== ========
Significant actuarial assumptions used in determining plan benefits for
the years ended March 31 are:
2002 2001 2000
-------- -------- --------
Annual salary increase (1) N/A 4.75% 5.50%
Long-term return on assets 8.00% 8.00% 8.00%
Discount rate used in measurement of benefit obligations 7.00% 7.25% 8.00%
(1) The annual salary increase rate is not applicable as the plan is frozen.
F-24
Savings Incentive Plan. Carver has a savings incentive plan, pursuant to
Section 401(k) of the Code, for all eligible employees of the Bank. Through
December 31, 2000, employees had the option to elect to defer up to the lesser
of 15% or the maximum amount allowed under law of their compensation and receive
a 50% matching contribution from Carver up to the maximum allowed by law.
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 31s 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 one to five 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, 2002, 2001 and 2000 were
$60,000, $45,000 and $56,000 respectively.
Directors' Retirement Plan. Concurrent with the conversion to the stock
form of ownership, Carver 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. 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 at March 31:
----- -----
2002 2001
----- -----
(In thousands)
Change in projected benefit obligation during the year
Projected benefit obligation at beginning of year $ 296 $ 670
Service cost -- --
Interest cost 19 35
Actuarial loss (gain) -- 14
Benefits paid (51) (51)
Curtailment -- (372)
----- -----
Projected benefit obligation at end of year $ 264 $ 296
===== =====
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 51
Benefits paid (51) (51)
----- -----
Fair value of plan assets at end of year $ -- $ --
===== =====
Funded Status $(264) $(296)
Contributions -- --
Unrecognized loss 21 21
Unrecognized past service liability -- --
----- -----
Accrued pension cost $(243) $(275)
===== =====
F-25
Net periodic pension cost for the years ended March 31, 2002, 2001 and
2000 included the following:
2002 2001 2000
------ ------ ------
(In thousands)
Service cost $ -- $ -- $ --
Interest cost 20 35 51
Expected return on plan assets -- -- --
Amortization of:
Unrecognized gain -- 4 27
Unrecognized past service liability -- 23 55
Curtailment credit -- (179) --
------ ------ ------
Net periodic pension cost $ 20 $ (117) $ 133
====== ====== ======
The actuarial assumptions used in determining plan benefits include annual
fee increases of 5.50% during the year ended March 31, 2000, and a discount rate
of 7.25%, 7.25% and 8.00% for the years ended March 31, 2002, 2001 and 2000,
respectively.
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 $119,000, $0 and $178,000 as expense for the
years ended March 31, 2002, 2001 and 2000, respectively.
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. On May 20, 2002, the term loan was modified to
provide for interest at a fixed rate of 4% per annum. 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 $174,000, $298,000 and $326,000 for the years ended
March 31, 2002, 2001 and 2000, respectively.
F-26
The ESOP shares at March 31 are as follows:
2002 2001
-------- --------
(In thousands)
Allocated shares 149 134
Unreleased shares 33 48
-------- --------
Total ESOP shares 182 182
======== ========
Fair value of unreleased shares $ 374 $ 293
Stock Option Plan. During 1995, the Holding Company 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, 2002,
there were 107,267 options outstanding and 106,267 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 or five
years, commencing after one 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
follows:
2002 2001 2000
------------------------ ------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- -------- -------- -------- -------- --------
Outstanding, beginning of year 112,963 9.17 58,463 9.57 79,115 10.74
Granted 29,767 9.79 56,000 8.94 31,000 8.21
Exercised -- -- -- -- -- --
Forfeited (35,463) 10.61 (1,500) 16.13 (51,652) 10.55
-------- -------- -------- -------- -------- --------
Outstanding, end of year 107,267 8.86 112,963 9.17 58,463 9.57
======== ======== ======== ======== ======== ========
Exercisable at year end 106,267 -- 89,663 -- 34,470 --
======== ======== ======== ======== ======== ========
The following table summarizes information about stock options at March
31, 2002:
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 70,000 8 years $ 8.24 70,000 $ 8.24
9.00 9.99 28,267 9 years 9.79 28,267 9.79
10.00 10.99 8,000 9 years 10.42 8,000 10.42
13.00 13.99 1,000 6 years 13.81 -- --
------- -------
Total 107,267 106,267
======= =======
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
F-27
earnings per share.
