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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-21487
CARVER BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3904174
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
75 WEST 125TH STREET, NEW YORK, NEW YORK 10027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 876-4747
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE AMERICAN STOCK EXCHANGE
(TITLE OF CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] 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, 2000, there were 2,314,275 shares of Common Stock of the
registrant issued and outstanding. The aggregate market value of the
Registrant's common stock held by non-affiliates (based on the closing sales
price of $8.75 per share of the registrant's Common Stock on May 31, 2000) was
approximately $16.1 million.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
consisting 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 changes in general, economic and market,
legislative and regulatory conditions, the development of an adverse interest
rate environment that adversely affects the interest rate spread or other income
anticipated from the Company's operations and investments, the ability of the
Company to originate and purchase loans with attractive terms and acceptable
credit quality and the ability of the Company to realize cost efficiencies.
ITEM 1. BUSINESS.
GENERAL
CARVER BANCORP, INC.
Carver Bancorp, Inc., a Delaware corporation (the "Holding Company"), is
the holding company for Carver Federal Savings Bank, a federally chartered
savings bank (the "Bank" or "Carver Federal"). Collectively, the Holding Company
and the Bank are referred to herein as the "Company" or "Carver." On October 17,
1996, the Bank completed its reorganization into a holding company structure
(the "Reorganization") and became the wholly owned subsidiary of the Holding
Company. Pursuant to an Agreement and Plan of Reorganization, dated May 21,
1996, each share of the Bank's outstanding common stock was exchanged for one
share of common stock of the Holding Company. At this time, the Holding Company
conducts business as a unitary savings and loan holding company and the
principal business of the Holding Company consists of the operation of its
wholly owned subsidiaries, the Bank and Alhambra Holding Corp., a Delaware
corporation ("Alhambra"). The Company formed Alhambra to hold the Company's
investment in a commercial office building. See "Asset Quality -- Non-performing
Assets."
The Holding Company's executive offices are located at the home office of
the Bank at 75 West 125th Street, New York, New York 10027. The Holding
Company's telephone number is (212) 876-4747.
CARVER FEDERAL SAVINGS BANK
The Bank was chartered in 1948 and began operations in 1949 as Carver
Federal Savings and Loan Association, a federally chartered mutual savings and
loan association, at which time the Bank obtained federal deposit insurance and
became a member of the Federal Home Loan Bank of New York ("FHLB"). The Bank
converted to a federal savings bank in 1986 and changed its name at that time to
Carver Federal Savings Bank. On October 24, 1994, the Bank converted from mutual
to stock form and issued 2,314,275 shares of its common stock, par value $0.01
per share.
Carver Federal was founded to provide an African-American operated
institution where residents of under-served communities could invest their
savings and obtain credit. Carver Federal's principal business consists of
attracting passbook and other savings accounts through its branch offices and
investing those funds in mortgage loans and other investments permitted to
federal savings banks. During fiscal year 1997 ("fiscal 1997"), Carver adopted a
business plan to shift its emphasis to direct lending and restructure its
balance sheet to shift from mortgaged-backed and other investment securities to
higher yielding whole loans. In the fourth quarter of fiscal 1997 and the first
quarter of fiscal year 1998 ("fiscal 1998"), Carver restructured its balance
sheet by purchasing whole loans and decreasing its investment in mortgage-backed
and other investment securities. During fiscal 1998, Carver continued following
this strategy and expanded its origination of multi-family and commercial real
estate mortgage loans. As a result of this effort, Carver's loan portfolio
substantially increased as a percentage of total assets, and Carver's earnings
are derived more from direct lending and loan purchase activities than from
investing in securities. Based on asset size as of March 31, 2000, Carver
Federal is the largest African-American-operated financial institution in the
United States.
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CHANGE IN EXECUTIVE MANAGEMENT
Deborah C. Wright was appointed President, Chief Executive Officer and
Director of the Holding Company and the Bank as of June 1, 1999. For a
description of Ms. Wright's business experience, see "Executive Officers of the
Holding Company -- Deborah C. Wright." Ms. Wright succeeded Thomas L. Clark,
Jr., who was removed from his positions as President and Chief Executive Officer
of the Holding Company, and President, Chief Executive Officer and Director of
the Bank on January 25, 1999. Mr. Clark subsequently resigned from his position
as Director of the Holding Company as of June 1, 1999. During the period from
January 25, 1999 to June 1, 1999, the duties of the President and Chief
Executive Officer were performed by an Operating Committee comprised of
directors and officers of Carver.
Judith Taylor was appointed Acting Senior Vice President and Chief of
Retail Banking in November 1999, Margaret D. Peterson was appointed Senior Vice
President and Chief Administrative Officer in November 1999, James Boyle was
appointed Senior Vice President and Chief Financial Officer in January 2000 and
J. Kevin Ryan was appointed Senior Vice President and Chief Lending Officer in
June 2000, replacing Benny A. Joseph who had served in such position since
November 1999. Mr. Boyle succeeded Walter Bond who had served as Acting Chief
Financial Officer since September 1997. In January 2000, Mr. Bond was appointed
Senior Vice President and Special Assistant to the President and Chief Executive
Officer. For a description of the business experience of the executive officers,
see "Executive Officers of the Holding Company."
LENDING ACTIVITIES
General. Carver's principal lending activity is the origination of
mortgage loans for the purpose of purchasing or refinancing multi-family
residential and commercial real estate properties and one- to four-family
residential property. Carver also originates or participates in loans for the
construction or renovation of commercial property and residential housing
developments and occasionally originates permanent financing upon completion. In
addition, Carver originates consumer loans secured by deposits, education loans
and second mortgages on residential property.
Carver has continued to originate one- to four-family mortgage loans to
service its retail customers. To compliment this activity and as part of
Carver's overall strategy to increase its loan portfolio as a percentage of
total assets, Carver continued to engage in loan purchases during the past
fiscal year. At the close of the twelve month period ended March 31, 2000
("fiscal 2000"), one- to four-family mortgage loans totaled $152.5 million, or
55.54%, of Carver's total gross loan portfolio, multi-family loans totaled $86.2
million, or 31.40%, of the total gross loans, non-residential real estate loans
totaled $22.7 million, or 8.28%, of total gross loans and construction loans
totaled $6.4 million, or 2.33%, of total gross loans. Consumer and commercial
loans totaled $6.7 million, or 2.45%, of total gross loans. Gross loans
receivable decreased by $2.8 million, or 1.00%, to $274.5 million at March 31,
2000, compared to $277.3 million at March 31, 1999. Carver's net loan portfolio
as a percentage of total assets decreased to 64.30% at March 31, 2000, compared
to 64.95% at March 31, 1999.
Loan Portfolio Composition. One- to four-family mortgage loans decreased
by $28.9 million, or 15.92%, to $152.5 million, compared to $181.3 million at
March 31, 1999. Due to turnover in the lending department, both originations and
purchases of one- to four-family mortgage loans declined during fiscal 2000.
During fiscal 2000, multi-family real estate loans increased by $33.8 million,
or 64.58%, to $86.2 million at March 31, 2000, compared to $52.4 million at
March 31, 1999. The increase is primarily due to purchases of multi-family real
estate loans. Non-residential real estate loans decreased by $400,000, or 1.61%,
to $22.7 million at March 31, 2000, compared to $23.1 million at March 31, 1999.
Construction loans decreased by $4.7 million, or 42.13%, to $6.4 million at
March 31, 2000, compared to $11.0 million at March 31, 1999, primarily
reflecting a reduction in the origination of construction loans coupled with
repayments on outstanding construction loans. All other loans consisting
primarily of consumer loans decreased by $2.7 million, or 28.84%, to $6.7
million compared to $9.4 million at March 31, 1999. The decrease reflects the
Company's continued de-emphasis of consumer lending resulting from its decision
during the fiscal year ended March 31, 1999 ("fiscal 1999") to discontinue the
origination of unsecured consumer loans.
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Premium on loans decreased by $432,000, or 42.61%, to $582,000 at March 31,
2000, compared to $1.0 million at March 31, 1999 primarily reflecting the
repayment of loans purchased at a premium. Loans in process decreased by $1.6
million, or 59.71%, to $1.1 million at March 31, 2000, compared to $2.6 million
at March 31, 1999 reflecting the decrease in construction loans. Allowance for
loan losses decreased by $1.1 million, or 27.00%, to $2.9 million at March 31,
2000, compared to $4.0 million at March 31, 1999 reflecting charge-offs and a
decreased provision for loan losses during fiscal 2000. See "Asset
Quality -- Asset Classification and Allowance for Losses."
The following table sets forth selected data relating to the composition of
Carver's loan portfolio by type of loan at the dates indicated.
AT MARCH 31,
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2000 1999 1998 1997 1996
------------------ ------------------ ------------------ ------------------ -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Real estate loans:
One- to four-family..... $152,458 55.54% $181,320 65.39% $188,761 66.85% $139,961 67.94% $58,547 69.23%
Multi-family............ 86,184 31.40 52,365 18.89 49,289 17.46 19,936 9.68 2,490 2.94
Nonresidential.......... 22,721 8.28 23,092 8.33 12,789 4.53 22,415 10.88 11,138 13.18
Construction.............. 6,393 2.33 11,047 3.98 15,993 5.66 14,386 6.98 6,971 8.24
Consumer and commercial
business loans(1)....... 6,725 2.45 9,450 3.41 15,536 5.50 9,310 4.52 5,417 6.41
-------- ------ -------- ------ -------- ------ -------- ------ ------- ------
$274,481 100.00% $277,274 100.00% $282,368 100.00% $206,008 100.00% $84,563 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======= ======
Add:
Premium on loans........ $ 582 $ 1,014 $ 1,555 $ 1,805 $ 882
Less:
Loans in process(2)..... (1,062) (2,636) (4,752) (6,854) (1,406)
Deferred fees and loan
discounts............. (918) (1,110) (1,080) (795) (225)
Allowance for loan
losses................ (2,935) (4,020) (3,137) (2,246) (1,206)
-------- -------- -------- -------- -------
Total............. $270,148 $270,522 $274,954 $197,918 $82,608
======== ======== ======== ======== =======
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(1) Includes second mortgage, home equity, personal, auto, credit cards and
commercial business loans.
(2) Represents undisbursed portion of outstanding construction loans.
One- to Four-Family Residential Lending. Traditionally, Carver's lending
activity has been the origination of loans secured by first mortgages on
existing one- to four-family residences in Carver's market area. During fiscal
2000, the Company increased the purchase of portfolios of first mortgages on
existing one-to four-family residences to augment originations. See "-- Consumer
and Commercial Business Loans -- Purchases of Loans."
Carver originates and purchases one- to four-family residential mortgage
loans in amounts that typically range between $28,000 and $750,000. At March 31,
2000, $152.5 million, or 55.54%, of Carver's total gross loans were secured by
one- to four-family residences. Approximately 82.0% of Carver's
one-to-four-family residential mortgage loans had adjustable rates and
approximately 18.0% had fixed rates.
Carver's one- to four-family residential mortgage loans are generally for
terms of 30 years, amortized on a monthly basis, with principal and interest due
each month. Residential mortgage loans often remain outstanding for
significantly shorter periods than their contractual terms. These loans
customarily contain "due-on-sale" clauses which permit the Bank to accelerate
repayment of a loan upon transfer of ownership of the mortgaged property. Also,
borrowers may refinance or prepay 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
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value or purchase price, with private mortgage insurance required on loans with
LTV ratios in excess of 80%. The maximum LTV ratio on mortgage loans secured by
non-owner-occupied properties is limited to 80%. Under a special loan program,
the LTV ratio may go to 100%. This special loan program consists of loans
originated and sold to the State of New York Mortgage Agency ("SONYMA") secured
by detached single family homes purchased by first time home buyers.
Carver's fixed-rate, one- to four-family residential mortgage loans are
underwritten in accordance with applicable guidelines and requirements for sale
to Federal National Mortgage Association ("Fannie Mae") or SONYMA in the
secondary market. The Bank originates fixed-rate loans that qualify for sale,
and from time to time has sold such loans to Fannie Mae since 1993 and to SONYMA
since 1984. The Bank also originates, to a limited extent, loans underwritten
according to Federal Home Loan Mortgage Corporation ("FHLMC") standards. Loans
are sold with limited recourse, on a servicing retained basis to Fannie Mae and
on a servicing released basis to SONYMA. Carver uses an outside firm to service
mortgage loans, whether held in portfolio or sold servicing retained. At March
31, 2000, the Company, through its sub-servicer, was servicing approximately
$2.8 million of loans for Fannie Mae and FHLMC.
Carver offers one-year, three-year, five/one-year and five/three-year
adjustable-rate, one- to four-family residential mortgage loans. These loans are
indexed to the weekly average rate on the one-year, three-year and five-year
U.S. Treasury securities, respectively, adjusted to a constant maturity
(usually, one year), plus a margin of 275 basis points. The rates at which
interest accrues on these loans are adjustable every one or three years,
generally with limitations on adjustments of two percentage points per
adjustment period and six percentage points over the life of the one-year
adjustable-rate mortgage and five percentage points over the life of a
three-year adjustable-rate mortgage.
The retention of adjustable-rate loans in the Company's portfolio helps
reduce the Bank's exposure to increases in prevailing market interest rates.
However, there are unquantifiable credit risks resulting from potential
increases in costs to borrowers in the event of upward repricing of
adjustable-rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable-rate loans may increase due to
increases in interest costs to borrowers. Further, adjustable-rate loans which
provide for initial rates of interest below the fully indexed rates may be
subject to increased risk of delinquency or default as the higher, fully indexed
rate of interest subsequently replaces the lower, initial rate. In order to
mitigate such risk, the Bank qualifies borrowers at a rate equal to two
percentage points above any discounted introductory rate on one-year adjustable
rate mortgage loans ("ARMs"), one percentage point above any discounted
introductory rate on three-year ARMs and at the discounted introductory rate on
five/three-year ARMs. In addition, although adjustable-rate loans allow the Bank
to increase the sensitivity of its interest-earning assets to changes in
interest rates, the extent of this interest rate sensitivity is limited by the
periodic and lifetime interest rate adjustment limitations and the ability of
borrowers to convert the adjustable-rate loans to fixed-rate loans. 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. Finally,
adjustable-rate loans increase the Bank's exposure to decreases in prevailing
market interest rates, although decreases in the Bank's cost of funds would tend
to offset this effect.
Multi-Family Real Estate Lending. During fiscal 2000, multi-family real
estate loans increased by $33.8 million, or 64.58%, to $86.2 million at March
31, 2000, compared to $52.4 million at March 31, 1999. See "-- Lending
Activities -- Loan Portfolio Composition." At March 31, 2000, multi-family loans
comprised 31.40% of Carver's gross loan portfolio. The largest of permanent
loans outstanding was a $1.3 million loan on a 40 unit, multi-family apartment
building located in the New York City borough of Brooklyn. This loan was
performing at March 31, 2000. During fiscal 2000, Carver purchased approximately
$37.7 million of multi-family loans to augment originations. These loans are
located in the New York City area and were underwritten to similar guidelines
with similar terms and conditions as multi-family loans that Carver originates.
The Bank intends to continue to emphasize its highly competitive multi-family
mortgage loan product, which has enabled the Bank to expand its presence in the
multi-family lending market in the New York City area. Carver offers competitive
rates with flexible terms which make the product attractive to borrowers.
Multi-family property lending, however, 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
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of related borrowers, the payment experience on such loans typically is
dependent on the successful operation of the real estate project, and these
risks can be significantly impacted by supply and demand conditions in the
market for multi-family residential units.
To obtain the highest asset quality in its multi-family lending activities,
Carver has established conservative underwriting guidelines. Carver originates
the bulk of its multi-family residential mortgage loans for apartment buildings
of 15 units or more and 5-10 unit owner occupied residential properties. Carver
originates multi-family mortgage loans for smaller buildings on a case by case
basis. In many cases, on five to ten unit properties, the Bank requires that the
borrower reside in the subject property. Carver's multi-family product
guidelines generally require that the maximum LTV not exceed 80%, and in the
case of 5-10 unit properties, that the maximum LTV does not exceed 75%. The Bank
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. Carver's underwriting guidelines stipulate a
minimum DCR of 1.3 for all multi-family loans. The product is designed for, and
the Bank seeks to lend to borrowers that are experienced in real estate
management. On a case by case basis, the Bank will consider loan requests from
inexperienced borrowers who are purchasing a multi-family property as their
primary residence. In these instances, the borrowers are required to take a Bank
approved property management course prior to the closing of the loan. Pursuant
to regulation, Carver's maximum loan amount for an individual loan is $4.3
million. Currently, the Bank limits its maximum amount for an individual loan to
$2.0 million. See "Regulation and Supervision -- Regulation of Federal Savings
Associations -- Loans to One Borrower."
Carver originates multi-family mortgage loans that generally amortize on
the basis of a 15-, 20-, 25- or 30-year period but require a balloon payment
after the first five years, or the borrower may have an option to extend the
loan for two additional five year periods for a fee of 0.5% of the outstanding
loan balance, payable upon exercising each option. If a ballooning multi-family
mortgage has performed according to the loan agreement and the property value
has not decreased, Carver's practice is to extend an opportunity for the
borrower to roll-over the outstanding balance at the current rate then in effect
for another five-year period. The Bank on a case by case basis originates
fifteen-year fixed rate loans.
Commercial Real Estate Lending (Non-residential). At March 31, 2000,
non-residential real estate mortgage loans (including loans to churches) totaled
$22.7 million, or 8.28%, of the gross loan portfolio. At March 31, 2000, the
largest non-residential loan outstanding was a $3.0 million loan secured by a
retail shopping center located in the New York City borough of Brooklyn. This
loan was performing at March 31, 2000. Carver's non-residential real estate
lending activity consists predominantly of loans for the purpose of refinancing
commercial office, retail space and churches in its immediate service area.
Commercial (non-residential) lending, however, 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.
To help ensure continued collateral protection and asset quality for the
term of the commercial real estate loans, Carver employs (with the assistance of
an independent consulting firm) a risk-rating system. Under the risk-rating
system, all commercial real estate loans are risk rated by management prior to
granting the loan, and separate loan portfolio reviews are performed
semi-annually resulting in written management summary reports. Furthermore,
under this system, property inspections on commercial real estate loans with
balances of $500,000 or greater are performed annually, and all other commercial
loans are inspected on a two-year cycle. Any loan that becomes sixty days
delinquent is required to be inspected promptly. Written reports on all
properties inspected, along with photographs, are provided to document the
collateral status of each loan.
Carver originates commercial (non-residential) real estate first mortgage
loans in its service area. These mortgages are predominantly on well established
larger office buildings and retail properties in the communities in which the
Bank's offices are located. In certain instances, Carver originates loans which
are secured by mixed use real estate. In some, Carver typically requires that
the borrower maintain some form of occupancy at the subject property, either in
the form of operating its primary business from the subject property or residing
in the subject property. Carver's maximum LTV on commercial real estate mortgage
loans is 80%.
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The minimum DCR is 1.30. The Bank requires that properties be managed by an
established professional commercial real estate property manager. In addition,
Carver requires the assignment of rents of all tenants leasing in the subject
property.
Historically, Carver has been a New York City area leader in the
origination of loans to churches. At March 31, 2000, loans to churches totaled
$14.0 million, or approximately 5% of the Bank's gross loan portfolio. These
loans generally have 5-, 7- or 10-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. The largest permanent church
loan was a $2.0 million loan to a church located in Manhattan, New York City.
The second largest loan to a church was a $1.6 million permanent loan to a
church located in Mount Vernon, NY. These loans were performing according to
their respective terms at March 31, 2000. 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. Loans to churches generally average approximately $638,000.
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. As a
general matter, Carver will obtain a first mortgage on the underlying real
property and personal guarantees of key members of the congregation and/or key
person life insurance on the pastor of the congregation and may also require the
church to obtain key person life insurance on specific members of the church's
leadership. Asset quality in the church loan category has been exceptional
throughout Carver's history. Management believes that Carver remains a leading
lender to churches in its market area.
Construction Lending. The Bank currently originates construction loans
primarily for the new construction and renovation of churches, multi-family
buildings, planned residential developments, community service facilities and
affordable housing programs. Carver also offers construction loans to qualified
individuals and developers for new construction and renovation of one- to
four-family residences in the Bank's market area. The Bank does not lend to
private developers for speculative single-family housing construction. The
Bank's construction loans generally have adjustable interest rates and are
underwritten in accordance with the same standards as the Bank's mortgages on
existing commercial properties, except the loans generally provide for
disbursement in stages during a construction period from 12 to 24 months, during
which period the borrower is required to make monthly payments of accrued
interest on the outstanding loan balance. Construction loans generally have a
maximum LTV of 70%. Borrowers must satisfy all credit requirements that apply to
the Bank's permanent mortgage loan financing for the subject property. While the
Bank's construction loans generally require repayment in full upon the
completion of construction, the Bank typically makes construction loans with the
intent to convert to permanent loans following completion of construction.
Carver has established additional criteria for construction loans to include an
engineer's review on all construction budgets in excess of $500,000, appropriate
interest reserves for loans in excess of $250,000, and advances are made in
installments as construction progresses.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value which is insufficient to assure full repayment.
The ability of
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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 required for one- to four-family mortgage loans.
At March 31, 2000, the Bank had $6.4 million (including $1.1 million of
undisbursed funds) in construction loans outstanding, comprising 2.33% of the
Bank's total gross loan portfolio. The largest construction loan was on a retail
building for $2.0 million located in the New York City borough of Manhattan. The
second largest of such loans outstanding was a $1.8 million loan to a church
also located in Manhattan. At March 31, 2000, both loans were performing
according to their terms.
CONSUMER AND COMMERCIAL BUSINESS LOANS
Consumer Lending. During fiscal 1999, Carver ceased consumer lending
through its wholly owned subsidiary, CFSB Credit Corp., and deactivated the
subsidiary. At March 31, 2000, the Bank had approximately $5.8 million in
consumer loans, or 2.10% of the Bank's gross loan portfolio. The Bank's consumer
loans primarily consist of $2.4 million in credit card loans, $1.6 million in
automobile loans and $1.6 million in personal loans. The Bank had $252,000 in
home equity loans and second mortgages on single-family residences.
At March 31, 2000, Carver carried $2.4 million in credit card lines
consisting of $2.3 million of unsecured lines and $100,000 of secured lines.
During fiscal 1999, the Company discontinued the issuance of unsecured credit
card lines. The Company continues to issue secured credit card lines to its
existing customers. At March 31, 2000, the Company had approximately 2,850
credit card lines outstanding.
At March 31, 2000, Carver carried $1.6 million in automobile loans. During
fiscal 1999, the Company discontinued the origination of automobile loans.
At March 31, 2000, Carver carried $1.6 million in personal loans consisting
of $1.3 million unsecured personal loans and $294,000 in secured personal loans.
During fiscal 1999, the Company discontinued the issuance of unsecured personal
loans. Carver continues to grant loans secured by deposits for up to 90% of the
amount of the deposits. These loans are payable based on terms from 12 to 60
months and funds on deposit with Carver must be pledged as collateral to secure
such loans.
At March 31, 2000, Carver carried $252,000 in home equity loans and second
mortgages on single-family residences. These loans, when combined with any loan
having priority over such loans, are generally limited to 75% of the appraised
value of the property.
At March 31, 2000, Carver carried $67,000 in student loans. Carver has
participated in the Federal Family Education Loan Program since 1964. The Bank's
student loans are guaranteed by the New York Higher Education Service
Corporation, an independent agency of the State of New York. During fiscal 1999,
the Bank sold approximately $107,000 in student loans. There were no sales of
such loans during fiscal 2000.
Consumer loans generally involve more risk than first mortgage loans. In
addition, loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Further, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered. These loans may also give
rise to claims and defenses by a borrower against Carver, and a borrower may be
able to assert claims and defenses against Carver which it has against the
seller of the underlying collateral. In underwriting consumer loans, Carver
considers the borrower's credit history, an analysis of the borrower's income,
expenses and ability to repay the loan and the value of the collateral. In
addition, with respect to defaulted automobile loans, repossessed collateral may
not provide an adequate source of repayment of the outstanding loan balance as a
result of damage, loss or depreciation, and the remaining deficiency often does
not warrant further substantial collection efforts against the borrower. See
"Asset Quality -- Non-performing Assets."
7
9
Commercial Business Loans. At March 31, 2000, secured and unsecured
commercial business loans outstanding totaled $700,000. During the fourth
quarter of fiscal 1999, the Bank discontinued the origination of unsecured
commercial business loans. The Bank continues to make a limited number of
commercial business loans, which are secured in full by passbook and/or
certificate of deposit accounts.
Loan Processing and Approval. Carver 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 either salary, salary plus
commission or commissions. Loan application forms are available at each of the
Bank's offices.
All applications are forwarded to the processing department located in the
main office. Applications for all fixed-rate one- to four-family real estate
loans are underwritten in accordance with Fannie Mae and SONYMA guidelines. All
loan applications for other types of loans are underwritten in accordance with
the Bank's own comparable guidelines.
For commercial real estate loans, Carver has established underwriting
standards that require the broker or applicant to initially submit an itemized
income and expense statement (loan set-up). If acceptable, a letter of intent is
issued by Carver expressing an interest in the request, and such letter outlines
the conditions under which Carver will process the loan request. If the
applicant accepts the letter of intent, a commercial real estate loan
application is provided to the applicant. Prior to submission for loan approval,
the property must be visited by a commercial loan officer, who will prepare an
initial property inspection report. As part of the loan approval process,
consideration is given to the appraisal, location, accessibility, stability of
neighborhood, environmental assessment, personal credit history of the
applicant(s), and financial capacity.
Upon receipt of a completed loan application from a prospective borrower, a
credit report and verifications are ordered to verify specific information
relating to the loan applicant's employment, income and credit standing. It is
the Bank's policy to obtain an appraisal of the real estate intended to secure a
proposed mortgage loan from a fee appraiser approved by the Bank.
It is Carver's policy to record a lien on the real estate securing the loan
and to obtain a title insurance policy which insures that the property is free
of prior encumbrances. Borrowers must also obtain hazard insurance policies
prior to closing and, when the property is in a flood plain as designated by the
Department of Housing and Urban Development, paid flood insurance policies. Most
borrowers are also required to advance funds on a monthly basis together with
each payment of principal and interest to a mortgage escrow account from which
the Bank makes disbursements for items such as real estate taxes and hazard
insurance.
The Board of Directors (the "Board") has the overall responsibility and
authority for general supervision of Carver's loan policies. The Board has
established written lending policies for the Bank. The Bank's Chief Lending
Officer has authority to approve all consumer loans below $50,000, the President
has authority to approve such loans below $100,000, and the executive committee
of the Board must approve loans at or above $100,000. All mortgage loans that
conform to Fannie Mae standards and limits can be approved by the Chief Lending
Officer. The Management Loan Committee, composed of the President, the Chief
Lending Officer, the Chief Financial Officer and the Controller, approves
non-conforming loans up to $750,000. Loans above $750,000 must be approved by
the executive committee of the Board, and loans above $1.0 million must be
approved by the full Board. It has been management's experience that
substantially all approved loans are funded. During the period from January 25,
1999 to June 1, 1999, the Company's Operating Committee assumed the
responsibilities of the President and certain responsibilities of the executive
committee.
Originations and Sales of Loans. Originations of one- to four-family real
estate loans are generally within the New York City metropolitan area, although
Carver does occasionally fund loans in other areas. All such loans, however,
satisfy the Company's underwriting criteria regardless of location. The Bank
continues to offer one- to four-family fixed-rate mortgage loans in response to
consumer demand but requires that such loans satisfy guidelines of either Fannie
Mae or SONYMA to ensure subsequent sale in the secondary market as required to
manage interest rate risk exposure.
Under the loans-to-one-borrower limits of the Office of Thrift Supervision
("OTS"), with certain limited exceptions, loans and extensions of credit to a
single or related group of borrowers outstanding at one time
8
10
generally shall not exceed 15% of the unimpaired capital and surplus of a
savings bank. Loans and extensions of credit fully secured by readily marketable
collateral may comprise an additional 10% of unimpaired capital and surplus. At
March 31, 2000, the Bank had no lending relationships in excess of the OTS
loans-to-one-borrower limits.
Purchases of Loans. To supplement its origination of one- to four-family
first mortgage loans and multi-family mortgage loans and consistent with its
business strategy, during fiscal 2000, Carver purchased a total of $63.3 million
of mortgage loans consisting of $25.6 million of performing one- to four-family
adjustable rate mortgage loans and $37.7 million of multi-family mortgage loans,
which represented 9.32% and 13.74%, respectively, of Carver's gross loan
portfolio at March 31, 2000. The Company purchases loans in order to increase
interest income and to manage its interest rate risk. The $25.6 million in
performing one- to four-family adjustable rate mortgages purchased during the
fiscal year consist of 3/1-year ARMs. The $37.7 million of multi-family mortgage
loans consist of 10 year balloons.
The Company plans to reduce its purchases of one- to four-family adjustable
rate mortgages and increase its participation in multi-family and commercial
real estate mortgage loans with New York area lenders. In addition, the Company
is shifting its loan origination emphasis to take advantage of the higher yields
and better interest rate risk characteristics available on multi-family and
commercial real estate mortgage loans.
The following table sets forth certain information with respect to Carver's
loan originations, purchases and sales during the periods indicated.
YEAR ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Loans originated:
One- to four-family....................................... $ 2,082 $11,487 $ 7,235
Multi-family.............................................. 319 12,013 31,248
Nonresidential............................................ 988 6,213 3,300
Construction.............................................. 1,000 6,016 4,226
Consumer.................................................. 232 3,801 8,999
------- ------- -------
Total loans originated.................................... $ 4,621 $39,530 $55,008
======= ======= =======
Loans purchased(1).......................................... $63,282 $55,842 $80,175
======= ======= =======
Loans sold(2)............................................... $ -- $ 107 $ 1,459
======= ======= =======
- ---------------
(1) Comprised primarily of one- to four-family mortgage loans and multi-family
mortgage loans, all purchased with servicing retained.
(2) Comprised of one- to four-family loans and student loans, with loans sold
with servicing released.
The decline in total loan originations from approximately $39.5 million in
fiscal 1999 to approximately $4.6 million in fiscal 2000 was primarily caused by
turnover in the lending department.
Loans purchased by the Company entail certain risks not necessarily
associated with loans the Company originates. The Company's purchased loans are
generally acquired without recourse and in accordance with the Company's
underwriting criteria for originations. In addition, the purchased loans have a
variety of terms, including maturities, interest rate caps and indices for
adjustment of interest rates that may differ from those offered at the time by
the Company in connection with the loans the Company originates. Finally, the
market areas in which the properties which secure the purchased loans are
located are subject to economic and real estate market conditions that may
significantly differ from those experienced in Carver's market area. There can
be no assurance that economic conditions in these out of state areas will not
deteriorate in the future resulting in increased loan delinquencies and loan
losses among the loans secured by property in these areas.
In an effort to reduce these risks, with its existing personnel and through
the use of a quality control/loan review firm, the Bank has sought to ensure
that purchased loans satisfy the Bank's underwriting standards and
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do not otherwise have a higher risk of collection or loss than loans originated
by the Bank although specific rates and terms may differ from those offered by
the Bank. A Company officer monitors the inspection and confirms the review of
each purchased loan. The Company is dependent on the seller or originator of the
loans for ongoing collection efforts and collateral review. Carver also requires
appropriate documentation and further seeks to reduce its risk by requiring, in
each buy/sell agreement, a series of warranties and representations as to the
underwriting standards and the enforceability of the related legal documents.
These warranties and representations remain in effect for the life of the loan.
Any misrepresentation must be cured within ninety (90) days of discovery or
trigger certain repurchase provisions in the buy/sell agreement.
Interest Rates and Loan Fees. Interest rates charged by Carver on mortgage
loans are primarily determined by competitive loan rates offered in its market
area and minimum yield requirements for loans purchased by Fannie Mae and
SONYMA. Mortgage loan rates reflect factors such as prevailing market interest
rate levels, the supply of money available to the savings industry and the
demand for such loans. These factors are in turn affected by general economic
conditions, the monetary policies of the federal government, including the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board"), the
general supply of money in the economy, tax policies and governmental budget
matters.
Carver charges fees in connection with loan commitments and originations,
rate lock-ins, loan modifications, late payments and changes of property
ownership and for miscellaneous services related to its loans. Loan origination
fees are calculated as a percentage of the loan principal. The Company typically
receives fees of between zero and three points (one point being equivalent to 1%
of the principal amount of the loan) in connection with the origination of
fixed-rate and adjustable-rate residential mortgage loans. The loan origination
fee, net of certain direct loan origination expenses, is deferred and accreted
into income over the contractual life of the loan using the interest method. If
a loan is prepaid, refinanced or sold, all remaining deferred fees with respect
to such loan are taken into income at such time.
In addition to the foregoing fees, Carver receives fees for servicing loans
for others, which in turn generally are subserviced for Carver by a third party
servicer. Servicing activities include the collection and processing of mortgage
payments, accounting for loan repayment funds and paying real estate taxes,
hazard insurance and other loan-related expenses out of escrowed funds. Loan
servicing fees usually are charged as a percentage (usually, between 1/4% and
3/8%) of the outstanding balance of the loans being serviced. 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 Company's market
area.
Loan Maturity Schedule. The following table sets forth information at
March 31, 2000 regarding the dollar amount of loans maturing in Carver's
portfolio, including scheduled repayments of principal, based on contractual
terms to maturity. Demand loans, loans having no schedule of repayments and no
stated maturity and overdrafts are reported as due in one year or less. The
table below does not include any estimate of prepayments, which significantly
shorten the average life of all mortgage loans and may cause Carver's actual
repayment experience to differ from that shown below.
DUE DURING THE YEAR ENDING DUE AFTER DUE AFTER DUE AFTER
MARCH 31, 3 THROUGH 5 THROUGH 10 THROUGH DUE AFTER 20
--------------------------- 5 YEARS AFTER 10 YEARS AFTER 20 YEARS AFTER YEARS AFTER
2001 2002 2003 MARCH 31, 2000 MARCH 31, 2000 MARCH 31, 2000 MARCH 31, 2000 TOTAL
-------- -------- ----- -------------- -------------- -------------- -------------- --------
(DOLLARS IN THOUSANDS)
Real Estate loans:
One- to four-
family........... $19,654 $49,574 $597 $19,576 $ 614 $1,634 $60,809 $152,458
Multi-family....... 16 464 -- -- 79,891 259 5,554 86,184
Nonresidential..... 1 -- -- -- 15,968 -- 6,752 22,721
Construction....... 6,393 -- -- -- -- -- -- 6,393
Consumer and
commercial business
loans.............. 213 -- -- 6,512 -- -- -- 6,725
------- ------- ---- ------- ------- ------ ------- --------
Total....... $26,277 $50,038 $597 $26,088 $96,473 $1,893 $73,115 $274,481
======= ======= ==== ======= ======= ====== ======= ========
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The following table sets forth, at March 31, 2000, the dollar amount of
loans maturing subsequent to the year ending March 31, 2001 which have
predetermined interest rates and floating or adjustable interest rates.
PREDETERMINED FLOATING OR
RATE ADJUSTABLE RATES TOTAL
------------- ---------------- --------
(DOLLARS IN THOUSANDS)
Real estate loans:
One-to four-family................................. $ 22,764 $110,039 $132,803
Multi-family....................................... 81,279 4,889 86,168
Nonresidential..................................... 20,815 1,905 22,720
Consumer and commercial business loans:.............. 67 6,446 6,513
-------- -------- --------
Total...................................... $124,925 $123,279 $248,204
======== ======== ========
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms due to prepayments. In addition,
due-on-sale clauses in mortgage loans generally give Carver the right to declare
a conventional loan due and payable in the event, among other things, that a
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase when current
mortgage loan market rates are substantially higher than rates on existing
mortgage loans and tends to decrease when current mortgage loan market rates are
substantially lower than rates on existing mortgage loans.
ASSET QUALITY
Non-performing Assets. When a borrower fails to make a payment on a
mortgage loan, immediate steps are taken by Carver's sub-servicers to have the
delinquency cured and the loan restored to current status. With respect to
mortgage loans, once the payment grace period has expired (in most instances 15
days after the due date), a late notice is mailed to the borrower within two
business days, and a late charge is imposed, if applicable. If payment is not
promptly received, the borrower is contacted by telephone, and efforts are made
to formulate an affirmative plan to cure the delinquency. Additional calls are
made by the 20th and 25th day of the delinquency. If a mortgage loan becomes 30
days delinquent, a letter is mailed to the borrower requesting payment by a
specified date. If a mortgage loan becomes 60 days delinquent, Carver seeks to
make personal contact with the borrower and also has the property inspected. If
a mortgage becomes 90 days delinquent, a letter is sent to the borrower
demanding payment by a certain date and indicating that a 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, immediate steps
are taken by Carver's loan servicing department to have the delinquency cured
and the loan restored to current status. With the exception for 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 payment still has not been received, additional telephone calls
are made by the 20th and 25th day of 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, a second letter goes to
the borrower and the co-borrower (if any) demanding payment by a specified date
and outlining the seriousness of the problem. If the loan becomes 90 days
delinquent, a final warning letter is sent to the borrower and the co-borrower.
If the loan remains delinquent, it is reviewed for charge-off and/or placed for
collection.
If an automobile loan borrower fails to make a payment on a loan, immediate
steps are taken by Carver's loan servicing department to have the delinquency
cured and the loan restored to current status. Once the payment grace period has
expired (10 days after the due date), a late notice is mailed to the borrower
immediately and a late charge is imposed if applicable. If payment is not
promptly received the borrower is
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contacted by telephone, with a follow-up letter requesting payment. By the 45th
day of the delinquency, if payment is not received, repossession efforts begin.
Once the vehicle is repossessed, the borrower has a 30 day right of redemption.
In order for the borrower to exercise this right, one of the following must
occur:
1. The borrower must make all delinquent payments plus two additional
monthly payments, coupled with repossession and storage charges. In
addition, the borrower must show proof that the vehicle is fully insured
and that Carver is the loss payee.
2. If Carver reasonably believes that something seriously affects the
collectability of the monies owed under the installment loan note and the
security agreement or the value of the collateral, the full unpaid balance
plus accrued interest, late charges and other fees become immediately
payable in order for the vehicle to be released to the borrower.
The following table sets forth information with respect to Carver's
non-performing assets at the dates indicated. Loans generally are placed on
non-accrual status when they become 90 days delinquent.
AT MARCH 31,
----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Loans accounted for on a non-accrual basis(1)
Real estate
One- to four-family...................... $ 966 $ 392 $1,134 $1,791 $ 672
Multi-family............................. 870 1,051 258 -- 478
Nonresidential........................... -- -- -- 284 284
Construction............................. 122 560 3,089 954 521
Consumer and commercial....................... 168 414 1,087 256 79
------ ------ ------ ------ ------
Total............................... $2,126 $2,417 $5,568 $3,285 $2,034
====== ====== ====== ====== ======
Accruing loans contractually past due 90 days
or more:
Real Estate
One- to four-family...................... $ -- $ 568 $1,049 $ 279 $ 4
Multi-family............................. -- 804 -- 373 55
Nonresidential........................... -- -- -- -- 217
Construction............................. -- 530 -- 2,069 611
Consumer and commercial....................... -- 183 226 400 334
------ ------ ------ ------ ------
Total............................... $ -- $2,085 $1,275 $3,121 $1,221
====== ====== ====== ====== ======
Total of non-accrual and accruing 90 day past
due loans................................... $2,126 $4,502 $6,843 $6,406 $3,255
====== ====== ====== ====== ======
Other non-performing assets(2):
Real estate:
One- to four-family...................... $ 127 $ 185 $ 82 $ 82 $ 285
Multi-family............................. 27 -- -- -- --
Nonresidential........................... 768 -- -- -- 29
Consumer.................................... 16 99 -- -- --
------ ------ ------ ------ ------
Total other non-performing assets... $ 938 $ 284 $ 82 $ 82 $ 314
====== ====== ====== ====== ======
Total non-performing assets......... $3,064 $4,786 $6,925 $6,488 $3,569
====== ====== ====== ====== ======
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AT MARCH 31,
----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Non-performing loans to total loans........... 0.79% 1.66% 2.47% 3.28% 4.32%
Non-performing assets to total assets(3)...... 0.73% 1.15% 1.58% 1.53% 0.97%
Troubled debt restructurings(4):
Real estate
Multi-family and commercial.............. $ -- $ -- $ 807 $ 413 $ --
====== ====== ====== ====== ======
- ---------------
(1) Non-accrual status denotes any loan where the delinquency exceeds 90 days
past due and in the opinion of management the collection of additional
interest is doubtful. After a careful review of individual loan history and
related collateral by management, the loan may be designated as an accruing
loan that is contractually past due 90 days or more or if in the opinion of
management, the collection of additional interest is doubtful, the loan will
remain in non-accrual status. Payments received on a non-accrual loan are
either applied to the outstanding principal balance or recorded as interest
income, depending on assessment of the ability to collect on the loan.
During the year ended March 31, 2000, gross interest income of $345,000
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, interest on such loans included in income during the period
amounted to $0.
(2) Other non-performing assets represents property acquired by the Company in
settlement of loans (i.e., through foreclosure or repossession or as an
in-substance foreclosure). These assets are recorded at the lower of their
fair value or the unpaid principal balance plus unpaid accrued interest of
the related loans.
(3) Non-performing assets consist of non-accrual loans, accruing loans 90 days
or more past due and property acquired in settlement of loans.
(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, 2000 and 1999, Carver
had no restructured loans.
At March 31, 2000, non-performing assets decreased by $1.7 million, or
36.11%, to $3.1 million compared to $4.8 million at March 31, 1999. The decrease
in non-performing assets reflects a decrease in accruing loans past due 90 days
or more and in loans accounted for on a non-accrual basis, offset in part by an
increase in other non-performing assets.
Loans accounted for on a non-accrual basis decreased $291,000, or 12.04%,
to $2.1 million at March 31, 2000, compared to $2.4 million at March 31, 1999.
The decrease primarily reflects a decrease in non-performing multi-family,
construction and consumer and commercial loans, offset in part by an increase in
one- to four-family non-performing loans.
Accruing loans contractually past due 90 days or more decreased $2.1
million to $0 at March 31, 2000, compared to $2.1 million at March 31, 1999. The
decrease reflects the practice adopted by the Bank during fiscal 2000 to either
write off or place on non-accrual status all loans contractually past due 90
days or more.
Other non-performing assets increased $654,000, or 230.28%, to $938,000 at
March 31, 2000, compared to $284,000 at March 31, 1999. The increase primarily
reflects 2 non-residential properties added to the Bank's Real Estate Owned
since March 31, 1999.
Alhambra Holding Corp. In 1991, Carver purchased an $893,000 participation
in a $2.4 million loan to finance the first construction phase of a project to
renovate a historic theater located in the New York City borough of Manhattan,
Alhambra Building, into office space. The first phase of the project went into
receivership with the Federal Deposit Insurance Corporation ("FDIC"), the
borrower declared bankruptcy and the rents were being paid into the bankruptcy
court. These events contributed to Carver writing down the outstanding loan
balance of the participation to $413,000. During fiscal 1997, Carver negotiated
the purchase of the FDIC's interest in the loan for $395,000. At March 31, 1998,
the Bank held a 100% interest in the
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original loan of $2.4 million carried on the books at $807,000, and the Company
was involved in legal action to vacate the stay placed by the bankruptcy court
on the collateral in order to proceed with legal recourse.
In December 1998, in connection with a court approved bankruptcy plan, the
loan asset was transferred by the Bank to the Holding Company. The Holding
Company contributed $600,000 in cash and the loan asset into a newly formed
wholly owned subsidiary, Alhambra. Alhambra used the cash and the loan to
acquire 80% of the common stock and approximately $1.4 million or 100% of the
preferred stock of Alhambra Realty Corp. ("Alhambra Realty") pursuant to the
borrower's confirmed plan of reorganization (the "Plan"). Pursuant to the Plan,
title to the Alhambra Building was transferred to Alhambra Realty thereby
allowing Alhambra Realty to receive rental payments. In March 2000, the Alhambra
Building was sold. Pre-tax income of $728,000 resulting from the sale is
reflected in other non-interest income for fiscal 2000.