Alternatively, Carver could have accounted for under SFAS 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 123 for its Plan, net income and earnings per common share would
have been to the pro forma amounts indicated below for the years ended March 31:
2002 2001 2000
------------- -------------- --------------
(Dollars in thousands, except per share data)
Net Gain (loss) available to common shareholders:
As reported $ 4,516 $ (586) $ (1,180)
Pro forma 4,414 (759) (1,268)
Basic gain (loss) per share:
As reported $ 1.98 $ (0.26) $ (0.53)
Pro forma
1.94 (0.34) (0.57)
Diluted gain (loss) per share:
As reported $ 1.89 $ (0.26) $ (0.53)
Pro forma
1.85 (0.34) (0.57)
Weighted average number of shares outstanding 2,276,920 2,256,441 2,238,846
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 years.
NOTE 13. 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 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:
2002 2001
-------- --------
(In thousands)
Commitments to originate mortgage loans $ 14,723 $ 6,137
Consumer loans 2,877 3,380
-------- --------
Total $ 17,600 $ 9,517
======== ========
F-28
At March 31, 2002, of the $14.7 million in outstanding commitments to
originate mortgage loans, $3.1 million represented commitments to originate
multi-family mortgage loans at fixed rates within a range of 6.25% to 7.75%,
$7.7 million represented the balance of all other real estate loans at fixed
rates between 5.50% to 8.50% and $3.9 million represented construction loans at
an average rate of 6.36%.
At March 31, 2002, undisbursed funds from approved consumer lines of
credit, primarily credit cards, totaled $2.9 million. Such lines consist of
unsecured and secured lines of credit of $2.7 million and $207,000 respectively.
All such lines carry adjustable rates.
At March 31, 2002, undisbursed funds from approved unsecured commercial
lines of credit totaled $45,000.
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 $142,000, $191,000, and $273,000
for the years ended March 31, 2002, 2001 and 2000, respectively. As of March 31,
2002, minimum rental commitments under all noncancellable leases with initial or
remaining terms of more than one year and expiring through 2012 are as follows:
Year Ending Minimum
March 31, Rental
----------- --------------
(In thousands)
2003 $ 186
2004 189
2005 192
2006 195
2007 94
Thereafter 317
------
$1,173
======
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 Bank 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, 2002,
except as set forth below, there were no material legal proceedings to which the
Company 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 Federal employee, filed suit against Carver Federal in the Supreme
Court of the State of New York, County of New York (the "St. Rose
F-29
Action"). On or about January 12, 1999, Carver Federal and St. Rose entered into
an agreement (the "Agreement") providing that St. Rose would resign from Carver
Federal 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 Federal: (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 Federal moved to dismiss St. Rose's
fraudulent misrepresentation cause of action and the Court granted Carver
Federal's motion to dismiss. Carver Federal has not filed an answer in the St.
Rose Action. By written stipulation of the parties, Carver Federal's time to
file an answer to St. Rose's complaint has been extended without date. Carver
Federal plans to assert claims against St. Rose for, among other claims, payment
of certain financial obligations to Carver Federal, 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 Federal intends to continue to defend the St. Rose
Action vigorously.
Carver Federal is also a defendant in an action brought by Ralph Williams
(the "Williams Action") and an action brought by Janice Pressley (the "Pressley
Action" and, together with the Williams Action, the "Actions"), both of which
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 Federal 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 Federal, Chase Manhattan Bank ("Chase"),
Astoria Federal Savings and Loan Association and Reliance Federal Savings Bank
(Carver Federal 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 refiled their motion to dismiss the
Williams Action and it is sub judice. If the motion to dismiss is not granted,
Carver Federal intends to defend the Williams Action vigorously. On September
20, 2001 the court granted the Bank Defendants' motion to dismiss the Pressley
Action. Pressley has appealed the dismissal. Carver Federal is vigorously
opposing the appeal.
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 Federal 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 and in November 2001 the court dismissed
the breach of contract action against the individual defendants and the
equitable estoppel and estoppel by contract claims against all defendants.
Carver Federal appealed the failure to dismiss the breach of contract claims. If
Carver Federal does not prevail in the appeal, Carver Federal intends to
vigorously defend this action.
On or about January 28, 2002, plaintiff Monique Barrow, a former employee,
filed suit against Carver Federal in
F-30
the United States District Court for the Southern District of New York alleging
pregnancy discrimination in violation of the Family Medical Leave Act, New York
State and New York City laws. The plaintiff seeks compensatory damages in an
amount not less than $5 million, punitive, liquidated and other compensatory
damages in an amount not less than $10 million, as well as reinstatement to her
former position. Carver Federal has answered the complaint denying any
liability, and in the opinion of management, after consultation with legal
counsel, the lawsuit is without merit and the ultimate outcome of this matter is
not expected to have a material adverse effect on the Company's results of
operations, business operations or consolidated financial condition.
NOTE 14. 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.
Borrowings
The fair values of advances from the 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, 2002 approximates the fees
received. The fair value is not considered material.
F-31
The carrying amounts and estimated fair values of the Bank's financial
instruments at March 31, 2002 and 2001 are as follows:
At March 31,
-----------------------------------------------------------
2002 2001
-------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(In thousands)
Financial Assets:
Cash and cash equivalents $ 34,851 $ 34,851 $ 31,758 $ 31,758
Securities available-for-sale $ 39,663 $ 39,401 $ 19,926 $ 19,926
Investment securities held-to-maturity $ 15,643 $ 15,716 $ 24,996 $ 26,089
Mortgage backed securities $ 49,942 $ 50,420 $ 42,866 $ 42,842
Loans receivable $ 289,114 $ 300,251 $ 283,437 $ 290,140
Accrued interest receivable $ 2,804 $ 2,804 $ 2,541 $ 2,541
Financial Liabilities:
Deposits $ 324,954 $ 324,982 $ 279,424 $ 258,920
Securities sold under agreements to
repurchase -- -- $ 4,930 $ 4,930
Advances from Federal Home Loan Bank of
New York $ 75,262 $ 74,375 $ 100,299 $ 105,421
Other borrowed money $ 389 $ 384 $ 371 $ 371
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 subjectivity to these estimated fair values.
F-32
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly financial data for the
fiscal years ended March 31, 2002 and 2001:
Three Months Ended
---------------------------------------------------------------------
June 30 September 30 December 31 March 31
------------ ------------ ------------ ------------
(In thousands, except per share data)
Fiscal 2002
Interest income $ 7,049 $ 7,024 $ 7,162 $ 7,020
Interest expense (3,387) (3,233) (2,959) (2,469)
Net interest income 3,662 3,791 4,203 4,551
Provision for loan losses (225) (225) (225) (225)
Non-interest income 1,420 476 1,976 613
Non-interest expense (3,419) (3,438) (3,836) (3,505)
Income tax expense (273) (115) (402) (91)
------------ ------------ ------------ ------------
Net income $ 1,165 $ 489 $ 1,716 $ 1,343
============ ============ ============ ============
Earnings per common share
Basic 0.49 0.19 0.73 0.57
Diluted 0.47 0.19 0.69 0.53
============ ============ ============ ============
Fiscal 2001
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 taxes (expense) benefit (24) (178) 45 59
------------ ------------ ------------ ------------
Net income (loss) $ 149 $ 280 $ (397) $ (421)
============ ============ ============ ============
Earnings (loss) per common share
Basic 0.04 0.10 (0.20) (0.21)
Diluted 0.04 0.10 (0.20) (0.21)
============ ============ ============ ============
F-33
NOTE 16. CARVER BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31,
---------------------
2002 2001
-------- --------
(Dollars in thousands)
ASSETS
Cash on deposit with the Bank $ 439 $ 2,128
Investment in the Bank 37,567 30,360
-------- --------
Total assets $ 38,006 $ 32,488
======== ========
LIABILITIES
Accounts payable to the Bank $ 14 $ 118
Other liabilities 1,250 274
-------- --------
Total liabilities 1,264 392