Asset Classification and Allowances for Losses. Federal regulations
require savings institutions to classify their assets on the basis of quality on
a regular basis. An asset is classified as "substandard" if it is determined to
be inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. An asset is classified as
"doubtful" if full collection is highly questionable or improbable. An asset is
classified as "loss" if it is considered uncollectible, even if a partial
recovery could be expected in the future. The regulations also provide for a
"special mention" designation, described as assets which do not currently expose
a savings institution to a sufficient degree of risk to warrant classification
but do possess credit deficiencies or potential weaknesses deserving
management's close attention. Assets classified as substandard or doubtful
require a savings institution to establish general allowances for loan losses.
If an asset or portion thereof is classified loss, a savings institution must
either establish specific allowances for loan losses in the amount of the
portion of the asset classified loss, or charge off such amount. Federal
examiners may disagree with a savings institution's classifications. If a
savings institution does not agree with an examiner's classification of an
asset, it may appeal this determination to the OTS Regional Director.
At March 31, 2000, Carver Federal had $2.4 million of potential problem
loans which represented 0.57% of the Bank's total assets and 8.24% of the Bank's
tangible regulatory capital at March 31, 2000.
The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectability of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that adequate specific and general loan loss
allowances have been established, actual losses are dependent upon future events
and, as such, further additions to the level of specific and general loan loss
allowances may become necessary. Federal examiners may disagree with the savings
institution as to the appropriate level of the institution's allowance for loan
losses. While management believes Carver has established its existing loss
allowances in accordance with generally accepted accounting principles, there
can be no assurance that regulators, in reviewing Carver's assets, will not
require Carver to increase its loss allowance, thereby negatively affecting
Carver's reported financial condition and results of operations.
Carver's methodology for establishing the allowance for loan losses takes
into consideration probable losses that have been identified in connection with
specific loans as well as losses that have not been identified but can be
expected to occur. Further, management reviews the ratio of allowances to total
loans (including projected growth) and recommends adjustments to the level of
allowances accordingly. Management conducts quarterly reviews of the Bank's
loans and evaluates the need to establish general and specific allowances on the
basis of this review. In addition, management actively monitors Carver's asset
quality and charges off loans and properties acquired in settlement of loans
against the allowances for losses on loans and such properties when appropriate
and provides specific loss reserves when necessary. Although management believes
it uses the best information available to make determinations with respect to
the allowances for losses, future
14
16
adjustments may be necessary if economic conditions differ substantially from
the economic conditions in the assumptions used in making the initial
determinations.
Carver reviews its assets on a quarterly basis to determine whether any
assets require classification or re-classification. The Bank has a centralized
loan processing structure that relies upon an outside servicer, which generates
a monthly report of delinquent loans. The Bank's Board has designated the
Internal Auditor and the Internal Asset Review Committee to perform quarterly
reviews of the Bank's asset quality, and their report is submitted to the Board
for review and approval prior to implementation of any classification. In
originating loans, Carver recognizes that credit losses will occur and that the
risk of loss will vary with, among other things, the type of loan being made,
the creditworthiness of the borrower over the term of the loan, general economic
conditions and, in the case of a secured loan, the quality of the security for
the loan. It is management's policy to maintain a general allowance for loan
losses based on, among other things, regular reviews of delinquencies and loan
portfolio quality, character and size, the Company's and the industry's
historical and projected loss experience and current and forecasted economic
conditions. In addition, considerable uncertainty exists as to the future
improvement or deterioration of the real estate markets in various states, or of
their ultimate impact on Carver as a result of its purchased loans in such
states. See "-- Consumer and Commercial Business Loans -- Purchases of Loans."
Carver increases its allowance for loan losses by charging provisions for
possible losses against the Company'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 Company determines a property is an impaired property, the Company transfers
the property to real estate acquired in settlement of loans at the lower of cost
or fair value, less estimated selling costs. Fair value is defined as the amount
in cash or cash-equivalent value of other consideration that a real estate
parcel would yield in a current sale between a willing buyer and a willing
seller. At March 31, 2000, the Bank held $922,000, net of loss allowance, in
real estate acquired in settlement of loans. Any amount of cost in excess of
fair value is charged-off against the allowance for loan losses. Carver records
an allowance for estimated selling costs of the property immediately after
foreclosure. Subsequent to acquisition, the property is periodically evaluated
by management and an allowance is established if the estimated fair value of the
property, less estimated costs to sell, declines. If, upon ultimate disposition
of the property, net sales proceeds exceed the net carrying value of the
property, a gain on sale of real estate is recorded. See Note 1 of Notes to
Consolidated Financial Statements.
15
17
The following table sets forth an analysis of Carver's allowance for loan
losses for the periods indicated.
YEAR ENDED MARCH 31,
----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Balance at beginning of period................ $4,020 $3,138 $2,246 $1,206 $1,075
------ ------ ------ ------ ------
Loans charged-off(1)
Real estate
One- to four-family......................... 138 -- -- -- --
Multi-family................................ -- -- -- -- --
Commercial.................................. 171 -- -- 624 --
Consumer.................................... 2,260 3,230 367 75 --
------ ------ ------ ------ ------
Total charge-offs................... 2,569 3,230 367 699 --
====== ====== ====== ====== ======
Recoveries:
Construction................................ -- 45 -- 50 19
One-to-four family.......................... 31 -- -- -- --
Multi-family................................ 40 -- -- -- --
Commercial.................................. 22 -- -- -- --
Consumer loans.............................. 292 37 -- -- --
------ ------ ------ ------ ------
Total Recoveries............................ 385 82 -- 50 19
====== ====== ====== ====== ======
Net loans charged-off/(Recoveries)............ 2,184 3,148 367 649 (19)
Provision for losses........................ 1,099 4,030 1,259 1,689 150
------ ------ ------ ------ ------
Balance at end of period.................... $2,935 $4,020 $3,138 $2,246 $1,206
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans
outstanding.............................. 0.84% 1.17% 0.15% 0.69% --%
Ratio of allowance to total loans........... 1.07% 1.48% 1.11% 1.09% 1.42%
Ratio of allowance to non-performing
assets(2)................................ 95.79% 85.60% 45.30% 35.06% 37.05%
- ---------------
(1) Loans are charged-off when management determines that they are
uncollectible.
(2) Non-performing assets consist of non-accrual loans, accruing loans 90 days
or more past due and property acquired in settlement of loans.
16
18
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,
-----------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
Loans:
Real estate
One-to four-
family......... $1,050 55.54% $ 957 23.81% $1,691 53.91% $1,065 47.40% $ 165 69.23%
Multi-family..... 764 31.40% 902 22.44 400 12.75 264 11.76 75 2.94
Nonresidential... 202 8.28% 251 6.24 111 3.53 414 18.44 616 13.18
Construction..... 272 2.33% 424 10.55 340 10.84 212 9.44 15 8.24
Consumer, commercial
and other.......... 647 2.45% 1,486 36.96 596 18.97 291 12.96 335 6.41
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses........ $2,935 100.00% $4,020 100.00% $3,138 100.00% $2,246 100.00% $1,206 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
MORTGAGE-BACKED AND RELATED SECURITIES
Carver maintains a significant portfolio of mortgage-backed securities in
the form of Government National Mortgage Association ("GNMA") pass-through
certificates, Fannie Mae and FHLMC participation certificates and collateralized
mortgage obligations ("CMOs"). GNMA pass-through certificates are guaranteed as
to the payment of principal and interest by the full faith and credit of the
U.S. Government, while Fannie Mae and FHLMC certificates are each guaranteed by
their respective agencies as to principal and interest. Mortgage-backed
securities generally entitle Carver to receive a pro rata portion of the cash
flows from an identified pool of mortgages. CMOs are securities issued by
special purpose entities generally collateralized by pools of mortgage-backed
securities. The cash flows from such pools are segmented and paid in accordance
with a predetermined priority to various classes of securities issued by the
entity. Carver's CMOs are primarily adjustable-rate CMOs issued by the
Resolution Trust Corporation ("RTC"). Carver also invests 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 Company. Because Carver receives regular payments of
principal and interest from its mortgage-backed securities, these investments
provide more consistent cash flows than investments in other debt securities
which generally only pay principal at maturity. Mortgage-backed securities also
help the Bank meet certain definitional tests for favorable treatment under
federal banking and tax laws. See "Regulation and Supervision -- Regulation of
Federal Savings Associations -- QTL Test" and "Federal and State Taxation."
The Bank seeks to avoid interest rate risk by investing in adjustable-rate
mortgage-backed securities, which at March 31, 2000 constituted $31.6 million or
58.62% of the mortgage-backed securities portfolio. Mortgage-backed securities,
however, expose Carver to certain unique risks. In a declining rate environment,
accelerated prepayments of loans underlying these securities expose Carver to
the risk that it will be unable to obtain comparable yields upon reinvestment of
the proceeds. In the event the mortgage-backed security has been funded with an
interest-bearing liability with a maturity comparable to the original estimated
life of the mortgage-backed security, the Bank's interest rate spread could be
adversely affected. Conversely, in a rising
17
19
interest rate environment, the Bank may experience a lower than estimated rate
of repayment on the underlying mortgages, effectively extending the estimated
life of the mortgage-backed security and exposing the Bank to the risk that it
may be required to fund the asset with a liability bearing a higher rate of
interest.
The increased effort by Carver, since fiscal 1997, to originate and
purchase loans has shifted the emphasis away from the use of mortgage-backed
securities as the Company's primary interest earning asset. Over the last fiscal
year repayments received from mortgage-backed securities have primarily been
reinvested in residential mortgage loans. This has resulted in a decrease in
Carver's investment in mortgage-backed securities and a reduction in the
percentage of mortgage-backed securities to total assets. At March 31, 2000,
mortgage-backed securities constituted 12.91% of total assets, as compared to
15.99% at March 31, 1999.
The following table sets forth the carrying value of Carver's
mortgage-backed securities at the dates indicated.
YEAR ENDED MARCH 31,
------------------------------
2000 1999 1998
------- ------- --------
(DOLLARS IN THOUSANDS)
Held to Maturity
GNMA...................................................... $ 6,516 $ 7,631 $ 8,855
FANNIE MAE................................................ 26,222 29,718 36,685
FHLMC..................................................... 18,780 24,636 35,901
SBA....................................................... 760 1,325 1,770
CMO:
RTC.................................................... 1,708 2,282 6,565
FHLMC.................................................. -- 647 1,340
Other.................................................. 243 345 --
------- ------- --------
Total CMOs........................................ 1,951 3,274 7,905
------- ------- --------
Total Held to Maturity............................ 54,229 66,584 91,116
------- ------- --------
Available-for-Sale:
GNMA...................................................... $ -- $ -- $ 15,192
FANNIE MAE................................................ -- -- 8,541
FHLMC..................................................... -- -- 4,674
------- ------- --------
Total Available-for-Sale.......................... -- -- 28,407
------- ------- --------
Total Mortgage-Backed Securities.................. $54,229 $66,584 $119,523
======= ======= ========
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Carver's mortgage-backed securities at
March 31, 2000. Expected maturities will differ from contractual maturities due
to scheduled repayments and because borrowers may have the right to call or
prepay
18
20
obligations with or without prepayment penalties. The following table does not
take into consideration the effects of scheduled repayments or the effects of
possible prepayments.
ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS TOTAL MORTGAGE-BACKED SECURITIES
------------------ ------------------ -------------------- ----------------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE VALUE YIELD
-------- ------- -------- ------- --------- -------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
GMNA................. $ -- --% $ -- --% $ 6,516 6.74% $ 6,516 $ 6,244 6.74%
Fannie Mae........... -- -- 4,097 6.61 22,125 6.10 26,222 25,004 6.18
FHLMC................ 525 7.28 1,097 6.95 17,158 6.01 18,780 17,992 6.10
SBA.................. -- -- -- -- 760 6.41 760 766 6.41
CMO
RTC................ -- -- -- -- 1,708 5.18 1,708 1,696 5.14
Other.............. -- -- -- -- 243 7.29 243 237 7.29
---- ------ ------- ------- -------
TOTAL...... $525 $5,194 $48,510 $54,229 $51,939
==== ====== ======= ======= =======
INVESTMENT ACTIVITIES
Carver is permitted under federal law to make certain investments,
including investments in securities issued by various federal agencies and state
and municipal governments, deposits at the FHLB, certificates of deposit in
federally insured institutions, certain bankers' acceptances and federal funds.
The Bank may also invest, subject to certain limitations, in commercial paper
having one of the two highest investment ratings of a nationally recognized
credit rating agency, and certain other types of corporate debt securities and
mutual funds. Federal regulations require the Bank to maintain an investment in
FHLB stock and a minimum amount of liquid assets which may be invested in cash
and specified securities. From time to time, the OTS adjusts the percentage of
liquid assets which savings banks are required to maintain. For additional
information, see "Regulation and Supervision -- Regulation of Federal Savings
Associations -- Liquidity."
The following table sets forth the carrying value of Carver's investment
securities held to maturity and available for sale at the date indicated.
AT MARCH 31,
--------------------------
2000 1999 1998
------- ------- ----
(IN THOUSANDS)
HELD TO MATURITY:
U.S. Government and Agency securities..................... $24,996 $ -- $--
------- ------- --
Total held to maturity................................. $24,996 $ -- $--
AVAILABLE FOR SALE:
U.S. Government and Agency securities..................... $24,952 $29,918 $--
------- ------- --
Total available for sale............................... $24,952 $29,918 $--
------- ------- --
Total investment securities....................... $49,948 $29,918 $--
======= ======= ==
The following table sets forth the carrying value of Carver's investment in
FHLB stock and liquid assets at the date indicated.
AT MARCH 31,
--------------------------
2000 1999 1998
------ ------ ------
(IN THOUSANDS)
FHLB Stock.................................................. $5,755 $5,755 $5,755
Federal Funds Sold.......................................... 11,300 10,200 3,000
19
21
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Carver's investments at March 31, 2000.
ONE YEAR OR LESS ONE TO FIVE YEARS TOTAL OTHER INVESTMENTS
------------------ ------------------ ----------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE
VALUE YIELD VALUE YIELD VALUE VALUE YIELD
-------- ------- -------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
U.S. Government and Agency securities... $24,952 5.97% $24,996 6.41% $49,948 $49,261 6.19%
Federal funds sold...................... 11,300 5.75 -- -- 11,300 11,300 5.75
FHLB stock.............................. 5,755 7.05 -- -- 5,755 5,755 7.05
------- ------- ------- -------
Total investments....................... $42,007 $24,996 $67,003 $66,316
======= ======= ======= =======
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of Carver's funds for lending and
other investment purposes. In addition to deposits, Carver derives funds from
loan principal repayments, interest payments and maturing investments. Loan
repayments and interest payments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by prevailing market
interest rates and money market conditions. Borrowing may be used to supplement
the Company's available funds, and from time to time the Company has borrowed
funds from the FHLB and through reverse repurchase agreements.
Deposits. Carver attracts deposits principally from within its market area
by offering a variety of deposit instruments, including passbook and statement
accounts and certificates of deposit which range in term from 91 days to seven
years. Deposit terms vary, principally on the basis of the minimum balance
required, the length of time the funds must remain on deposit and the interest
rate. Carver also offers Individual Retirement Accounts. Carver's policies are
designed primarily to attract deposits from local residents through the
Company's branch network rather than from outside the Company's market area.
Carver also holds deposits from various governmental agencies or authorities.
Carver does not accept deposits from brokers. The Bank's interest rates,
maturities, service fees and withdrawal penalties on deposits are established by
management on a periodic basis. Management determines deposit interest rates and
maturities based on the Company's funds acquisition and liquidity requirements,
the rates paid by the Company's competitors, the Company's growth goals and
applicable regulatory restrictions and requirements.
20
22
The following table sets forth deposit categories, weighted average
interest rate, minimum terms, minimum balance, aggregate balance and percentage
of total deposits for Carver's deposits at March 31, 2000.
WEIGHTED AGGREGATE PERCENTAGE
AVERAGE MINIMUM MINIMUM BALANCE OF TOTAL
INTEREST RATE TERM CATEGORY BALANCE (IN THOUSANDS) DEPOSITS
- ------------- ------------ ----------------------------- ------- -------------- ----------
1.83% None NOW accounts $1,000 $ 18,873 6.69%
2.50 None Savings and club 300 145,277 51.52
3.17 None Money market savings accounts 500 19,418 6.89
-- None Other demand accounts 500 12,337 4.38
-------- ------
Total Savings accounts $195,905 69.48
======== ======
Certificates of Deposit
3.85 91 days Fixed-term, fixed rate 2,500 $ 5,129 1.82
4.05 182-365 days Fixed-term, fixed rate 2,500 12,564 4.46
4.68 1-2 years Fixed-term, fixed rate 1,000 26,105 9.27
4.32 2-3 years Fixed-term, fixed rate 1,000 3,594 1.27
5.17 3-4 years Fixed-term, fixed rate 1,000 8,410 2.98
4.87 4-5 years Fixed-term, fixed rate 1,000 2,574 0.91
5.10 5-7 years Fixed-term, fixed rate 500 22,493 7.98
5.77 30 days Negotiable 80,000 5,167 1.83
-------- ------
Total Certificates of Deposit $ 86,036 30.52
-------- ------
Total Deposits $281,941 100.00%
======== ======
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by Carver between the dates indicated.
BALANCE AT PERCENTAGE BALANCE AT PERCENTAGE BALANCE AT PERCENTAGE
MARCH 31, OF TOTAL INCREASE MARCH 31, OF TOTAL INCREASE MARCH 31, OF TOTAL
2000 DEPOSITS (DECREASE) 1999 DEPOSITS (DECREASE) 1998 DEPOSITS
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Savings and club.......... $145,277 51.52% $ 1,482 $143,795 51.91% $(1,653) $145,448 52.91%
Money market savings...... 19,418 6.89 (1,514) 20,932 7.56 (564) 21,496 7.82
NOW and demand accounts... 31,210 11.07 4,499 26,711 9.64 (2,206) 28,917 10.52
Certificates of deposit... 86,036 30.52 475 85,561 30.89 6,528 79,033 28.75
-------- ------ ------- -------- ------ ------- -------- ------
Total deposits... $281,941 100.00% $ 4,942 $276,999 100.00% $ 2,105 $274,894 100.00%
======== ====== ======= ======== ====== ======= ======== ======
The following table sets forth the average balances and interest rates
based on month end balances for certificates of deposit and non-certificate
accounts as of the dates indicated.
YEAR ENDED MARCH 31,
-----------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Non-interest-bearing demand.... $ 11,388 0.00% $ 9,670 0.00% $ 8,625 0.00%
Savings and club............... 143,908 2.54 144,990 2.49 144,466 2.49
Certificates................... 86,316 4.65 80,897 4.81 76,990 5.13
Money market savings
accounts..................... 19,578 3.22 21,541 2.85 21,514 3.22
NOW accounts................... 18,032 1.74 18,789 1.67 18,725 1.89
-------- -------- --------
Total................ $279,222 $275,887 $270,320
======== ======== ========
21
23
The following table sets forth time deposits in specified weighted average
interest rate categories as of the dates indicated.
AT MARCH 31,
----------------------------------
2000 1999 1998
------- ------------ -------
(IN THOUSANDS)
2%-3.99%........................................... $ 5,129 $18,034 $ --
4%-5.99%........................................... 80,907 67,527 78,958
6%-7.99%........................................... -- -- 75
------- ------- -------
Total.................................... $86,036 $85,561 $79,033
======= ======= =======
The following table sets forth the amount and maturities of time deposits
in specified weighted average interest rate categories at March 31, 2000.
AMOUNT DUE
----------------------------------------------------------
LESS THAN AFTER
RATE ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
- ---- --------- --------- ---------- ------- -------
(IN THOUSANDS)
2%-3.99%...................... $ 5,129 $ -- $ -- $ -- $ 5,129
6%-7.99%...................... 12,564 26,105 3,594 38,644 80,907
------- ------- ------ ------- -------
Total............... $17,693 $26,105 $3,594 $38,644 $86,036
======= ======= ====== ======= =======
The following table indicates the amount of Carver's certificates of
deposit of $100,000 or more by time remaining until maturity as of March 31,
2000.
CERTIFICATES OF
MATURITY PERIOD DEPOSITS
- --------------- ---------------
(IN THOUSANDS)
Three months or less........................................ $ 2,430
Three through six months.................................... 3,099
Six through 12 months....................................... 3,281
Over 12 months.............................................. 8,704
-------
Total............................................. $17,514
=======
The following table sets forth Carver's deposit reconciliation for the
periods indicated.
YEAR ENDED MARCH 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Deposits at beginning of year...................... $276,999 $274,894 $266,471
Net decrease before Interest credited.............. (3,670) (6,315) (173)
Interest credited.................................. 8,612 8,420 8,596
-------- -------- --------
Deposits at end of year............................ $281,941 $276,999 $274,894
======== ======== ========
Borrowing. Savings deposits historically have been the primary source of
funds for Carver's lending, investment and general operating activities. Carver
is authorized, however, to use advances and securities sold under agreement to
repurchase ("Repos") from the FHLB and approved primary dealers to supplement
its supply of funds and to meet deposit withdrawal requirements. The FHLB
functions as a central bank providing credit for savings institutions and
certain other member financial institutions. As a member of the FHLB system,
Carver is required to own stock in the FHLB and is authorized to apply for
advances. Advances are made pursuant to several different programs, each of
which has its own interest rate and range of maturities. Advances from the FHLB
are secured by Carver's stock in the FHLB and a blanket pledge of Carver's
mortgage loan and mortgage-backed securities portfolios.
22
24
One of the elements of Carver's investment strategy is to leverage the
balance sheet by increasing liabilities with advances and Repos and investing
borrowed funds into adjustable rate mortgage loans. The Bank seeks to match as
closely as possible the term of borrowing with the repricing cycle of the
mortgage loans on the balance sheet. At March 31, 2000, Carver had $66.7 million
in FHLB Advances and $31.3 million in securities sold under agreements to
repurchase outstanding.
The following table sets forth certain information regarding Carver's
short-term borrowing at the dates and for the periods indicated:
AT OR FOR THE
YEAR ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Amounts outstanding at end of period:
FHLB advances............................................. $66,688 $65,708 $36,742
Securities sold under agreements to repurchase............ 31,337 35,337 87,020
Weighted average rate paid at period end:
FHLB advances............................................. 5.60% 5.46% 5.82%
Securities sold under agreements to repurchase............ 5.49% 5.52% 5.85%
Maximum amount of borrowing outstanding at any month end:
FHLB advances............................................. $66,688 $65,723 $39,744
Securities sold under agreements to repurchase............ 35,337 85,720 87,020
Approximate average amounts outstanding for period:
FHLB advances............................................. $65,031 $47,393 $31,273
Securities sold under agreements to repurchase............ 32,670 59,296 78,310
Approximate weighted average rate paid during period(1):
FHLB advances............................................. 5.47% 5.66% 5.96%
Securities sold under agreements to repurchase............ 5.46% 5.74% 5.79%
- ---------------
(1) The approximate weighted average rate paid during the period was computed by
dividing the average amounts outstanding into the related interest expense
for the period.
SUBSIDIARY ACTIVITIES
The Holding Company is the parent of two wholly owned subsidiaries, Carver
Federal and Alhambra. For a description of Alhambra, see "Asset
Quality -- Non-performing Assets."
As a federally chartered savings institution, Carver Federal is permitted
to invest up to 2% of its assets in subsidiary service corporations plus an
additional 1% in subsidiaries engaged in specified community purposes. At March
31, 2000, the net book value of the Bank's service corporations investments was
$445,237.
Carver Federal is also authorized to make investments of any amount in
operating subsidiaries that engage solely in activities that federal savings
institutions may conduct directly. On March 8, 1995, the Bank formed CFSB Realty
Corp. as a wholly owned subsidiary which holds real estate acquired through
foreclosure pending eventual disposition. At March 31, 2000, this subsidiary had
$281,922 in total capital and net operating expenses of $10,174.
On September 19, 1996, the Bank formed CFSB Credit Corp. ("CCC") as a
wholly owned subsidiary to undertake Carver's credit card issuance. During the
fourth quarter of fiscal 1998, in response to delinquencies in the credit card
portfolio, the Board resolved to discontinue the direct issuance of unsecured
credit cards and limited the issuance of secured credit cards to existing Bank
customers. CCC is currently inactive, and its operations have been consolidated
into the Bank's activities.
MARKET AREA AND COMPETITION
General. The Company's primary market area for deposits consists of the
areas served by its six branches, and the Bank considers its lending market to
include Bronx, Kings, New York, Queens and Richmond counties, together
comprising New York City, and Lower Westchester County, New York.
23
25
Although Carver's branches are located in areas that have been historically
underserved by other financial institutions, Carver is facing increasing
competition for deposits and residential mortgage lending in its immediate
market areas. Management believes that this competition has become more intense
as a result of an increased examination emphasis by federal banking regulators
on financial institutions' fulfillment of their responsibilities under the
Community Reinvestment Act ("CRA"). Many of Carver's competitors have
substantially greater resources than Carver and offer a wider array of financial
services and products than Carver. At times, these larger commercial banks and
thrifts may offer below market interest rates on mortgage loans and above market
interest rates for deposits. These pricing concessions combined with a larger
presence in the New York market add to the challenges Carver faces in expanding
its current market share. The Bank believes that it can compete with these
institutions by offering a competitive range of services as well as through the
personalized attention and community commitment which has always been Carver's
hallmark.
Branch Sale Agreement. On January 28, 1998, the Company announced that it
had entered into a definitive agreement to sell the Bank's branch office located
in Roosevelt, New York to City National Bank of New Jersey ("City National
Bank"). However, the sale was delayed because of certain regulatory issues. The
Roosevelt branch office is located in Nassau County and had deposits of
approximately $8.6 million at March 31, 2000. During May, 1999, the Company and
City National Bank reopened the discussion of the transaction under similar
terms and conditions as the sale agreement. In May, 2000, the Company completed
the sale of the Roosevelt branch office to City National Bank. City National
Bank assumed the deposit liabilities and acquired the related branch assets
consisting of cash, fixed assets and loans secured by deposits. City National
Bank paid to the Company a premium of approximately $255,000 or approximately 3%
of the deposit liabilities assumed.
EMPLOYEES
As of March 31, 2000, Carver had 110 full-time equivalent employees, none
of whom was represented by a collective bargaining agreement.
REGULATION AND SUPERVISION
GENERAL
The Bank is subject to extensive regulation, examination, and supervision
by the OTS, as its chartering agency, and the FDIC, as its deposit insurer. The
Bank's deposit accounts are insured up to applicable limits by the Savings
Association Insurance Fund ("SAIF") administered by the FDIC, and it is a member
of the FHLB. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, and it must obtain regulatory approvals
prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions. The OTS and the FDIC conduct
periodic examinations to assess the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which a savings association can engage and is
intended primarily for the protection of the insurance fund and depositors. The
Holding Company, as a savings association holding company, is required to file
certain reports with, and otherwise comply with, the rules and regulations of
the OTS and of the Securities and Exchange Commission (the "SEC") under the
federal securities laws.
The OTS and the FDIC have significant discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC, or the Congress, could have a material
adverse impact on the Holding Company, the Bank, and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations, and it does not
purport to be a comprehensive description of all such statutes and regulations.
24
26
IMPACT OF ENACTMENT OF THE GRAMM-LEACH-BLILEY ACT
On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act
("Gramm-Leach"), which among other things, establishes a comprehensive framework
to permit affiliations among commercial banks, insurance companies and
securities firms. Generally, the new law (1) repeals the historical restrictions
and eliminates many federal and state law barriers to affiliations among banks
and securities firms, insurance companies and other financial service providers,
(2) provides a uniform framework for the activities of banks, savings
institutions and their holding companies, (3) broadens the activities that may
be conducted by subsidiaries of national banks and state banks, (4) provides an
enhanced framework for protecting the privacy of information gathered by
financial institutions regarding their customers and consumers, (5) adopts a
number of provisions related to the capitalization, membership, corporate
governance and other measures designed to modernize the FHLB System, (6)
requires public disclosure of certain agreements relating to funds expended in
connection with an institution's compliance with the CRA, and (7) addresses a
variety of other legal and regulatory issues affecting both day-to-day
operations and long-term activities of financial institutions, including the
functional regulation of bank securities and insurance activities.
Gramm-Leach also restricts the powers of new unitary savings and loan
association holding companies. Unitary savings and loan holding companies that
are "grandfathered," i.e., unitary savings and loan holding companies in
existence or with applications filed with the OTS on or before May 4, 1999, such
as the Holding Company, retain their authority under the prior law. All other
unitary savings and loan holding companies are limited to financially related
activities permissible for bank holding companies, as defined under Gramm-
Leach. Gramm-Leach also prohibits non-financial companies from acquiring
grandfathered unitary savings and loan association holding companies.
Gramm-Leach also requires financial institutions to disclose, on ATM
machines, any non-customer fees and to disclose to their customers upon the
issuance of an ATM card any fees that may be imposed by the institutions on ATM
users. For older ATMs, financial institutions will have until December 31, 2004
to provide such notices.
Bank holding companies are permitted to engage in a wider variety of
financial activities than permitted under the prior law, particularly with
respect to insurance and securities activities. In addition, in a change from
the prior law, bank holding companies are in a position to be owned, controlled
or acquired by any company engaged in financially related activities.
The Bank does not believe that the new law will have a material adverse
affect upon its operations in the near term. However, to the extent the new law
permits banks, securities firms and insurance companies to affiliate, the
financial services industry may experience further consolidation. This type of
consolidation could result in a growing number of larger financial institutions
that offer a wider variety of financial services than the Bank currently offers
and that can more aggressively compete in the markets we currently serve.
REGULATION OF FEDERAL SAVINGS ASSOCIATIONS
Business Activities. The Bank derives its lending and investment powers
from the Home Owner's Loan Act, as amended ("HOLA"), and the regulations of the
OTS thereunder. Under these laws and regulations, the Bank may invest in
mortgage loans secured by residential and commercial real estate, commercial and
consumer loans, certain types of debt securities, and certain other assets. The
Bank may also establish service corporations that may engage in activities not
otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage. These investment powers are
subject to various limitations, including (a) a prohibition against the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories; (b) a limit of 400% of an association's capital on
the aggregate amount of loans secured by non-residential real estate property;
(c) a limit of 20% of an association's assets on commercial loans, with the
amount of commercial loans in excess of 10% of assets being limited to small
business loans; (d) a limit of 35% of an association's assets on the aggregate
amount of consumer loans and acquisitions of certain debt securities; (e) a
limit of 5% of assets on nonconforming loans (loans in excess of the specific
limitations of HOLA); and (f) a limit of the greater of 5% of assets or an
association's capital on
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certain construction loans made for the purpose of financing what is or is
expected to become residential property.
Loans to One Borrower. Under HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. Additional amounts may be
lent, not in excess of 10% of unimpaired capital and surplus, if such loans or
extensions of credit are fully secured by readily marketable collateral. Such
collateral is defined to include certain debt and equity securities and bullion,
but generally does not include real estate. At March 31, 2000, the Bank's limit
on loans to one borrower based on its unimpaired capital and surplus was $4.3
million. During fiscal 1999, the Bank was directed by the OTS to abstain from
originating new loans which individually, or in the aggregate exceed $2.0
million to one borrower. Since such notice, the Bank has not originated loans
which individually, or in the aggregate exceed $2.0 million.
QTL Test. HOLA requires a savings association to meet a qualified thrift
lender ("QTL") test. Under the QTL test, a savings association is required to
maintain at least 65% of its "portfolio assets" in certain "qualified thrift
investments" in at least nine months of the most recent twelve-month period.
"Portfolio assets" means, in general, an association's total assets less the sum
of (a) specified liquid assets up to 20% of total assets, (b) certain
intangibles, including goodwill and credit card rights, and (c) the value of
property used to conduct the association's business. "Qualified thrift
investments" includes various types of loans made for residential and housing
purposes, investments related to such purposes, including certain
mortgage-backed and related securities, and consumer loans. At March 31, 2000,
the Bank maintained approximately 84.85% of its portfolio assets in qualified
thrift investments. The Bank had also met the QTL test in each of the prior 12
months and was, therefore, a qualified thrift lender.
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (a) engaging in any new activity not
permissible for a national bank, (b) paying dividends not permissible under
national bank regulations, (c) obtaining new advances from any FHLB, and (d)
establishing any new branch office in a location not permissible for a national
bank in the association's home state. In addition, within one year of the date a
savings association ceases to meet the QTL test, any company controlling the
association would have to register under, and become subject to the requirements
of, the Bank Holding Company Act of 1956 ("BHC Act"), as amended. If the savings
association does not re-qualify under the QTL test within the three-year period
after it failed the QTL test, it would be required to terminate any activity and
to dispose of any investment not permissible for a national bank and would have
to repay as promptly as possible any outstanding advances from an FHLB. A
savings association that has failed the QTL test may re-qualify under the QTL
test and be free of such limitations, but it may do so only once.
Capital Requirements. The OTS capital regulations require federally
chartered savings banks to meet three capital ratios: a 1.5% tangible capital
ratio, a 4% leverage (core capital) ratio and an 8% risk-based capital ratio. In
assessing an institution's capital adequacy, the OTS takes into consideration
not only these numeric factors but also qualitative factors as well, and has the
authority to establish higher capital requirements for individual institutions
where necessary. The Bank, as a matter of prudent management, targets as its
goal the maintenance of capital ratios which exceed these minimum requirements
and that are consistent with the Bank's risk profile. At March 31, 2000, the
Bank exceeded each of its capital requirements with tangible and leverage
capital ratios of 6.85% and a risk-based capital ratio of 15.38%.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA"),
requires that the OTS and other federal banking agencies revise their risk-based
capital standards, with appropriate transition rules, to ensure that they take
into account interest rate risk ("IRR"), concentration of risk and the risks of
non-traditional activities. The OTS adopted regulations, effective January 1,
1994, that set forth the methodology for calculating an IRR component to be
incorporated into the OTS risk-based capital regulations. The OTS has
indefinitely deferred its requirements of the IRR component in the calculation
of an institution's risk-based capital calculation. The OTS continues to monitor
the IRR of individual institutions through analysis of
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the change in net portfolio value ("NPV"). The OTS has also used this NPV
analysis as part of its evaluation of certain applications submitted by thrift
institutions. For a more complete discussion of NPV analysis, see "Executive
Officers of the Holding Company -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Discussion of Market Rate
Sensitivity Analysis." The OTS, through its general oversight of the safety and
soundness of savings associations, retains the right to impose minimum capital
requirements on individual institutions to the extent the institution is not in
compliance with certain written guidelines established by the OTS regarding NPV
analysis. The OTS has not imposed any such requirements on the Bank.
Limitation on Capital Distributions. The OTS regulations impose
limitations upon capital distributions by savings associations, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cashout merger, and other distributions
charged against capital. Effective April 1, 1999, the OTS amended its capital
distribution regulations to reduce regulatory burdens on savings associations.
Under the OTS regulations, certain savings associations are permitted to pay
capital distributions during a calendar year that do not exceed the
association's net income for that year plus its retained net income for the
prior two years, without notice to, or the approval of, the OTS. However, a
savings association subsidiary of a savings and loan holding company, such as
the Bank, must file a notice unless the specific capital distribution requires
an application. In addition, the OTS can prohibit a proposed capital
distribution, otherwise permissible under the regulation, if the OTS has
determined that the association is in need of more than normal supervision or if
it determines that a proposed distribution by an association would constitute an
unsafe or unsound practice. Furthermore, under the OTS prompt corrective action
regulations, the Bank would be prohibited from making any capital distribution
if, after the distribution, the Bank failed to meet its minimum capital
requirements, as described above. See "-- Prompt Corrective Regulatory Action."
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) equal
to a specified percentage of the average daily balance of its net withdrawal
deposit accounts plus short-term borrowing for the preceding calendar quarter or
the balance of such items at the end of the preceding calendar quarter. This
liquidity requirement may be changed from time to time by the OTS to any amount
within the range of 4% to 10% depending upon economic conditions and the savings
flows of member institutions, and is currently 4%. Monetary penalties may be
imposed for failure to meet these liquidity requirements. The Bank's liquidity
ratio for the year ended March 31, 2000 was 20.43%, which exceeded the
applicable requirements.
Assessments. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The assessment for an
individual savings association is based on three components: the size of the
association, on which the basic assessment would be based; the association's
supervisory condition, which would result in an additional assessment based on a
percentage of the basic assessment for any savings institution with a composite
rating of 3, 4 or 5 in its most recent safety and soundness examination; and the
complexity of the association's operations, which would result in an additional
assessment based on a percentage of the basic assessment for any savings
association that managed over $1.0 billion in trust assets, serviced for others
loans aggregating more than $1.0 billion, or had certain off-balance sheet
assets aggregating more than $1.0 billion. In order to avoid a disproportionate
impact on the smaller savings institutions, which are those whose total assets
never exceeded $100.0 million, the regulations provide that the portion of the
assessment based on asset size will be the lesser of the assessment under the
amended regulations or the regulations before the amendment.
Branching. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such a branch is
available (a) in states that expressly authorize branches of savings
associations located in another state and (b) to an association that qualifies
as a "domestic building and loan association" under the Internal Revenue Code of
1986 (the "Code"), which imposes qualification requirements similar to those for
a "qualified thrift lender" under HOLA. See "-- QTL Test." The authority for a
federal savings association to establish an interstate branch network would
facilitate a geographic diversification of the association's
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activities. This authority under HOLA and the OTS regulations preempts any state
law purporting to regulate branching by federal savings associations.
Community Reinvestment. Under the CRA, as implemented by OTS regulations,
a federally chartered savings association has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the OTS, in
connection with its examination of a savings association, to assess the
association's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
association. The CRA regulations establish an assessment system that bases an
association's rating on its actual performance in meeting community needs. In
particular, the assessment system focuses on three tests: (a) a lending test, to
evaluate the institution's record of making loans in its assessment areas; (b)
an investment test, to evaluate the institution's record of investing in
community development projects, affordable housing, and programs benefiting low
or moderate income individuals and businesses; and (c) a service test, to
evaluate the institution's delivery of services through its branches, ATMs, and
other offices. The CRA also requires all institutions to make public disclosure
of their CRA ratings. The Bank received a "Satisfactory" CRA rating in its most
recent examination conducted in 1998.
Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an
affiliate of the Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions. The OTS
regulations prohibit a savings association (a) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the BHC Act and (b) from purchasing the
securities of any affiliate other than a subsidiary. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings association and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings association's
capital and surplus. Extensions of credit to affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A, and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
association as those prevailing at the time for comparable transactions with
nonaffiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
nonaffiliated companies.
The Bank's authority to extend credit to its directors, executive officers,
and 10% shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the Federal Reserve Board thereunder. Among other things,
these provisions require that extensions of credit to insiders (a) be made on
terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features and (b) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the association's capital. In addition, extensions of credit in excess
of certain limits must be approved by the association's board of directors.
Enforcement. Under the Federal Deposit Insurance Act ("FDI Act"), the OTS
has primary enforcement responsibility over savings associations and has the
authority to bring enforcement action against all "institution affiliated
parties," including any controlling stockholder or any shareholder, attorney,
appraiser and accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other significant adverse effect on an insured savings association.
Civil penalties cover a wide
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range of violations and actions and range from $5,000 for each day during which
violations of law, regulations, orders, and certain written agreements and
conditions continue, up to $1.0 million per day for such violations if the
person obtained a substantial pecuniary gain as a result of such violation or
knowingly or recklessly caused a substantial loss to the institution. Criminal
penalties for certain financial institution crimes include fines of up to $1.0
million and imprisonment for up to 30 years. In addition, regulators have
substantial discretion to take enforcement action against an institution that
fails to comply with its regulatory requirements, particularly with respect to
its capital requirements. Possible enforcement actions range from the imposition
of a capital plan and capital directive to receivership, conservatorship, or the
termination of deposit insurance. Under the FDI Act, the FDIC has the authority
to recommend to the Director of OTS that enforcement action be taken with
respect to a particular savings association. If action is not taken by the
Director of the OTS, the FDIC has authority to take such action under certain
circumstances.
Standards for Safety and Soundness. Pursuant to the FDI Act, as amended by
FDICIA and the Riegle Community Development and Regulatory Improvement Act of
1994, the OTS and the federal bank regulatory agencies have adopted a set of
guidelines prescribing safety and soundness standards. The guidelines establish
general standards relating to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings, and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director or principal shareholder. In addition, the
OTS adopted regulations pursuant to FDICIA that authorize, but do not require,
the OTS to order an institution that has been given notice by the OTS that it is
not satisfying any of such safety and soundness standards to submit a compliance
plan. If, after being so notified, an institution fails to submit an acceptable
compliance plan or fails in any material respect to implement an accepted
compliance plan, the OTS must issue an order directing action to correct the
deficiency and may issue an order directing other actions of the types to which
an undercapitalized association is subject under the "prompt corrective action"
provisions of FDICIA. If an institution fails to comply with such an order, the
OTS may seek to enforce such order in judicial proceedings and to impose civil
money penalties.
Prompt Corrective Regulatory Action. FDICIA established a system of prompt
corrective action to resolve the problems of undercapitalized depository
institutions. Under this system, the federal banking regulators are required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends on the institution's degree of capitalization. For
this purpose, a savings association would be placed in one of five categories
based on the association's capital. Generally, a savings association is treated
as "well capitalized" if its ratio of total capital to risk-weighted assets is
at least 10.0%, its ratio of core capital to risk weighted assets is at least
6.0%, its ratio of core capital to total assets is at least 5.0%, and it is not
subject to any order or directive by the OTS to meet a specific capital level. A
savings association will be treated as "adequately capitalized" if its ratio of
total capital to risk-weighted assets is at least 8.0%, its ratio of core
capital to risk weighted assets is at least 4.0%, and its ratio of core capital
to total assets is at least 4.0% (3.0% if the association receives the highest
rating on the Uniform Financial Institutions Rating System). A savings
association that has a total risk based capital of less than 8.0% or a leverage
ratio or a Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if
the association receives the highest rating on the Uniform Financial
Institutions Rating System) is considered to be "undercapitalized." A savings
association that has a total risk based capital of less than 6.0% or a Tier 1
risk based capital ratio or a leverage ratio of less than 3.0% is considered to
be "significantly undercapitalized." A savings association that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The elements of an association's capital for purposes of the
prompt corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. As of March 31, 2000, the Bank was
considered well-capitalized by the OTS. See "-- Regulation of Federal Savings
Associations -- Capital Requirements."
When appropriate, the OTS can require corrective action by a savings
association holding company under the "prompt corrective action" provisions of
FDICIA.
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Insurance of Deposit Accounts. The Bank is a member of the SAIF of the
FDIC, and the Bank pays its deposit insurance assessments to the SAIF of the
FDIC. The FDIC also maintains another insurance fund, the Bank Insurance Fund
("BIF"), which primarily insures the deposits of banks and state chartered
savings banks.
Pursuant to FDICIA, the FDIC established a risk based assessment system for
determining the deposit insurance assessments to be paid by insured depository
institutions. Under the assessment system, the FDIC assigns an institution to
one of three capital categories based on the institution's financial information
as of the reporting period ending seven months before the assessment period. The
three capital categories consist of (a) well capitalized, (b) adequately
capitalized, or (c) undercapitalized. The FDIC also assigns an institution to
one of three supervisory subcategories within each capital group. The
supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's primary federal
regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the regulation, there are
nine assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Assessment rates currently range from 0.0% of deposits for an institution in the
highest category (i.e., well-capitalized and financially sound, with no more
than a few minor weaknesses) to 0.27% of deposits for an institution in the
lowest category (i.e., undercapitalized and substantial supervisory concern).