Stockholders' equity 36,742 32,096
-------- --------
Total liabilities and stockholders' equity $ 38,006 $ 32,488
======== ========
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
--------------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
INCOME
Equity in net income (loss) from the Bank $ 6,247 $ 624 $ (413)
Equity in net income (loss) from Alhambra Holding -- -- 720
Interest income from deposit with the Bank 33 48 77
Interest income from promissory note -- -- 12
Other income -- -- 13
Total income 6,280 672 409
EXPENSES
Salaries and employee benefits 82 64 113
Legal expense 236 233 659
Shareholder expense 296 510 432
Other 72 156 340
-------- -------- --------
Total expense 686 963 1,544
Income (loss) before income taxes 5,594 (291) (1,135)
Income tax expense 881 98 --
-------- -------- --------
Net income (loss) $ 4,713 $ (389) $ (1,135)
======== ======== ========
F-34
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
--------------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 4,714 $ (389) $ (1,135)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Equity in net (income) loss of the Bank (6,247) (624) 413
Equity in net income of Alhambra Holding -- -- (720)
Decrease (increase) in accounts receivable -- 3 (3)
Decrease (increase) in promissory note receivable -- 50 (50)
Increase (decrease) in accounts payable to Bank (104) 45 73
Increase (decrease) in other liabilities 976 (802) 914
Allocation of ESOP Stock and MRP activity 206 203 341
Other, net (845) (203) (25)
-------- -------- --------
Net cash provided by operating activities (1,300) (1,717) (192)
-------- -------- --------
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 (77) (61) --
Dividends paid (312) (298) (106)
Decrease in unrealized loss on investments -- -- --
-------- -------- --------
Net cash (used in) provided by financing activities (389) (359) 2,260
-------- -------- --------
Net (decrease) increase in cash (1,689) 60 2,068
Cash and cash equivalents - beginning 2,128 2,068 --
-------- -------- --------
Cash and cash equivalents - ending $ 439 $ 2,128 $ 2,068
======== ======== ========
NOTE 17. RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective April 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), as amended. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The
statement requires that all derivative instruments be recorded on the balance
sheet at fair value. However, the accounting for changes in fair value of the
derivative instrument depends on whether the derivative instrument qualifies as
a hedge. If the derivative instrument qualifies as a hedge, the accounting
treatment varies based on the type of risk being hedged. If the derivative
instrument does not qualify as a hedge, changes in fair value are reported in
earnings when they occur. Under SFAS 133, an entity that elects to apply hedge
accounting is required to establish, at the inception of the hedge, the method
it will use for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge. Those
methods must be consistent with the entity's approach to managing risk.
Upon the adoption of SFAS 133 on April 1, 2001 the Bank transferred $45.7
million of securities from held-to-maturity to available-for-sale. SFAS 133 did
not have a material impact on the consolidated financial statements, however,
future volatility of earnings and other comprehensive income may result due to
management's use of derivatives in connection with potential hedging strategies
and changes in market values of derivatives and hedged items.
F-35
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
In September 2000, the Financial Accounting Standards 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 Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
SFAS 140 revised the standards of accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but it carries over most of SFAS 125's provisions without reconsideration. SFAS
140 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial components approach that focuses on control. Under
this approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes the financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS 140 applies generally to transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. Requirements for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral apply to fiscal years ending after December 15, 2000. The adoption of
SFAS 140 did not have a material impact on the financial condition or results of
operations.