The Bank's annual assessment rate for the first half of 2000 was 0.17% of
deposits. The FDIC is authorized to raise the assessment rates as necessary to
maintain the required reserve ratio of 1.25%. As a result of the Deposit
Insurance Funds Act of 1996 (the "Funds Act"), both the BIF and the SAIF
currently satisfy the reserve ratio requirement. If the FDIC determines that
assessment rates should be increased, institutions in all risk categories could
be affected. The FDIC has exercised this authority several times in the past and
could raise insurance assessment rates in the future. If such action is taken by
the FDIC, it could have an adverse effect on the earnings of the Bank.
In addition, the Funds Act expanded the assessment base for the payments on
the bonds ("FICO bonds") issued in the late 1980s by the Financing Corporation
to recapitalize the now defunct Federal Savings and Loan Insurance Corporation.
Beginning January 1, 1997, the deposits of both BIF- and SAIF-insured
institutions were assessed for the payments on the FICO bonds. The Bank's total
expense in fiscal 2000 for the assessment of deposit insurance and the FICO
payments was $609,000.
Privacy Protection. On June 1, 2000, the OTS published final privacy rules
implementing the privacy protection provisions of Section 504 of Gramm-Leach.
The proposed regulations would require each financial institution to adopt
procedures to protect customers' and consumers' "nonpublic personal information"
by November 13, 2000; however, compliance will be optional until July 1, 2001.
The Bank would be required to disclose its privacy policy, including identifying
with whom it shares "nonpublic personal information," to customers at the time
of establishing the customer relationship and annually thereafter. In addition,
the Bank would be required to provide its customers with the ability to
"opt-out" of having the Bank share its personal information with unaffiliated
third parties.
Gramm-Leach also provides for the ability of each state to enact
legislation that is more protective of consumers' personal information.
Currently, there are a number of privacy bills pending in the New York
legislature. No action has been taken on any of these bills, and the Bank cannot
predict what impact, if any, these bills would have.
Federal Home Loan Bank System. The Bank is a member of the FHLB-NY, which
is one of the regional FHLBs composing the FHLB System. Each FHLB provides a
central credit facility primarily for its member institutions. The Bank, as a
member of the FHLB-NY, is required to acquire and hold shares of capital stock
in the FHLB-NY in an amount at least equal to the greater of 1% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, 0.390 of total assets, or 5%, of its
advances (borrowing) from the FHLB, whichever is greater. The Bank was in
compliance with this requirement with an investment in the capital stock of the
FHLB at March 31, 2000 of
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$5.8 million. Any advances from a FHLB must be secured by specified types of
collateral, and all long term advances may be obtained only for the purpose of
providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. The FHLB paid dividends to the
Bank of $393,000 for the twelve months ended March 31, 2000 and dividends of
$407,000 for the prior fiscal year. If dividends were reduced, or interest on
future FHLB advances increased, the Bank's net interest income would likely also
be reduced.
Pursuant to Gramm-Leach, the foregoing minimum share ownership requirements
will be replaced by regulations to be promulgated by the Federal Housing Finance
Board. Gramm-Leach specifically provides that the minimum requirements in
existence immediately prior to adoption of Gramm-Leach shall remain in effect
until such regulations are adopted. Formerly, federal saving associations were
required to be members of the FHLB System. The new law removed the mandatory
membership requirement and authorized voluntary membership for federal savings
associations, as is the case for all other eligible institutions.
Federal Reserve System. The Bank is subject to provisions of the FRA and
the Federal Reserve Board's regulations pursuant to which depositary
institutions may be required to maintain noninterest-earning reserves against
their deposit accounts and certain other liabilities. Currently, reserves must
be maintained against transaction accounts (primarily NOW and regular checking
accounts). The Federal Reserve Board regulations generally require that reserves
be maintained in the amount of 3% of the aggregate of transaction accounts up to
$44.3 million. The amount of aggregate transaction accounts in excess of $44.3
million are currently subject to a reserve ratio of 10%, which ratio the Federal
Reserve Board may adjust between 8% and 14%. The Federal Reserve Board
regulations currently exempt $5.0 million of otherwise reservable balances from
the reserve requirements, which exemption is adjusted by the Federal Reserve
Board at the end of each year. The Bank is in compliance with the foregoing
reserve requirements. Because required reserves must be maintained in the form
of either vault cash, a noninterest bearing account at a Federal Reserve Bank,
or a passthrough account as defined by the Federal Reserve Board, the effect of
this reserve requirement is to reduce the Bank's interest-earning assets. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the OTS.
FHLB System members are also authorized to borrow from the Federal Reserve
"discount window," but Federal Reserve Board regulations require such
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
Holding Company Regulation. The Holding Company is a unitary savings and
loan holding company within the meaning of the HOLA. As such, it is registered
with the OTS and is subject to the OTS regulations, examinations, supervision
and reporting requirements. In addition, the OTS has enforcement authority over
the Holding Company and savings association subsidiaries. Among other things,
this authority permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings association. The Bank
must notify the OTS at least 30 days before declaring any dividend to the
Holding Company. No dividends were paid from the Bank to the Holding Company in
fiscal 2000.
The HOLA prohibits a savings and loan holding company (directly or
indirectly, or through one or more subsidiaries) from acquiring another savings
association or holding company thereof without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
associations, the OTS must consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.
Federal Securities Laws. The Holding Company is subject to the periodic
reporting, proxy solicitation, tender offer, insider trading restrictions and
other requirements under the Securities Exchange Act of 1934, as amended,
("Exchange Act").
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Delaware Corporation Law. The Holding Company is incorporated under the
laws of the State of Delaware. Thus, we are subject to regulation by the State
of Delaware and the rights of our shareholders are governed by the General
Corporation Law of the State of Delaware.
New York State Banking Regulations. The New York State Banking Department
has proposed regulations that would impose restrictions and limitations on
certain high cost home loans made by any individual or entity, including a
federally-chartered savings association, that originates more than one high cost
home loan in New York State in a 12-month period. The regulations, among other
things, prohibit certain mortgage loan provisions and certain acts and practices
by originators and impose certain disclosure and reporting requirements. It is
unclear whether these provisions, if enacted, would be preempted by Section 5(a)
of HOLA, as implemented by the lending and investment regulations of the OTS.
The OTS has not yet adopted regulations regarding high-cost mortgage loans and
is currently considering whether it will do so. Although the Bank does not
originate loans that meet the definition of "high cost" under the proposed
regulations, in the event the Bank determines to originate such loans in the
future, the Bank may be subject to such regulation, if adopted as proposed.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Holding Company and the Bank currently file consolidated
federal income tax returns, report their income for tax return purposes on the
basis of a taxable-year ending March 31st, using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations with some exceptions, including particularly the Bank's tax
reserve for bad debts discussed below. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Holding Company.
Bad Debt Reserves. The Bank, as a "small bank" (one with assets having an
adjusted tax basis of $500 million or less) is permitted to maintain a reserve
for bad debts with respect to "qualifying loans," which, in general, are loans
secured by certain interests in real property, and to make, within specified
formula limits, annual additions to the reserve which are deductible for
purposes of computing the Bank's taxable income. Pursuant to the Small Business
Job Protection Act of 1996, the Bank is now recapturing (taking into income)
over a multi-year period a portion of the balance of its bad debt reserve as of
March 31, 1996.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's "base year reserve" i.e., its reserve as of
March 31, 1988, to the extent thereof and then from its supplemental reserve for
losses on loans, and an amount based on the amount distributed will be included
in the Bank's taxable income. Nondividend distributions include distributions in
excess of the Bank's current and accumulated earnings and profits, distributions
in redemption of stock and distributions in partial or complete liquidation.
However, dividends paid out of the Bank's current or accumulated earnings and
profits, as calculated for federal income tax purposes, will not constitute
nondividend distributions and, therefore, will not be included in the Bank's
income.
The amount of additional taxable income created from a nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the nondividend distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate.
Corporate Alternative Minimum Tax. The Code imposes a 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
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Company's adjusted current earnings exceeds its AMTI (determined without regard
to this adjustment and prior to reduction for net operating losses).
Dividends-Received Deduction and Other Matters. 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 rate for each of fiscal 1998 and fiscal 1999 was
10.53% (including Metropolitan Commuter Transportation District Surcharge) of
net income. In general, the Holding Company is not required to pay New York
State tax on dividends and interest received from the Bank or on gains realized
on the sale of Bank stock.
New York State has enacted legislation that enabled the Bank to avoid the
recapture of the New York State tax bad debt reserves that otherwise would have
occurred as a result of the changes in federal law and to continue to utilize
either the federal method or a method based on a percentage of its taxable
income for computing additions to its bad debt reserve.
New York City. The Bank and the Holding Company are also subject to a
similarly calculated New York City banking corporation tax of 9% on income
allocated to New York City. In this connection, legislation was recently enacted
regarding the use and treatment of tax bad debt reserves that is substantially
similar to the New York State legislation described above.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Holding Company is exempted from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
EXECUTIVE OFFICERS OF THE HOLDING COMPANY
The name, position, term of office as officer and period during which he or
she has served as an officer is provided below for each executive officer of the
Holding Company. Each of the persons listed below is an executive officer of the
Holding Company and the Bank.
NAME AGE POSITION
- ---- --- ------------------------------------------------------
Deborah C. Wright.................... 42 President and Chief Executive Officer, Director
Walter T. Bond....................... 42 Senior Vice President and Special Assistant to the CEO
James Boyle.......................... 50 Senior Vice President and Chief Financial Officer
Anthony Galleno...................... 58 Vice President and Controller
Margaret Peterson.................... 50 Senior Vice President and Chief Administrative Officer
J. Kevin Ryan........................ 50 Senior Vice President and Chief Lending Officer
Judith Taylor........................ 57 Acting Senior Vice President and Chief of Retail
Banking
DEBORAH C. WRIGHT is currently President and Chief Executive Officer and a
Director of Carver and Carver Federal, positions she assumed on June 1, 1999.
Prior to assuming her current positions, Ms. Wright was President & CEO of the
Upper Manhattan Empowerment Zone Development Corporation, a position she held
since May 1996. She previously served as Commissioner of the Department of
Housing Preservation and Development under Mayor Rudolph W. Giuliani from
January 1994 through March 1996. Prior to that
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appointment, Ms. Wright was named to the New York City Housing Authority Board,
by Mayor David N. Dinkins, which manages New York City's 189,000 public housing
units. She serves on the boards of the Initiative for a Competitive Inner City,
Empire State Development Corporation, PENCIL, Inc., The Ministers and
Missionaries Benefit Board of the American Baptist Churches, and the New York
City Partnership, Inc. Ms. Wright earned A.B., J.D. and M.B.A. degrees from
Harvard University.
WALTER T. BOND is Senior Vice President and Special Assistant to the
President and Chief Executive Officer. Mr. Bond is also a member of the Bank's
Investment Committee. Mr. Bond joined the Bank in February 1993, as Assistant
Vice President, Mortgage Lender. Mr. Bond is a member of the New York Society of
Securities Analyst and the Financial Managers Society.
JAMES BOYLE is Senior Vice President and Chief Financial Officer a position
he assumed in January 2000. Mr. Boyle was formerly Senior Vice President and
Chief Financial Officer of Broad National Bank, which was acquired by
Independence Community Bank in 1999. Mr. Boyle also held senior level financial
positions at National Westminister Bancorp NJ, formerly First Jersey National
Bank. He began his career at KPMG.
ANTHONY GALLENO is Vice President and Controller. After serving 35 years in
the banking business, Mr. Galleno joined the Bank in September, 1998. During his
previous 35 years of service in a thrift financial environment, he served in
various capacities including Senior Vice President-District Manager Community
Lending (Home Savings of America, FSB), Senior Vice President-Chief Financial
Officer (The Bowery Savings Bank), Vice President-Controller (The Bowery Savings
Bank) and Senior Vice President-Corporate Secretary of both Home Savings of
America, FSB-NY and The Bowery Savings Bank. He has served as a Board member of
Home Savings of America, FSB-NY, The Bowery Savings Bank, Long Island Housing
Partnership, Queens Child Guidance Center and various other organizations.
MARGARET D. PETERSON is Senior Vice President and Chief Administrative
Officer, integrating Human Resources, Information Technology, Facilities, Vendor
Management and other support activities. Ms. Peterson joined Carver Federal in
November 1999. Ms. Peterson came to Carver from Deutsche Bank where she served
as a Compensation Planning Consultant in Corporate Human Resources. Prior to
joining Deutsche Bank, Ms. Peterson was a Vice President and Senior HR
Generalist for Citibank Global Asset Management. Besides her 11 years in Human
Resources, Ms. Peterson has 10 years of Systems and Technology experience from
various positions held at JP Morgan and Chase. Ms. Peterson earned a B.S. from
Pace University, a M.B.A. from Columbia University as a Citicorp Fellow, and has
been designated a Certified Compensation Professional by the American
Compensation Association.
J. KEVIN RYAN is Senior Vice President and Chief Lending Officer. Mr. Ryan
joined Carver Federal in June 2000 and has over 20 years' experience in real
estate lending. Prior to joining Carver, Mr. Ryan served as Vice President-Team
Leader for Commercial Real Estate at Greenpoint Mortgage Funding Co., where he
was employed since 1996. From 1985 through 1996, Mr. Ryan served as President of
a commercial and residential real estate appraisal company, which he founded in
New York City. Mr. Ryan also served in various positions at Dime Savings Bank of
NY from 1977 to 1985, including Vice President, and as an Adjunct Professor of
Management & Economics at St. John's University from 1981-1984. He also is a
member of the Queens County Board of Habitat for Humanity. Mr. Ryan received a
BBA in Management from Hofstra University and an MBA in Finance from Fordham
University.
JUDITH TAYLOR is Acting Senior Vice President and Chief of Retail Banking.
Ms. Taylor joined Carver Federal in June 1999. Ms. Taylor was most recently with
The Resolution Trust Corporation, where she served as CEO of four savings and
loan associations. Prior to joining the Resolution Trust Corporation, Ms. Taylor
was a Vice President at Chemical Bank. She brings over 30 years of experience to
Carver.
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ITEM 2. PROPERTIES.
The following table sets forth certain information regarding Carver's
offices and other material properties at March 31, 2000.
LEASE NET BOOK
OWNED OR EXPIRATION VALUE AT
YEAR OPENED LEASED DATE MARCH 31, 2000
----------- -------- ---------- --------------
(IN THOUSANDS)
MAIN OFFICE:
75 West 125th Street...................... 1996 Owned -- $5,797
New York, New York
BRANCH OFFICES:
2815 Atlantic Avenue...................... 1990 Owned -- 334
Brooklyn, New York
(East New York Office)
1281 Fulton Street........................ 1989 Owned -- 1,313
Brooklyn, New York
(Bedford-Stuyvesant Office)
1009-1015 Nostrand Avenue................. 1975 Owned -- 211
Brooklyn, New York
(Crown Heights Office)
261 8th Avenue............................ 1964 Leased 10/31/04 228
New York, New York
(Chelsea Office)
115-02 Merrick Boulevard.................. 1982 Leased 02/28/11 293
Jamaica, New York
(St. Albans Office)
302 Nassau Road(1)........................ 1985 Leased 6/30/05 $ --
Roosevelt, New York
(Roosevelt Office)
------
Total........................... $8,176
======
- ---------------
(1) On May 12, 2000 the Company completed the sale of the Roosevelt branch
office to City National Bank of New Jersey. See "Asset Quality -- Market
Area and Competition -- Branch Sale Agreement."
The net book value of Carver's investment in premises and equipment totaled
approximately $11.2 million at March 31, 2000.
ITEM 3. LEGAL PROCEEDINGS
From time to time, Carver Federal is a party to various legal proceedings
incident to its business. At March 31, 2000, except as set forth below, there
were no legal proceedings to which Carver Federal or its subsidiaries was a
party, or to which any of their property was subject, which were expected by
management to result in a material loss.
On or about January 18, 2000, a complaint was filed in the Court of
Chancery of the State of Delaware in and for New Castle County (the "Court")
entitled BBC Capital Market, Inc. v. Carver Bancorp, Inc., et al., C.A. No.
17743, naming the Holding Company, all of the Holding Company's directors (the
"individual defendants"), Morgan Stanley & Co., Inc. ("Morgan Stanley") and
Provender Opportunities Fund, L.P. ("Provender") as defendants (the "Action").
The complaint alleged, among other things, that plaintiff BBC Capital Market,
Inc. ("BBC" or "Plaintiff") is a 7.4% stockholder of the Holding Company and
sought to challenge the Holding Company's issuance on January 11, 2000 of 40,000
shares of the Holding Company's Series A Preferred Stock to Morgan Stanley and
60,000 shares of the Holding Company's Series B Preferred Stock to Provender
(the "Transactions"). The complaint further alleged, among other things, that:
(i) the individual defendants approved the Transactions for the primary purpose
of interfering with effective stockholder action at the Holding Company's annual
meeting of stockholders on February 24, 2000 (the "Annual Meeting") at which two
director-defendants were up for re-election; (ii) Morgan Stanley sought to
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intimidate Plaintiff's representatives into dropping any challenge to the
election of directors at the Holding Company and that the individual defendants
conspired with Morgan Stanley in the alleged intimidation; and (iii) the Holding
Company issued a false and misleading proxy statement in connection with the
Annual Meeting by not disclosing, among other things, certain facts relating to
Plaintiff's nomination of directors at the Annual Meeting and the circumstances
surrounding the calling of the Annual Meeting. The complaint alleged four
counts: (1) breach of fiduciary duty of loyalty against the individual
defendants; (2) breach of fiduciary duty of disclosure against the individual
defendants; (3) aiding and abetting breaches of fiduciary duty against Morgan
Stanley and Provender; and (4) pursuant to 10 Del. C. sec. 6501, a determination
that the individual defendants, Morgan Stanley and Provender, could not cast in
excess of 10% of their collective vote at the Annual Meeting.
The complaint sought, among other things: (1) an order preliminarily and
permanently enjoining the Holding Company, the individual defendants and others
from: (a) treating the stock issued to Morgan Stanley and Provender as validly
issued for purposes of voting at the Annual Meeting; (b) taking any steps to
solicit proxies in favor of the Holding Company's nominees at the Annual Meeting
until such time that all alleged disclosure violations were cured; and (c)
taking any action to obstruct a proxy solicitation by Plaintiff; (2) an order
preliminarily and permanently enjoining Morgan Stanley, Provender and others
from aiding and abetting the individual defendants' alleged breach of fiduciary
duties and taking any action to obstruct a proxy solicitation by Plaintiff; (3)
an order rescinding the Transactions; (4) a declaration that the defendants,
Morgan Stanley and Provender, could not cast in excess of 10% of their
collective vote at the Annual Meeting; and (5) an award to Plaintiff of the cost
and disbursements of the action, including reasonable attorneys' fees and
experts' fees. On or about January 29, 2000, defendants filed an answer denying
the substantive allegations of the complaint and seeking, among other things, an
order dismissing the complaint in its entirety, with prejudice.
On or about January 31, 2000, Plaintiff filed an amended complaint
repeating the allegations in the original complaint and adding a count pursuant
to 8 Del. C. sec. 220 seeking an order requiring the Holding Company to
immediately produce all information requested in Plaintiff's letter demanding
that the Holding Company produce certain information relating to the Holding
Company's Employee Stock Ownership Plan (the "ESOP") and 401(k) Savings Plan in
RSI Retirement Trust. On or about February 22, 2000, defendants filed an answer
denying the substantive allegations of the amended complaint and seeking, among
other things, an order dismissing the complaint in its entirety, with prejudice.
On or about January 18, 2000, Plaintiff also made a motion for a
preliminary injunction to obtain the injunctive relief sought in the complaint
and a motion for expedited proceedings to obtain discovery in support of its
application for preliminary injunctive relief. The parties engaged in expedited
discovery and the Court heard Plaintiff's motion for a preliminary injunction on
February 16, 2000. On February 16, 2000, the Court denied Plaintiff's motion for
a preliminary injunction in its entirety.
On or about March 7, 2000, after the Holding Company's Inspector of
Election declared that the Holding Company's nominees had defeated Plaintiff's
nominees at the Annual Meeting, Plaintiff filed a second amended complaint which
repeated the substantive allegations made in the complaint and the amended
complaint and added certain additional allegations, including, among others: (i)
further allegations that the Holding Company's proxy statement and related
materials issued in connection with the Annual Meeting contained false and
misleading statements; and (ii) allegations that the Inspector of Election
improperly counted the votes of certain unallocated shares in the ESOP in favor
of the Holding Company's nominees. The second amended complaint alleged five
counts: (1) breach of fiduciary duty against the individual defendants; (2)
breach of fiduciary duty of disclosure against the individual defendants; (3)
aiding and abetting breaches of fiduciary duty against Morgan Stanley and
Provender; (4) pursuant to 10 Del. C. sec. 6501, a determination that the
individual defendants, Morgan Stanley and Provender, could not cast in excess of
10% of their collective vote at the Annual Meeting; and (5) pursuant to 8 Del.
C. sec. 225, a determination that the Inspector of Election improperly counted
the votes of certain unallocated shares in the ESOP in favor of the Holding
Company's nominees.
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The second amended complaint sought, among other things: (1) an order
permanently enjoining the Holding Company, the individual defendants and others
from treating any stock issued to Morgan Stanley and Provender as validly issued
for purposes of voting; (2) an order rescinding the Transactions; (3) an order
declaring that Plaintiff's nominees were elected as directors of the Holding
Company at the Annual Meeting; (4) an award to Plaintiff of the cost and
disbursements of the Action, including reasonable attorneys' fees and experts'
fees; and (5) an award to Plaintiff of its costs and disbursements in the proxy
contest, including legal fees, proxy solicitor fees, printing fees and the like.
On or about March 27, 2000, defendants filed an answer denying the substantive
allegations of the second amended complaint and seeking, among other things, an
order dismissing the second amended complaint in its entirety, with prejudice.
On or about March 2, 2000, Blaylock & Partners, L.P. ("Blaylock") filed an
application in the Court pursuant to section 8 Del. C. sec. 231(c) (the
"Application"). The Application alleged that Blaylock is a beneficial holder of
approximately 100,000 shares of common stock of the Holding Company and that the
Inspector of Election improperly declined to accept and count Blaylock's vote at
the Annual Meeting. The Application sought, among other things, an order
directing the Inspector of Election to accept and count Blaylock's votes at the
Annual Meeting. On or about March 8, 2000, defendants filed an answer to the
Application and took no position with respect to the relief sought in the
Application.
SUBSEQUENT EVENTS
On or about April 6, 2000, Plaintiff filed a motion for partial summary
judgment with respect to Count V in its second amended complaint seeking a
determination that the Inspector of Election improperly counted the votes of
certain unallocated shares in the ESOP in favor of the Holding Company's
nominees and an order declaring that Plaintiff's nominees had won the election
at the Annual Meeting (the "Partial Summary Judgment Motion"). On April 24,
2000, the Court granted the Partial Summary Judgment Motion and declared that
the Inspector of Election improperly counted the votes attaching to the
unallocated ESOP shares at the Annual Meeting.
By order dated April 20, 2000, the Application was consolidated with the
Action and entitled In Re the Carver Bancorp, Inc., Cons. C.A. No. 17743 (the
"Consolidated Action"). The issues in the Consolidated Action were scheduled to
be tried before the Court beginning on May 15, 2000. The trial was expected to
last between 5 and 10 days.
On or about April 26, 2000, certain defendants filed motions in the Court
seeking: (1) an order directing the entry of a final judgment on the Court's
decision and order on the Partial Summary Judgment Motion or, in the
alternative, an order certifying an appeal from the Court's interlocutory order
on the Partial Summary Judgment Motion; and (2) to stay the proceedings in the
Consolidated Action pending appeal of the Partial Summary Judgment Motion. On or
about May 4, 2000, the Court denied these motions.
On or about May 2, 2000, Plaintiff filed a motion for summary judgment with
respect to the Application seeking, among other things, to dismiss the
Application.
On or about May 19, 2000, with the exception of Blaylock, the parties to
the Consolidated Action entered into a Settlement Agreement and Mutual Release
(the "Settlement Agreement"). Pursuant to the terms of the Settlement Agreement,
among other things, the parties agreed that: (a) BBC's nominees at the Annual
Meeting were appointed to the Boards of the Holding Company and Carver Federal
effective May 19, 2000 for a term expiring at the annual meeting of stockholders
for the fiscal year ending March 31, 2002; (b) the Holding Company will hold its
annual meeting of stockholders for the fiscal year ending March 31, 2000 (the
"2000 Annual Meeting") on or before March 24, 2001; (c) in connection with the
2000 Annual Meeting, the Holding Company will ensure that a sufficient number of
directors are made eligible for election to the Board of the Holding Company so
that the sum of (i) the number two and (ii) the number of directorships up for
election at the 2000 Annual Meeting will constitute a majority of the number of
directors on the Board of the Holding Company as of the date of the 2000 Annual
Meeting; (d) certain directors of the Holding Company agreed to pay and will
cause their insurance carrier to pay $475,000 to BBC; (e) all claims concerning
the subject matter of the Consolidated Action are mutually released and forever
discharged; and (f) the parties would promptly execute and file a stipulation
and order dismissing the Consolidated Action with respect to the parties to the
Settlement Agreement.
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On or about May 22, 2000, the parties to the Settlement Agreement executed
and filed with the Court a Stipulation and Order of Dismissal With Prejudice
(the "Stipulation") providing, among other things, that the Consolidated Action
is dismissed with prejudice as to the parties to the Settlement Agreement. On
May 24, 2000, the Stipulation was entered as an Order of the Court.
In light of, among other things, the Settlement Agreement and Stipulation,
Blaylock agreed to withdraw the Application with prejudice. Accordingly, by
Order dated May 26, 2000, the Court dismissed the Application with prejudice.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Holding Company held its Annual Meeting on February 24, 2000. The
purpose of the Annual Meeting was to vote on the following proposals:
1. The election of two directors for terms of three years each, which
election was contested by BBC;
2. The ratification of the appointment of KPMG, LLP as independent
auditors of the Holding Company for the fiscal year ending March
31, 2000; and
3. The consideration of a shareholder proposal requesting that the
shareholders adopt a nonbinding resolution recommending that the
Board immediately engage the services of an investment banker to
explore alternatives to enhance shareholder value, opposed by the
Board.
The results of voting were as follows:
Proposal 1: Election of Directors:
Holding Company Nominees
David R. Jones For 888,031
Withheld 21,634
David N. Dinkins For 887,934
Withheld 21,731
BBC's Nominees
Kevin Cohee For 856,342
Withheld 8,902
Teri Williams For 857,264
Withheld 7,980
Proposal 2: Ratification of Appointment For 1,657,339
of Independent Auditors Against 111,942
Abstain 5,628
Broker Non-Votes 0
Proposal 3: Shareholder Proposal For 459,843
Against 1,271,540
Abstain 43,524
Broker Non-Votes 0
In addition to the nominees elected at the Annual Meeting, the following
persons' terms of office as directors continued after the Annual Meeting:
Deborah C. Wright, Linda H. Dunham, Robert J. Franz, Pazel G. Jackson, Jr.,
Herman Johnson and Frederick O. Terrell.
Shortly after the Annual Meeting, the Holding Company's Inspector of
Election declared that the Holding Company's nominees had defeated BBC's
nominees at the Annual Meeting. On or about March 7, 2000, BBC filed a second
amended complaint to the Action described in "Legal Proceedings" which, among
other things, alleged that the Inspector of Election improperly counted the
votes of certain unallocated shares in the ESOP in favor of the Holding
Company's nominees and which, among other things, sought an order declaring that
BBC's nominees had been elected as directors of the Holding Company at the
Annual Meeting.
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On or about March 2, 2000, Blaylock filed the Application in the Court
which alleged that Blaylock is a beneficial owner of approximately 100,000
shares of common stock of the Holding Company and that the Inspector of Election
improperly declined to accept and count Blaylock's vote at the Annual Meeting.
The Application sought, among other things, an order directing the Inspector of
Election to accept and count Blaylock's votes at the Annual Meeting.
On or about April 6, 2000, BBC filed the Partial Summary Judgment Motion
with respect to Count V in its second amended complaint seeking a determination
that the Inspection of Election improperly counted the votes of certain
unallocated shares in the ESOP in favor of the Holding Company's nominees and an
order declaring that BBC's nominees had won the election at the Annual Meeting.
On April 24, 2000, the Court granted the Partial Summary Judgment Motion and
declared that the Inspector of Election improperly counted the votes attaching
to the unallocated ESOP shares at the Annual Meeting.
On or about May 19, 2000, with the exception of Blaylock, the parties to
the Consolidated Action entered into the Settlement Agreement. Pursuant to the
terms of the Settlement Agreement, among other things, the parties agreed that
(i) BBC's nominees at the Annual Meeting were appointed to the Boards for a term
expiring at the annual meeting of stockholders for the fiscal year ending March
31, 2002, (ii) the Holding Company will hold the 2000 Annual Meeting on or
before March 24, 2001; and (iii) in connection with the 2000 Annual Meeting, the
Holding Company will ensure that a sufficient number of directors are made
eligible for election to the Board of the Holding Company so that the sum of (i)
the number two and (ii) the number of directorships up for election at the 2000
Annual Meeting will constitute a majority of directors on the Board of the
Holding Company as of the date of the 2000 Annual Meeting. Under the terms of
the Settlement Agreement, Messrs. Dinkins and Jones were not required to
relinquish their seats on the Boards; however, Mr. Dinkins and Mr. Jones
resigned from each of the Boards of the Holding Company and Carver Federal
effective May 25, 2000. See "-- Legal Proceedings."
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET FOR THE COMMON STOCK
The Common Stock is listed on the American Stock Exchange under the symbol
"CNY." Prior to May 21, 1997, the Common Stock traded on the National Market of
The Nasdaq Stock Market under the symbol "CARV." As of June 1, 2000, there were
2,316,358 shares of the Common Stock outstanding, held by approximately 1,150
holders of record. The following table shows the high and low per share sales
prices of the Common Stock.
CLOSING SALES PRICE QUARTER ENDED
- -----------------------------------------------------------------------------------------------
HIGH LOW HIGH LOW
----- ---- ----- -----
Year Ended March 31, 2000 Year Ended March 31, 1999
First Quarter.............. $11 3/8 $7 1/2 First Quarter................ $13 3/4 $ 13
Second Quarter............. $ 10 $7 5/8 Second Quarter............... $10 3/8 $8 7/8
Third Quarter.............. $11 1/8 $ 7 Third Quarter................ $9 1/4 $7 7/8
Fourth Quarter............. $13 1/2 $8 1/4 Fourth Quarter............... $10 1/4 $ 7
The Board declared a cash dividend of $0.05 (five cents) per share on
February 14, 2000 for stockholders of record on February 25, 2000. The Board has
not determined to establish a regular dividend at this time, but will review the
Company's position after each quarter for the possible declaration of additional
dividends. The timing and amount of future dividends will be within the
discretion of Carver's Board and will depend on the earnings of the Company and
its subsidiaries, their financial condition, liquidity and capital requirements,
applicable governmental regulations and policies and other factors deemed
relevant by the Board.
The Bank will not be permitted to pay dividends to the Holding Company on
its capital stock if its stockholders' equity would be reduced below applicable
regulatory capital requirements or the amount
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required to be maintained for the liquidation account. The OTS capital
distribution regulations applicable to savings institutions (such as the Bank)
that meet their regulatory capital requirements permit capital distributions
during a calendar year that do not exceed the association's net income for that
year plus its retained net income for the prior two years. For information
concerning the Bank's liquidation account, see Note 2 of the Notes to 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.
ITEM 6. SELECTED FINANCIAL DATA.
AT MARCH 31
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
FINANCIAL CONDITION DATA:
TOTAL AMOUNT OF:
Assets.............................. $420,119 $416,483 $437,458 $423,614 $367,657
Loans, net.......................... 270,148 270,522 274,954 197,918 82,608
Mortgage-backed securities.......... 54,229 66,584 91,116 110,853 131,105
Investment securities............... 24,996 -- -- 1,675 8,937
Securities available for sale(1).... 24,952 29,918 28,408 83,863 114,328
Excess of cost over assets
acquired.......................... 817 1,030 1,246 1,456 1,669
Cash and cash equivalents........... 22,202 21,321 15,120 4,231 10,026
Deposits............................ 281,941 276,999 274,894 266,471 256,952
Borrowed funds...................... 98,579 102,038 124,946 121,101 73,948
Stockholders' equity................ 32,641 31,175 35,534 33,984 34,765
NUMBER OF:
Deposit accounts.................... 54,597 58,113 51,550 49,142 45,815
Offices............................. 7 7 7 7 8
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YEAR ENDED MARCH 31
------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
OPERATING DATA:
Interest income.............. $27,367 $28,473 $27,828 $22,847 $23,529
Interest expense............. 14,009 14,815 15,019 12,483 13,594
---------- ---------- ---------- ---------- ----------
Net interest income.......... 13,358 13,658 12,809 10,364 9,935
Provision for loan losses.... 1,099 4,029 1,260 1,690 131
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan
losses..................... 12,259 9,629 11,549 8,674 9,804
---------- ---------- ---------- ---------- ----------
Non-interest income:
Gain (loss) on sales of
asset...................... -- 4 188 (927) --
Other........................ 2,539 2,378 2,163 1,040 608
---------- ---------- ---------- ---------- ----------
Total non-interest income.... 2,539 2,382 2,351 113 608
---------- ---------- ---------- ---------- ----------
Non-interest expenses:
Loss on sale of foreclosed
real estate................ -- -- -- 38 77
Other........................ 15,823 17,963 11,651 11,764 8,976
---------- ---------- ---------- ---------- ----------
Total non-interest expense... 15,823 17,963 11,651 11,802 9,053
---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes...................... (1,025) (5,952) 2,249 (3,015) 1,359
---------- ---------- ---------- ---------- ----------
Income taxes (benefit)....... 110 (1,499) 1,203 (1,275) 606
---------- ---------- ---------- ---------- ----------
Net income (loss)............ $(1,135) $(4,453) $1,046 $(1,740) $753
========== ========== ========== ========== ==========
Net (loss) income per common
share...................... $ (0.53) $ (2.02) $ 0.48 $ (0.80) $ 0.35
Weighted average number of
common shares
outstanding................ 2,238,846 2,206,133 2,187,619 2,156,346 2,169,276
41
43
AT OR FOR THE YEAR ENDED MARCH 31,
--------------------------------------------
2000 1999 1998 1997 1996
------ ------ ----- ------ -----
KEY OPERATING RATIOS:
Return on average assets(1)(2).................. (0.27)% (1.05)% 0.25% (0.47)% 0.21%
Return on average equity(2)(3).................. (3.29) (12.70) 3.00 (5.00) 2.16
Interest rate spread(4)......................... 3.38 3.29 3.14 2.90 2.57
Net interest margin(5).......................... 3.47 3.43 3.27 3.04 2.85
Operating expenses to average assets(2)(6)...... 3.82 4.22 2.80 3.22 2.48
Equity-to-assets(7)............................. 7.77 7.49 8.12 8.03 9.45
Efficiency Ratio(2)(8).......................... 99.54 111.98 76.85 112.65 85.87
Average interest-earning assets to average
interest-bearing liabilities.................. 1.03x 1.04x 1.04x 1.04x 1.07x
ASSET QUALITY RATIOS:
Non performing assets to total assets(9)........ 0.73% 1.15% 1.58% 1.53% 0.97%
Non performing assets to total loans(9)......... 1.12 1.66 2.47 3.28 4.32
Allowance for loan losses to total loans........ 1.07 1.48 1.11 1.09 1.42
Allowance for loan losses to non-performing
loans(9)...................................... 138.07 85.60 45.30 35.06 37.05
Net loan charge-offs to average loans
outstanding................................... 0.84 1.17 0.15 0.69 --
- ---------------
(1) Net income divided by average total assets.
(2) For fiscal 1999, excluding non-recurring items amounting to $7.8 million,
the return on average assets, return on average equity, operating expenses
to average assets and operating income to operating expenses were 0.24%,
2.85%, 2.98% and 78.94%, respectively.
Excluding an assessment to recapitalize the SAIF of $1.6 million, the return
on average assets, return on average equity, operating expenses to average
assets and operating income to operating expenses for fiscal 1997 were
(0.022%), (2.29%), 2.77% and 97.07%, respectively.
(3) Net income divided by average total equity.
(4) Combined weighted average interest rate earned less combined weighted
average interest rate cost.
(5) Net interest income divided by average interest-earning assets.
(6) Non-interest expenses less loss on foreclosed real estate, divided by
average total assets.
(7) Total equity divided by assets at period end.
(8) Efficiency ratio represents operating expenses divided by the sum of net
interest income plus operating income.
(9) Non-performing assets consist of non-accrual loans, accruing loans 90 days
or more past due and property acquired in settlement of loans.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Carver's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loan, investment
and mortgage-backed securities portfolios and the interest paid on its
interest-bearing liabilities, such as deposits and borrowings. In addition, net
income is affected by the level of provision for loan losses, as well as
non-interest income and operating expenses.
The operations of the Bank 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.
42
44
During fiscal 2000, Carver made significant changes in its management,
hiring a new President and Chief Executive Officer, Chief Financial Officer and
Chief Lending Officer, and hired KPMG LLP as its new external auditor. In
addition, Judith Taylor was appointed Acting Senior Vice President and Chief of
Retail Banking in June 1999, Margaret D. Peterson was appointed Senior Vice
President and Chief Administrative Officer in November 1999, James Boyle was
appointed Senior Vice President and Chief Financial Officer in January 2000 and
J. Kevin Ryan was appointed Senior Vice President and Chief Lending Officer in
June 2000, replacing Benny A. Joseph who had served in such position since
November 1999. Mr. Boyle succeeded Walter Bond who had served as Acting Chief
Financial Officer since September 1997. In January 2000, Mr. Bond was appointed
Senior Vice President and Special Assistant to the President and Chief Executive
Officer. For a description of the business experience of the executive officers,
see "Executive Officers of the Holding Company."
There were also changes to the Boards of the Holding Company and the Bank.
Ms. Linda Dunham resigned in March 2000. Messrs. David N. Dinkins and David R.
Jones resigned in May 2000. Mr. Herman Johnson retired in May 2000. Mr.
Frederick O. Terrell joined the Boards of the Holding Company and the Bank in
January 2000 and became Chairman in May 2000. Pursuant to the terms of a
Securities Purchase Agreement relating to the issuance of the Holding Company's
Series B Preferred Stock to Provender Opportunities Fund, L.P. ("Provender"),
Mr. Frederick O. Terrell was appointed to the Boards of the Holding Company and
the Bank. Pursuant to the terms of the settlement agreement, Mr. Kevin Cohee and
Ms. Teri Williams joined the Boards of the Holding Company and the Bank as of
May 19, 2000. In addition, beginning with the July 2000 Board meetings, Messrs.
Robert Holland, Jr. and Strauss Zelnick will join the Boards of the Holding
Company and the Bank.
The net loss of $1.1 million for fiscal 2000 is primarily attributable to
the determination that certain assets were no longer recoverable and should be
expensed, the costs associated with the proxy fight and the associated
litigation and increased expenses associated with certain of the Company's
benefit plans resulting from accounting adjustments. In addition, an incorrect
accounting entry of $415,000 made during the second quarter of fiscal 2000 was
reversed, resulting in restated net income for the three- and six-month periods
ended September 30, 1999 and for the nine-month period ended December 31, 1999.
DEPOSIT INSURANCE ASSESSMENT
During the fourth quarter of fiscal 1999, the Bank incurred increased
deposit insurance assessments as a result of the reduction in the Bank's
supervisory rating by the OTS, Carver's primary regulator. These increased
deposit insurance assessments continued into fiscal 2000. As a result, Carver's
deposit insurance assessments increased by $318,000, or 109.28%, to $609,000 for
the twelve month period ended March 31, 2000 compared to $291,000 for the twelve
month period ended March 31, 1999.
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. Carver Federal has also reduced interest rate risk through its
origination and purchase of primarily adjustable rate mortgage loans and
extending the term of borrowings.
43
45
DISCUSSION OF MARKET RISK -- INTEREST RATE SENSITIVITY ANALYSIS
As a financial institution, the Company's primary component of market risk
is interest rate volatility. Fluctuations in interest rates will ultimately
impact both the level of income and expense recorded on a large portion of the
Company's assets and liabilities, and the market value of all interest-earning
assets, other than those which possess a short term to maturity. Since all of
the Company's interest-bearing liabilities and virtually all of the Company's
interest-earning assets are located at the Bank, virtually all of the Company's
interest rate risk exposure lies at the Bank level. As a result, all significant
interest rate risk management procedures are performed at the Bank level. Based
upon the Bank's nature of operations, the Bank is not subject to foreign
currency exchange or commodity price risk. The Bank does not own any trading
assets.
The Company seeks to manage its interest rate risk by monitoring and
controlling the variation in repricing intervals between its assets and
liabilities. To a lesser extent, the Company also monitors its interest rate
sensitivity by analyzing the estimated changes in market value of its assets and
liabilities assuming various interest rate scenarios. As discussed more fully
below, there are a variety of factors which influence the repricing
characteristics of any given asset or liability.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate-sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific period of time and the amount of interest-bearing
liabilities repricing within that same time period. A gap is considered positive
when the amount of rate-sensitive assets exceeds the amount of rate-sensitive
liabilities and is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of rate-sensitive assets. Generally,
during a period of falling interest rates, a negative gap could result in an
increase in net interest income, while a positive gap could adversely affect net
interest income, and during a period of rising interest rates a negative gap
could adversely affect net interest income, while a positive gap could result in
an increase in net interest income. As illustrated below, Carver had a negative
one-year gap equal to 14.69% of total rate-sensitive assets at March 31, 2000,
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, 2000. Maturity repricing dates
have been projected by applying the assumptions set forth below to contractual
maturity and repricing dates. The information presented in the following table
is derived 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.
44
46
OVER ONE OVER FIVE
THREE OR FOUR TO THROUGH OVER THREE THROUGH OVER
LESS TWELVE THREE THROUGH TEN TEN
MONTHS MONTHS MONTHS YEARS FIVE YEARS YEARS YEARS TOTAL
- ------ -------- -------- -------- ---------- --------- ------- --------
(DOLLARS IN THOUSANDS)
RATE-SENSITIVE ASSETS:
Loans........................... $15,552 $ 26,115 $ 78,697 $ 26,354 $82,552 $45,211 $274,481
Federal Funds Sold.............. 11,300 -- -- -- -- -- 11,300
Investment Securities(1)........ 24,952 -- -- 24,996 -- -- 49,948
Mortgage-Backed Securities...... 25,202 9,530 4,449 3,870 5,662 5,515 54,228
------- -------- -------- -------- ------- ------- --------
Total........................... $77,006 $ 35,645 $ 83,146 $ 55,220 $88,214 $50,726 $389,957
======= ======== ======== ======== ======= ======= ========
RATE-SENSITIVE LIABILITIES:
NOW Accounts.................... $ 2,809 $ 3,745 $ 8,114 $ 4,058 $ 6,242 6,242 31,210
Savings Accounts................ 5,811 7,336 12,515 23,238 45,670 50,707 145,277
Money Market Accounts........... 3,689 11,457 1,941 1,553 389 389 19,418
Certificate of Deposits......... 22,869 29,342 19,818 14,007 0 0 86,036
Borrowings...................... 19,953 62,937 15,000 689 0 0 98,579
------- -------- -------- -------- ------- ------- --------
Total Interest-Bearing
Liabilities................... $55,131 $114,817 $ 57,388 $ 43,545 $52,301 $57,338 $380,520
======= ======== ======== ======== ======= ======= ========
Interest Sensitivity Gap........ 21,875 $(79,172) $ 25,758 $ 11,675 $35,913 $(6,612) $ 9,437
Cumulative Interest Sensitivity
Gap........................... 21,875 $(57,297) $(31,539) $(19,864) $16,049 $ 9,437 $ --
Ratio of Cumulative Gap to Total
Rate-Sensitive Assets......... 5.61% -14.69% -8.09% -5.09% 4.12% 2.42% --
- ---------------
(1) Includes securities available-for-sale.