BUSINESS COMBINATIONS
In June 2001, the FASB issued SFAS No. 141 "Business Combinations" ("SFAS
141") effective June 30, 2001. SFAS 141 addresses the financial accounting and
reporting for business combinations and requires that all business combinations
initiated after June 30, 2001, be accounted for using the purchase method of
accounting and prohibits the use of pooling-of-interests method of accounting.
Pooling transactions initiated prior to that date were not affected. SFAS 141
also establishes guidelines as to how the purchase method is to be applied. This
guidance is similar to that previously contained in APB Opinion No. 16, however,
SFAS 141 establishes additional disclosure requirements for transactions
occurring after the effective date. SFAS 141 also requires identifiable
intangible assets acquired in a business combination to be recognized as an
asset apart from goodwill if they meet certain criteria. The requirements of
SFAS 141 did not have a material impact on the financial condition or results of
operations.
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 addresses the initial recognition and measurement
of intangible assets acquired individually or with a group of other assets not
constituting a business combination. In accordance with the provisions of SFAS
142, all goodwill and identifiable intangible assets identified as having an
indefinite useful life, including those acquired before its effective date, will
no longer be amortized but will be assessed for impairment at least annually by
applying a fair-value based test as defined in the Statement. SFAS 142 requires
that on acquired intangible assets having an estimated useful life, be
separately recognized and amortized over their estimated useful lives.
Intangible assets that remain subject to amortization shall continue to be
reviewed for impairment in accordance with previous pronouncements.
Additionally, SFAS 142 requires that an initial impairment assessment on
all goodwill recognized in the consolidated financial statements be completed
within six months of the statements adoption to determine if a transition
impairment charge needs to be recognized. Management has performed the initial
impairment assessment as of March 31, 2002, and determined that no impairment
charge is warranted. The consolidated balance sheets and consolidated statements
of income, presented herein disclose the identifiable intangible assets that
were originally recognized separate from goodwill. Effective April 1, 2002,
goodwill will no longer be amortized, however, identifiable intangible assets
will continue to be amortized over the estimated useful lives. Amortization of
identifiable intangible assets is estimated to be $212 thousand in fiscal 2003.
F-36
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. Management does not anticipate that the adoption of this statement
will have a significant effect on the Company's earnings or financial position.
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and resolves accounting and implementation issues related to previous
pronouncements. More specifically, it: (a) eliminates the allocation of goodwill
to long-lived assets to be tested for impairment; and (b) details both a
probability - weighted and primary asset approach to estimate cash flows in
testing for impairment of a long-lived asset. SFAS 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001.
Management does not anticipate that the adoption of this statement will have a
significant effect on the Company's earnings or financial position.
F-37
EXHIBIT INDEX
Exhibit Number 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
4.3 Bylaws of Carver Federal Savings Bank
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)
E-1
Exhibit Number Description
- -------------- -----------
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)
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 (8)
10.18 Amended and Restated Employment Agreement by and between
Carver Bancorp, Inc. and Deborah C. Wright, entered into as
of June 1, 1999 (8)
10.19 Form of Letter Employment Agreement between Executive
Officers and Carver Bancorp, Inc. (8)
10.20 Employment Agreement by and between Carver Federal Savings
Bank and Catherine A. Papayiannis, entered into as of April
22, 2002
21.1 Subsidiaries of the Registrant (6)
23.2 Consent of KPMG LLP
- --------------------------
(1) Incorporated herein by reference to Registration Statement No. 333-5559 on
Form S-4 of Carver Bancorp, Inc., filed with the Securities and Exchange
Commission on June 7, 1996.
(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.
E-2
(7) Incorporated herein by reference to the Registrant's Proxy Statement,
dated January 25, 2001.
(8) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 2001.
E-3