The preceding table was prepared utilizing certain assumptions regarding
prepayment and decay rates as determined by the OTS for savings associations
nationwide. While management does not believe that these assumptions will be
materially different from Carver's actual experience, the actual interest rate
sensitivity of the Bank's assets and liabilities could vary significantly from
the information set forth in the table due to market and other factors. The
following assumptions were used: (i) adjustable-rate first mortgage loans will
prepay at the rate of 6% per year; and (ii) fixed-rate first mortgage loans will
prepay annually as follows:
ANNUAL PREPAYMENT RATE
-----------------------------
5-YEAR
COUPON RATE 30-YEAR 15-YEAR BALLOON
- ----------- ------- ------- -------
6.50%.................................................. 7.00% 9.00% 16.00%
7.00................................................... 8.00 9.00 17.00
7.50................................................... 8.00 10.00 18.00
8.00................................................... 9.00 11.00 20.00
8.50................................................... 11.00 12.00 23.00
9.00................................................... 13.00 14.00 29.00
9.50................................................... 17.00 -- --
10.00................................................... 23.00 -- --
In addition, it is assumed that fixed maturity deposits are not withdrawn
prior to maturity, transaction accounts will decay at a rate of 37.00% in the
first year, passbook accounts will decay at a rate of 17.00% in the first year,
and money market accounts will reflect a 79.00% decay rate in year one.
Certain shortcomings are inherent in the method of analysis presented in
the table above. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in the market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, generally have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event
45
47
of a change in interest rates, prepayments and early withdrawal levels would
likely deviate significantly from those assumed in calculating the table.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase. Virtually all of the adjustable-rate loans in Carver's portfolio
contain conditions which restrict the periodic change in interest rate.
The ratio of cumulative gap to total rate sensitivity assets was negative
14.69% at March 31, 2000 compared to positive 0.79% at March 31, 1999.
Adjustable rate assets represented 53.67% of the Bank's total interest sensitive
assets at March 31, 2000.
NPV Analysis. As part of its efforts to maximize net interest income and
manage the risks associated with changing interest rates, management uses the
net portfolio value ("NPV") methodology which the OTS has adopted as part of its
capital regulations.
Under this methodology, interest rate risk exposure is assessed by
reviewing the estimated changes in net interest income ("NII") and NPV which
would hypothetically occur if interest rates rapidly rise or fall all along the
yield curve. Projected values of NII and NPV at both higher and lower regulatory
defined rate scenarios are compared to base case values (no change in rates) to
determine the sensitivity to changing interest rates.
Presented below, as of March 31, 2000, is an analysis of the bank's
interest rate risk ("IRR") as measured by changes in NPV and NII for
instantaneous and sustained parallel shifts of 100 basis points in market
interest rates. Such limits have been established with consideration of the
impact of various rate changes and the Bank's current capital position. The
information set forth below relates solely to the Bank; however, because
virtually all of the Company's IRR exposure lies at the bank level, management
believes the table below also accurately reflects an analysis of the Company's
IRR.
NPV AS % OF PV
NET PORTFOLIO VALUE OF ASSETS
-------------------------------- --------------------
CHANGE IN RATE $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
- -------------- -------- -------- -------- --------- -------
(DOLLARS IN THOUSANDS)
+300 bp............................... 27,230 -1,590 -30 6.64 -247 bp
+200 bp............................... 32,033 -6,787 -17 7.70 -141 bp
+100 bp............................... 36,012 -2,808 -7 8.54 -57 bp
- -bp................................... 38,820 9.11
(100) bp.............................. 40,561 1,741 +4 9.45 +33 bp
(200) bp.............................. 41,922 3,102 +8 9.69 +58 bp
(300) bp.............................. 46,532 7,712 +20 10.60 +149 bp
3/31/00 12/31/99 3/31/99
------- -------- -------
RISK MEASURES: 200 BP RATE SHOCK
Pre-Shock NPV Ratio: NPV as % of PV of Assets............... 9.11% 8.22% 7.79%
Post-Shock NPV Ratio........................................ 7.70 6.85 7.79
Sensitivity Measure; Decline in NPV Ratio................... 141 bp 137 bp 0 bp
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV Table presented assumes that the composition of the Company's interest
sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured and also assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV Table provides an indication of the
Company's interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Company's net interest income
and will differ from actual results.
46
48
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to Carver's
average interest-earning assets and average interest-bearing liabilities and
reflects the average yield on assets and the average cost of liabilities for the
years indicated. Such yields and costs are derived by dividing income or expense
by the average balances of assets or liabilities, respectively, for the periods
shown. Average balances are derived from average month-end balances, except for
federal funds which are derived from daily balances. Management does not believe
that the use of average monthly balances instead of average daily balances on
all other accounts has caused any material difference in the information
presented.
The table also presents information for the years indicated with respect to
the difference between the weighted average yield earned on interest-earning
assets and the weighted average rate paid on interest-bearing liabilities, or
"interest rate spread," which savings institutions have traditionally used as an
indicator of profitability. Another indicator of an institution's net interest
income is its "net interest margin," which is its net interest income divided by
the average balance of interest-earning assets. Net interest income is affected
by the interest rate spread and by the relative amounts of interest-earning
assets and interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate NII.
AT MARCH 31, YEAR ENDED MARCH 31,
2000 2000
------------------ -----------------------------
AVERAGE AVERAGE
YIELD AVERAGE 2000 YIELD
BALANCE COST BALANCE INTEREST COST
-------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
Loans(1).......................................... $270,148 7.20% $259,408 $19,443 7.50%
Investment securities(2).......................... 55,703 6.45 57,357 3,593 6.26
Mortgage-backed securities........................ 54,229 6.71 55,075 3,641 6.61
Federal funds sold................................ 11,300 6.11 13,000 690 5.31
-------- ---- -------- ------- -----
Total interest-earning assets........... 391,380 6.99% 384,840 27,367 7.12%
Non-interest earning assets....................... 28,739 29,220
-------- --------
Total assets............................ $420,119 $414,060
======== ========
INTEREST-BEARING LIABILITIES:
Deposits
DDA............................................. $ 12,337 0.00% $ 11,388 $ -- --%
NOW............................................. 18,873 1.66 18,032 314 1.74
Savings and clubs............................... 145,277 2.51 143,908 3,650 2.54
Money market accounts........................... 19,418 3.25 19,578 631 3.22
Certificate of deposits......................... 86,036 4.67 86,316 4,017 4.65
-------- ---- -------- ------- -----
Total deposits.......................... 281,941 3.05 279,222 8,612 3.08
Borrowed money.................................... 98,579 5.47 95,769 5,397 5.64
-------- ---- -------- ------- -----
Total interest-bearing liabilities...... 380,520 3.68% 374,991 14,009 3.74%
Non-interest-bearing liabilities.................. 6,958 4,596
-------- --------
Total liabilities....................... 387,478 379,587
Stockholders' equity.............................. 32,641 34,473
-------- --------
Total liabilities and stockholders'
equity................................ $420,119 $414,060
======== ========
Net interest income............................... $13,358
=======
Interest rate spread.............................. 3.31% 3.38%
==== =====
Net interest margin............................... 3.47%
=====
Ratio of average interest-earning assets to
average interest-bearing liabilities............ 1.03x
=====
47
49
YEAR ENDED MARCH 31,
-------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
AVERAGE AVERAGE
AVERAGE YIELD AVERAGE YIELD
BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
Loans(1)................................. $269,241 $20,575 7.64% $242,948 $18,311 7.54%
Investment securities(2)................. 32,284 1,801 5.58 12,117 671 5.54
Mortgage-backed securities............... 85,236 5,431 6.37 130,927 8,523 6.51
Federal funds sold....................... 12,013 666 5.54 5,735 323 5.63
-------- ------- ----- -------- ------- -----
Total interest-earning assets............ 398,774 28,473 7.14% 391,727 27,828 7.10%
Non-interest earning assets.............. 26,709 23,746
-------- --------
Total assets............................. $425,483 $415,473
======== ========
INTEREST-BEARING LIABILITIES:
Deposits DDA............................. $ 9,670 $ -- --% $ 8,625 $ -- --%
NOW.................................... 18,789 314 1.67 18,725 354 1.89
Savings and clubs...................... 144,990 3,604 2.49 144,466 3,601 2.49
Money market accounts.................. 21,541 613 2.85 21,514 692 3.22
Certificate of deposits................ 80,897 3,890 4.81 76,990 3,949 5.13
-------- ------- ----- -------- ------- -----
Total deposits........................... 275,887 8,421 3.05 270,320 8,596 3.18
Borrowed money........................... 107,766 6,393 5.93 108,970 6,423 5.89
-------- ------- ----- -------- ------- -----
Total interest-bearing liabilities....... 383,653 14,814 3.85% 379,290 15,019 3.96%
Non-interest-bearing liabilities......... 6,771 1,310
-------- --------
Total liabilities........................ 390,424 380,600
Stockholders' equity..................... 35,059 34,873
-------- --------
Total liabilities and stockholders'
equity................................. $425,483 $415,473
======== ========
Net interest income...................... $13,659 $12,809
======= =======
Interest rate spread..................... 3.29% 3.14%
===== =====
Net interest margin...................... 3.43% 3.27%
===== =====
Ratio of average interest-earning assets
to Average interest-bearing
liabilities............................ 1.04x 1.04x
===== =====
- ---------------
(1) Includes non-accrual loans.
(2) Includes FHLB stock and fair value of investments available for sale of
$30.7 million at March 31, 2000.
48
50
RATE/VOLUME ANALYSIS
The following table sets forth information regarding the extent to which
changes in interest rates and changes in volume of interest related assets and
liabilities have affected Carver's interest income and expense during the
periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided for changes attributable to
(i) changes in volume (changes in volume multiplied by new rate), (ii) changes
in rates (change in rate multiplied by old volume), and (iii) total change.
Changes in rate/volume (changes in rate multiplied by the changes in volume) are
allocated proportionately between changes in rate and changes in volume.
YEAR ENDED MARCH 31,
-----------------------------------------------------------
2000 VS. 1999 1999 VS. 1998
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
---------------------------- ----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- ------ -------- -------- ------ --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans.................................. $ (754) $(378) $(1,132) $ 2,021 $ 243 $ 2,264
Investment securities(1)............... 1,549 243 1,792 1,125 5 1,130
Mortgage-backed securities(1).......... (2,003) 213 (1,790) (2,909) (182) (3,091)
Federal funds sold..................... 49 (25) 24 348 (6) 342
------- ----- ------- ------- ----- -------
Total interest-earning
assets..................... (1,159) 53 (1,106) 585 60 645
------- ----- ------- ------- ----- -------
Interest-bearing liabilities:
NOW.................................. (13) 13 -- -- (41) (41)
Savings and clubs.................... (27) 73 46 3 -- 3
Money market accounts................ (42) 60 18 1 (80) (79)
Certificate of deposits.............. 252 (125) 127 188 (246) (58)
------- ----- ------- ------- ----- -------
Total deposits............... 170 21 191 192 (367) (175)
Borrowed money....................... (721) (275) (996) (30) -- (30)
------- ----- ------- ------- ----- -------
Total interest-bearing
liabilities................ (551) (254) (805) (162) (367) (205)
------- ----- ------- ------- ----- -------
Net change in net interest income...... $ (608) $ 307 $ (301) $ 423 $(427) $ 850
======= ===== ======= ======= ===== =======
- ---------------
(1) Includes securities available for sale.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2000 AND 1999
At March 31, 2000, total assets increased by 3.6 million, or 0.87%, to
$420.1 million compared to $416.5 million at March 31, 1999. The increase in
total assets was primarily attributable to increases in investment securities
held to maturity and other interest-earning assets, offset in part by decreases
in securities available for sale, mortgage-backed securities held to maturity
and other assets. Investment securities held to maturity increased by $25
million at March 31, 2000 whereas at March 31, 1999 the Company did not carry
any investment securities held to maturity. The investment in securities held to
maturity reflects the reinvestment of principal and interest received on
mortgage-backed securities and loans receivable. At March 31, 2000, total cash
and cash equivalents increased by $882,000, or 4.14%, to $22.2 million compared
to $21.3 million at March 31, 1999. Investment securities held as available for
sale decreased by $5.0 million, or 16.6%, to $25.0 million at March 31, 2000,
compared to $29.9 million at March 31, 1999.
Mortgage-backed securities held to maturity decreased by $12.4 million, or
18.56%, to $54.2 million, compared to $66.6 million at March 31, 1999. Loans
receivable decreased by $374,000, or 0.14%, to $270.1 million at March 31, 2000,
compared to $270.5 at March 31, 1999. These decreases primarily reflect
principal repayments on mortgage-backed securities held to maturity and loans
receivable.
At March 31, 2000, total liabilities increased by $2.2 million, or 0.56%,
to $387.5 million compared to $385.3 million at March 31, 1999.
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51
At March 31, 2000, total deposits increased by $4.9 million, or 1.78%, to
$281.9 million compared to $277.0 million at March 31, 1999. The increase in
total deposits was primarily attributable to increases of $4.5 million in NOW
accounts, $1.6 million in passbook savings and $475,000 in certificates of
deposit, offset in part by decreases of $1.5 million in money market accounts
and $92,000 in club accounts.
At March 31, 2000, total borrowings decreased by $3.5 million, or 3.39%, to
$98.6 million compared to $102.0 million at March 31, 1999. The decrease in
total borrowings reflects a decrease in reverse repurchase agreements ("reverse
repos") of $4.0 million, or 11.32%, to $31.3 million, offset in part by an
increase in FHLB advances of $980,000, or 1.49%, to $66.7 million. The Company
shifted from reverse repos to take advantage of the more attractive terms
available on FHLB advances. The overall decrease in total borrowings reflects a
reduction in the need for borrowed funds. The Company was able to fund loan
originations and loan purchases with repayments on mortgage-backed securities
and loans receivable together with an increase in deposits.
At March 31, 2000, stockholders' equity increased by $1.5 million, or
4.70%, to $32.6 million compared to $31.2 million at March 31, 1999. The
increase in stockholders' equity primarily reflects an increase in additional
paid-in capital resulting from the net proceeds of the preferred stock totaling
$2.4 million issued in January 2000, offset by a reduction in retained earnings
primarily attributable to the net loss of $1.1 million recorded for fiscal 2000.
There were several extraordinary items that contributed to the net loss.
First, in connection with the year-end audit, there were expenses of
approximately $1.8 million relating to assets determined to be no longer
recoverable as well as other accounting adjustments. Second, expenses associated
with the Annual Meeting, which included a proxy contest, and subsequent
litigation relating to the voting of shares at the Annual Meeting equaled
approximately $870,000. Third, there were one-time increases of approximately
$593,000 associated with certain of the Bank's benefit plans.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
NET INCOME (LOSS)
The Company reported a net loss for the twelve month period ended March 31,
2000 of $1.1 million compared to a net loss of $4.5 million for the same period
the prior year. The decrease in the net loss was primarily due to decreases in
non-interest expenses and the provision for possible loan losses.
INTEREST INCOME
Interest income decreased by $1.1 million, or 3.89%, to $27.4 million for
the twelve month period ended March 31, 2000 compared to $28.5 million for the
twelve month period ended March 31, 1999. The decrease in interest income was
primarily attributable to a $13.9 million, or 3.49%, decrease in average balance
of interest earning assets to $384.8 million for the twelve months ended March
31, 2000, compared to $398.8 million for twelve months ended March 31, 1999. The
yield on average interest earning assets declined to 7.12% for the twelve months
ended March 31, 2000, compared to 7.14% for the prior year.
Interest income on loans decreased by $1.1 million, or 5.50%, to $19.4
million for fiscal 2000 compared to $20.6 million for fiscal 1999. The decrease
in interest income from loans reflects a decrease of $9.8 million, or 3.65%, in
the average balance of loans to $259.4 million for fiscal 2000 compared to
$269.2 million for fiscal 1999, coupled with a 14 basis point decrease in the
average rate earned on loans to 7.50% for fiscal 2000 from 7.64% for the prior
year. Interest income on investment securities increased by approximately $1.8
million, or 99.50%, to $3.6 million for the twelve months ended March 31, 2000,
compared to $1.8 million for the prior year, reflecting an increase of $25
million in the average balance of investment securities to $57.4 million for
fiscal 2000 compared to $32.3 million for fiscal 1999, coupled with a 68 basis
point increase in the average rate earned on investment securities to 6.26% from
5.58%. Interest income on mortgage-backed securities decreased by $1.8 million,
or 32.98%, to $3.6 million for the twelve months ended March 31, 2000 compared
to $5.4 million for the prior year reflecting a decrease of $30.2 million in the
average balance of mortgage-
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backed securities to $55.1 million for fiscal 2000 compared to $85.2 million for
fiscal 1999, offset in part by a 24 basis point increase in the average rate
earned on mortgage-backed securities to 6.61% from 6.37%.
The increase in the average balance of investment securities is primarily
attributable to the reallocation that existed throughout most of fiscal 2000 of
cash flows from loans and mortgage-backed securities into investment securities.
Significant turnover of personnel in the Lending Department adversely affected
the Bank's ability to originate and purchase loans during fiscal 2000,
contributing to the decrease in the average balance of loans.
INTEREST EXPENSE
Interest expense decreased by $805,000, or 5.43%, to $14.0 million for
fiscal 2000 compared to $14.8 million for the prior year. The decrease in
interest expense is attributable to an $8.7 million decrease in the average
balance of interest-bearing liabilities combined with an 11 basis point decrease
in the average cost of interest bearing liabilities.
Interest expense on deposits increased $191,000, or 2.27%, to $8.6 million
for fiscal 2000 compared to $8.4 million for the prior year. This increase is
attributable to a $3.3 million, or 1.21%, increase in the average balance of
deposits to $279.2 million for fiscal 2000 compared to $275.9 million for fiscal
1999, and to a lesser extent, to a 3 basis point increase in the cost of average
deposits.
Interest expense on borrowed money decreased by $996,000, or 15.58%, to
$5.4 million for fiscal 2000 compared to $6.4 million for the prior year. The
average balance of borrowed money was $12.0 million, or 11.13%, lower during
fiscal 2000 than during fiscal 1999, and the average cost of borrowed money for
fiscal 2000 was 29 basis points lower than the average cost of borrowed money
for fiscal 1999.
NET INTEREST INCOME
Net interest income before the provision for possible loan losses decreased
$301,000, or 2.20%, to $13.4 million for fiscal 2000 compared to $13.7 million
for the prior year. The 11 basis point decrease in the cost of interest-bearing
liabilities used to fund interest earning assets contributed to an 8 basis point
increase in the interest rate spread to 3.38% for fiscal 2000 compared to 3.29%
for the prior year. The decrease in the cost of interest-bearing liabilities
used to fund interest earning assets also contributed to a 4 basis point
increase in the net interest margin to 3.47% for fiscal 2000 compared to 3.43%
for fiscal 1999. However, the average balance on interest earning assets
decreased to a greater degree that the average balance of interest-bearing
liabilities, and the decrease in the average balance of interest earning assets
was the most significant factor resulting in the $302,000 decrease in net
interest income for fiscal 2000 as compared to fiscal 1999.
PROVISION FOR LOAN LOSSES
Provision for loan losses decreased by $2.9 million, or 72.72%, to $1.1
million, for the twelve month period ended March 31, 2000, compared to $4.0
million for the year ended March 31, 1999. When determining the provision for
loan losses, management assesses the risk inherent in its loan portfolio based
on the information available at such time relating to trends in the local and
national economy, trends in the real estate market and the Company's level on
non-performing loans and assets and net charge offs. The provision for possible
loan losses for fiscal 2000 represents the amount required to maintain the
allowance for possible loan losses at the level required by the Company's
policy, and the reduced provision is primarily attributable to the decrease in
non-performing loans during fiscal 2000. During fiscal 2000, the Bank charged
off approximately $2.6 million of loans. At March 31, 2000, non-performing loans
totaled $2.1 million, or 0.78%, of total loans compared to $4.5 million, or
1.64%, of total loans at March 31, 1999. At March 31, 2000, the Bank's allowance
for possible loan losses was $2.9 million compared to $4.0 million at March 31,
1999, resulting in a ratio of the allowance to non-performing loans of 138.0% at
March 31, 2000 compared to 89.3% at March 31, 1999 and a ratio of the allowance
for possible loan losses to total loans of 1.07% and 1.46% at March 31, 2000 and
March 31, 1999, respectively.
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NON-INTEREST INCOME
Non-interest income is composed of loan fees and service charges, gains or
(losses) from the sale of securities, and fee income for banking services.
Non-interest income increased $157,000, or 6.6%, to $2.5 million for fiscal 2000
compared to $2.4 million for fiscal 1999. The increase in non-interest income is
primarily due to non-recurring income of $728,000 resulting from the sale of the
Alhambra Building by the Company's subsidiary, Alhambra Realty. Excluding the
income from the sale of the Alhambra Building, total non-interest income
decreased by $571,000, or 23.97%, compared to fiscal 1999. Excluding the income
from the sale of the Alhambra Building, the decrease in non-interest income is
primarily attributable to a decrease in bank loan fees and service charges as
well as the decrease in bank service charges on deposit accounts.
NON-INTEREST EXPENSE
Non-interest expense decreased by $2.1 million, or 11.91%, to $15.8 million
for fiscal 2000 compared to $18.0 million for the prior fiscal year. The
decrease in non-interest expense is primarily attributable to a decrease of $2.5
million in other non-interest expenses, offset by increases of $475,000 in
salaries and employee benefits. The increase in salaries and employee benefits
is the result of increased expenses associated with certain of the Bank's
benefit plans. The decrease in other non-interest expenses is primarily
attributable to reductions in consultant fees and reconciliation adjustments,
which offset increases of approximately $318,000 in FDIC assessments, $229,000
in audit expenses and $335,000 in legal expenses.
INCOME TAX EXPENSE
In connection with the loss from operations incurred for fiscal 2000 and
fiscal 1999, the Company has available an operating loss carry forward totaling
approximately $5.7 million that will expire in 2019 to offset future taxable
income. The Company recorded income tax expense of $110,000 for fiscal 2000,
compared to a tax benefit of $1.5 million for fiscal 1999. The income tax
expense for fiscal 2000 represents taxes payable to New York State and New York
City based upon the Company's total assets. The Company paid no taxes for the
year ended March 31, 1999, and its effective tax rate was 53.5% for the year
ended March 31, 1998.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NET INCOME (LOSS)
The Company reported a net loss for the twelve month period ended March 31,
1999 of $4.5 million compared to net income of $1.0 million for the same period
the prior year. The decrease in net income was primarily due to increases in
non-interest expense and provision for loan losses, offset in part by increases
in net interest income and non-interest income.
INTEREST INCOME
Interest income increased by $646,000, or 2.32%, to $28.4 million for the
twelve month period ended March 31, 1999, compared to $27.8 million for the
twelve month period ended March 31, 1998. The increase in interest income was
primarily attributable to a $7.1 million, or 1.80%, increase in average balance
of interest earning assets to $398.8 million for the twelve months ended March
31, 1999, compared to $391.7 million for twelve months ended March 31, 1998,
coupled with a 4 basis point increase in the yield on average interest earning
assets to 7.14% for the twelve months ended March 31, 1999, compared to 7.10%
for the same period the prior year.
Interest income on loans increased by $2.3 million, or 12.37%, to $20.6
million for the twelve month period ended March 31, 1999, compared to $18.3
million for the same period the prior year. The increase in interest income from
loans reflects a $26.3 million, or 10.83%, increase in the average balance of
loans to $269.2 million at March 31, 1999, compared to $242.9 million at March
31, 1998 coupled with a 10 basis point increase in the average yield on loans to
7.64% from 7.54%. Interest income on mortgage-backed securities held to maturity
decreased by $3.1 million, or 36.28%, to $5.4 million for the twelve months
ended March 31, 1999, compared to $8.5 million for the same period the prior
year, reflecting a decrease of $45.7 million in the
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54
average balance of total mortgage-backed securities to $85.2 million at March
31, 1999 compared to $130.9 million at March 31, 1998 coupled with a 14 basis
point decrease in the average yield on mortgage-backed securities to 6.37% from
6.51%. Interest income on investment securities increased by approximately $1.1
million or 168.56% to $1.8 million for the twelve months ended March 31, 1999
compared to $671,000 for the same period the prior year. The increase in
interest income on investment securities is primarily due to a $20.2 million, or
166.94%, increase in the average balance of investment securities to $32.3
million for the twelve months ended March 31, 1999, compared to $12.1 million
for the same period the prior year.
The increase in the average balances of investment securities reflects the
increased investment of repayments from loans and mortgage-backed securities
into investment securities.
INTEREST EXPENSE
Interest expense decreased by $204,000, or 1.36%, to $14.8 million for the
twelve month period ended March 31, 1999 compared to $15.0 million for the same
period the prior year. The decrease in interest expense reflects an 11 basis
point decrease in the average cost of such liabilities to 3.85% for the twelve
months ended March 31, 1999 compared to 3.96% for the same period the prior
year, offset in part by a $4.4 million, or 1.15%, increase in the average
balance of interest-bearing liabilities.
Interest expense on deposits decreased by $175,000, or 2.04%, to $8.4
million for the twelve month period ended March 31, 1999 compared to $8.6
million for the same period the prior year primarily due to a 13 basis point
decrease in the cost average of deposits, offset in part by a $5.6 million, or
2.06%, increase in the average balance of deposits to $275.9 million for the
twelve month period ended March 31, 1999 compared to $270.3 million for the same
period the prior year.
Interest expense on borrowings was unchanged at $6.4 million for the twelve
month period ended March 31, 1999 compared to the same period the prior year.
The average balance of borrowings decreased by $1.2 million to $107.8 million
for the twelve month period ended March 31, 1999 compared to $109.0 million for
the same period the prior year. The average cost of borrowings was unchanged at
5.89%.
NET INTEREST INCOME
Net interest income before provision for loan losses for the twelve month
period ended March 31, 1999 increased by $850,000, or 6.64%, to $13.7 million
compared to $12.8 million for the same period the prior year. The increase was
primarily attributable to a 15 basis point increase in the Company's interest
rate spread for the twelve month period ended March 31, 1999 to 3.29% from
3.14%, coupled with a $7.0 million increase in the balance of average interest
earning assets to $398.8 million for the twelve month period ended March 31,
1999 compared to the same period the prior year. The Company's net interest
margin increased by 16 basis points to 3.43% from 3.27%, average
interest-earning assets to interest-bearing liabilities increased to 1.04x for
the twelve month period ended March 31, 1999, compared to 1.03x for the same
period the prior year.
PROVISION FOR LOAN LOSSES
Provision for loan losses increased by $2.8 million, or 219.96%, to $4.0
million, for fiscal 1999, compared to $1.3 million for the year ended March 31,
1998. When determining the provision for loan losses, management assesses the
risk inherent in its loan portfolio based on the information available at such
time relating to trends in the local and national economy, trends in the real
estate market and the Company's level on non performing loans and assets and net
charge offs. The increase in the provision for loan losses for the twelve month
period, in significant part, reflects a one time special provision of $2.5
million. The Company took the special provision along with a general increase in
the provision to significantly increase the Bank's allowance for loan losses
primarily in response to an increase in non-performing consumer loans and to
maintain an adequate level of allowance consistent with the Bank's policies.
During the twelve month period, the Bank charged off approximately $3.2 million
in non-performing loans. At March 31, 1999, non-performing loans totaled $4.8
million, or 1.66%, of total loans compared to $6.8 million, or 2.47% at March
31, 1998. At March 31, 1999, the Bank's allowance for loan losses was $4.0
million compared to $3.1 million at March 31, 1998, resulting in a ratio of
allowance to non-performing loans of 85.60% at March 31, 1999 compared to
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55
45.30% at March 31, 1998, and a ratio of allowances for loan losses to total
loans of 1.48% and 1.11%, respectively.
NON-INTEREST INCOME
Non-interest income is composed of loan fees and service charges, gains or
(losses) from the sale of securities, and fee income for banking services.
Non-interest income was unchanged at $2.4 million for the twelve month period
ended March 31, 1999. Non-interest income for the twelve month period ended
March 31, 1998 reflected a $188,000 gain on the sale of securities. Excluding
the gain on the sale of securities, non-interest income increased by $219,000,
or 10.13%, for the twelve month period ended March 31, 1999 compared to the same
period the prior year. The increase in non-interest income excluding the gain on
the sale of securities reflects increases in prepayment fees on loans and
increases in fees from bank service charges.
NON-INTEREST EXPENSE
Non-interest expense increased by approximately $6.3 million, or 54.18%, to
$18.0 million for the twelve month period ended March 31, 1999 compared to $11.7
million for the twelve month period ended March 31, 1998. The increase in
non-interest expense reflects non-recurring charges of $4.1 million in
reconciliation adjustments related to the conversion of the Company's data
processing system, $1.2 million in consultant fees related to post conversion
assignments, and $750,000 in one-time charges incurred during the fourth
quarter, offset in part by a recovery of approximately $750,000 of such
adjustments.
Excluding all reconciliation adjustments, one-time charges, and the
consultant fees, non-interest expense increased by approximately $1.0 million,
or 8.69%, to $12.7 million for the twelve month period ended March 31, 1999
compared to $11.7 million for the same period the prior year. This increase
primarily reflects increases of $365,000 in salaries and employee benefits
expense, $142,000 in equipment expense, $117,000 in FDIC insurance expense,
$125,000 in legal expense and $250,000 in connection with the settlement of
litigation.
INCOME TAX EXPENSE
In connection with the loss from operations incurred through the
twelve-month period ended March 31, 1999, the Company has reflected a benefit
resulting from the carry back of the loss for income taxes paid of approximately
$1.5 million of which $1.2 million were paid in fiscal 1998 compared to an
income tax expense of $1.2 million for fiscal 1998. In addition, the Company has
available an operating loss tax carry forward totaling approximately $4.4
million, which will expire in 2019 to offset future taxable income. The Company
paid no taxes for the year ended March 31, 1999, and its effective tax rate was
53.5% for the year ended March 31, 1998. A deferred tax asset of approximately
$1.0 million was established in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Carver Federal's primary sources of funds are deposits, FHLB advances, and
proceeds from principal and interest payments on loans and mortgage-backed
securities. While maturities and scheduled amortization of loans and investments
are predictable sources of funds, deposit flow and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition.
The Bank is required to maintain an average daily balance of liquid assets
and short term liquid assets as a percentage of net withdrawable deposit
accounts plus short-term borrowings as defined by OTS regulation. The minimum
required liquidity and short-term liquidity ratio is 4%. The Bank's liquidity
ratios were 20.43% and 16.59% at March 31, 2000 and 1999, respectively.
The Bank's most liquid assets are cash and short-term investments. The
level of these assets are dependent on the Bank's operating, financing lending
and investing activities during any given period. At March 31, 2000, and 1999,
assets qualifying for short-term liquidity, including cash and short-term
investments, totaled $72.7 million and $50.8 million, respectively.
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The Consolidated Statements of Cash Flows present the change in cash from
operating, investing and financing activities. During fiscal 2000, cash and cash
equivalents increased by $881,749. Net cash provided by operating activities was
$5,037,186, representing primarily the results of operations adjusted for
depreciation and amortization, the provision for possible loan losses and the
decrease in other assets. Net cash used in investing activities was $7,898,630,
which was used primarily to fund the increase in investment securities,
particularly investment securities held to maturity. Net cash provided by
financing activities was $3,743,193, reflecting primarily increases in deposits,
and advances from the FHLB as well as proceeds from the issuance of preferred
stock, offset in part by a net decrease in securities sold under agreements to
repurchase.
THE YEAR 2000 PROBLEM
The Year 2000 problem centered on the inability of some computer systems to
recognize the year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field without considering the upcoming
change in the century.
During the past several quarters, the Company developed and implemented a
Year 2000 Project Plan (the "Plan") to address the year 2000 problem and its
effect on the Company. The Plan included five components, which addressed the
issues of awareness, assessment, renovation, validation and implementation. To
implement the Plan and ensure its success, the senior management of the Company
became actively involved in all phases of the Plan, including remaining actively
involved and on premises during the New Year's weekend.
The Company primarily used its own personnel with some assistance from
outside consultants to minimize costs. The Company also followed the published
substantive guidance of the OTS and other federal bank regulatory agencies.
These publications, in addition to providing guidance as to the examination
criteria, outlined the requirements for the creation and implementation of a
compliance plan and target dates for testing and implementation of corrective
action.
As a result of the Company complying with the federal banking regulatory
guidelines and meeting the target dates for testing of its mission critical
systems and communicating with all significant suppliers, the Company did not
experience any interruptions in any computer operations related to the year 2000
problem. Our loan and deposit customers did not experience any interruption of
service due to the difficulties that could have been encountered as a result of
the year 2000 problem. We estimated that the total costs related to the year
2000 problem, from inception to date, did not exceed $150,000, and we do not
anticipate any additional costs to be incurred related to this matter.
REGULATORY CAPITAL POSITION
The Bank must satisfy three minimum capital standards established by the
OTS. For a description of the OTS capital regulation, see "Regulation and
Supervision -- Regulation of Federal Savings Associations -- Capital
Requirements."
The Bank presently exceeds all capital requirements as currently
promulgated. At March 31, 2000, the Bank had tangible, core, and risk-based
capital ratios of 6.85%, 6.25%, and 15.38%, respectively.
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The following table reconciles the Bank's stockholders equity at March 31,
2000, under generally accepted accounting principles to regulatory capital
requirements:
REGULATORY CAPITAL REQUIREMENTS
----------------------------------------------
GAAP TANGIBLE TIER/CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
------- -------- --------- ----------
(IN THOUSANDS)
Stockholders' Equity at March 31, 2000(1)......... $29,532 $29,532 $29,532 $29,532
=======
Add:
Unrealized loss on securities available for
sale, net.................................... -- -- --
General valuation allowances.................... -- -- 2,538
Qualifying intangible assets.................... -- -- --
Deduct:
Goodwill........................................ (817) (817) (817)
Excess of net deferred tax assets............... -- -- --
Asset required to be deducted................... -- -- (40)
------- ------- -------
Regulatory capital.............................. 28,715 28,715 31,213
Minimum capital requirement..................... 6,283 16,766 16,235
------- ------- -------
Regulatory capital excess....................... $22,432 $11,949 $14,978
======= ======= =======
- ---------------
(1) Reflects Bank only.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and accompanying notes appearing elsewhere herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of Carver's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a greater impact on Carver's
performance than do the effects of the general level of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
TAX BAD DEBT RESERVES
Federal tax law changes were enacted in August 1996 to eliminate the
"thrift bad debt" method of calculating bad debt deductions. The legislation
requires the Bank to recapture into taxable income (over a six-year period) all
bad debt reserves accumulated after March 31, 1988. Since the Bank's federal bad
debt reserves approximated the 1988 base-year amounts, this recapture
requirement had no significant impact. The tax law changes also provide that
taxes associated with the recapture of pre-1988 bad debt reserves would become
payable under more limited circumstances than under prior law. For example, such
taxes would no longer be payable in the event that the thrift charter is
eliminated and the Bank is required to convert to a bank charter.
Amendments to the New York State and New York City tax laws redesignate the
Bank's state and New York City bad debt reserves at December 31, 1995 as the
base-year amount and also permit future additions to the base-year reserves
using the percentage-of-taxable-income method. This change eliminated the excess
New York State and New York City reserves for which the Company had recognized a
deferred tax liability. Management does not expect these changes to have a
significant impact on the Bank. Taxes associated with the recapture of the New
York State and New York City base-year reserve would still become payable under
various circumstances, including conversion to a bank charter or failure to meet
various thrift definition tests.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
statement also requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and those
instruments at fair value. This statement, as amended, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of
this statement is not anticipated to have a material impact on the financial
position or results of operations.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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LETTERHEAD OF KPMG LLP
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
CARVER BANCORP, INC.
We have audited the accompanying consolidated statement of financial
condition of Carver Bancorp, Inc. and subsidiaries (the "Company") as of March
31, 2000 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audit. The accompanying financial statements of Carver Bancorp,
Inc. as of March 31, 1999 were audited by other auditors whose report thereon
dated June 29, 1999, expressed an unqualified opinion on those financial
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of March 31, 2000, and the results of its operations and cash flows for the
year then ended in conformity with generally accepted accounting principles.
/S/ KPMG LLP
MAY 25, 2000
NEW YORK, NEW YORK
F-1
60
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31,
----------------------------
2000 1999
------------ ------------
ASSETS
ASSETS:
Cash and amounts due from depository institutions........... $ 10,902,497 $ 11,120,748
Federal funds sold.......................................... 11,300,000 10,200,000
------------ ------------
Total cash and cash equivalents (Note 20)................... 22,202,497 21,320,748
------------ ------------
Investment Securities held to maturity (estimated fair value
of $24,308,640) (Notes 4, 13 and 20)...................... 24,995,850 --
Securities available for sale (Notes 3, 13 and 20).......... 24,952,220 29,918,137
Mortgage-backed securities held to maturity, net (estimated
fair values of $51,939,162 and $65,693,568 at March 31,
2000 and March 31, 1999) (Notes 5, 12, 13 and 20)......... 54,229,230 66,584,447
Loans receivable............................................ 273,083,331 274,541,950
Less allowance for loan losses............................ (2,935,314) (4,020,099)
Loans receivable, net (Notes 6, 13 and 20)................ 270,148,017 270,521,851
------------ ------------
Real estate owned, net...................................... 922,308 184,599
Property and equipment, net (Note 8)........................ 11,175,334 11,884,983
Federal Home Loan Bank of New York stock, at cost (Note
13)....................................................... 5,754,600 5,754,600
Accrued interest receivable (Notes 9 and 20)................ 2,653,266 2,860,693
Excess of cost over net assets acquired, net (Note 10)...... 816,780 1,029,853
Other assets (Notes 14 and 16).............................. 2,268,430 6,422,933
------------ ------------
Total assets...................................... $420,118,532 $416,482,844
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Notes 11 and 20).................................. $281,941,338 $276,999,074
Securities sold under agreements to repurchase (Notes 12 and
20)....................................................... 31,337,000 35,337,000
Advances from Federal Home Loan Bank of New York (Notes 13
and 20)................................................... 66,688,456 65,708,466
Other borrowed money (Notes 18 and 20)...................... 553,201 992,619
Other liabilities (Notes 14 and 17)......................... 6,957,680 6,270,419
------------ ------------
Total liabilities................................. 387,477,675 385,307,578
------------ ------------
Commitments and contingencies (Notes 19 and 20)............. -- --
STOCKHOLDERS' EQUITY: (Note 16)
Preferred stock, $0.01 par value per share; 1,000,000
authorized; 100,000 shares issued and outstanding...... 1,000 --
Common stock; $0.01 par value per share; 5,000,000
authorized; 2,314,275 issued and outstanding (Note 2)..... 23,144 23,144
Additional paid-in capital (Note 2)......................... 23,789,111 21,423,574
Retained earnings (Notes 2 and 14).......................... 9,479,552 10,721,168
Common stock acquired by the ESOP (Notes 2 and 18).......... (651,950) (992,620)
Comprehensive income, net of income tax..................... -- --
------------ ------------
Total stockholders' equity........................ 32,640,857 31,175,266
------------ ------------
Total liabilities and stockholders' equity........ $420,118,532 $416,482,844
============ ============
See Notes to Consolidated Financial Statements
F-2
61
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Interest income:
Loans............................................. $19,442,840 $20,576,506 $18,311,042
Mortgage-backed securities........................ 3,640,555 5,430,638 8,522,922
Investment securities............................. 3,593,178 1,800,738 670,509
Federal funds sold................................ 689,929 665,544 323,243
----------- ----------- -----------
Total interest income..................... 27,366,502 28,473,426 27,827,716
----------- ----------- -----------
Interest expense:
Deposits (Note 11)................................ 8,612,026 8,421,226 8,596,358
Advances and other borrowed money................. 5,396,833 6,393,457 6,422,666
----------- ----------- -----------
Total interest expense.................... 14,008,859 14,814,683 15,019,024
----------- ----------- -----------
Net interest income................................. 13,357,643 13,658,743 12,808,692
Provision for loan losses (Note 6).................. 1,099,300 4,029,996 1,259,531
----------- ----------- -----------
Net interest income after provision for loan
losses............................................ 12,258,343 9,628,747 11,549,161
----------- ----------- -----------
Non-interest income:
Loan fees and service charges..................... 353,215 673,541 559,960
Gain on sale of securities held for sale (Note
3)............................................. -- 3,948 188,483
Proceeds from Sale of Alhambra Building........... 728,000 -- --
Other............................................. 1,458,206 1,704,667 1,603,096
----------- ----------- -----------
Total non-interest income................. 2,539,421 2,382,156 2,351,539
----------- ----------- -----------
Non-interest expenses:
Salaries and employee benefits (Notes 17 and
18)............................................ 5,722,355 5,247,525 4,739,069
Net occupancy expense (Note 19)................... 1,463,052 1,490,592 1,118,467
Equipment......................................... 1,350,710 1,409,429 1,255,301
Other............................................. 7,287,053 9,815,474 4,538,111
----------- ----------- -----------
Total non-interest expenses............... 15,823,170 17,963,020 11,650,948
----------- ----------- -----------
Income (loss) before income taxes................... (1,025,406) (5,952,117) 2,249,752
Income taxes (benefit) (Note 14).................... 110,030 (1,499,367) 1,203,466
----------- ----------- -----------
Net income (loss)................................... $(1,135,436) $(4,452,750) $ 1,046,286
----------- ----------- -----------
Net income (loss) available to common
stockholders...................................... $(1,179,589) $(4,452,750) $ 1,046,286
----------- ----------- -----------
Net income (loss) per common share.................. $ (0.53) $ (2.02) $ 0.48
----------- ----------- -----------
Weighted average number of shares outstanding....... 2,238,846 2,206,133 2,187,619
=========== =========== ===========
See Notes to Consolidated Financial Statements
F-3
62
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON
ADDITIONAL STOCK
PREFERRED COMMON PAID-IN RETAINED ACQUIRED COMPREHENSIVE
STOCK STOCK CAPITAL EARNINGS BY ESOP INCOME TOTAL
--------- ------- ----------- ------------- ----------- ------------- -----------
Balance -- March 31, 1997...... $ -- $23,144 $21,410,167 $14,359,060 $(1,365,990) $(442,659) $33,983,722
------ ------- ----------- ----------- ----------- --------- -----------
Net income for the year ended
March 31, 1998............... -- -- 1,046,286 -- -- 1,046,286
Preferred Stock................ -- -- -- --
Allocation of ESOP stock....... 58,566 -- 182,132 -- 240,698
Dividends paid................. -- -- (115,714) -- -- (115,714)
Options exercised.............. -- (49,836) -- -- -- (49,836)
Decrease in unrealized, loss in
securities available for
sale, net.................... -- -- -- -- 429,189 429,189
------ ------- ----------- ----------- ----------- --------- -----------
Balance -- March 31, 1998...... 23,144 21,418,897 15,289,632 (1,183,858) (13,470) 35,534,345
------ ------- ----------- ----------- ----------- --------- -----------
Net loss for the year ended
March 31, 1999............... -- -- (4,452,750) -- -- (4,452,750)
Allocation of ESOP Stock....... -- 4,677 -- 191,240 -- 195,917
Dividends paid................. -- -- (115,714) (115,714)
Decrease in unrealized, loss in
Securities available for
sale, net.................... -- -- -- -- 13,470 13,470
------ ------- ----------- ----------- ----------- --------- -----------
Balance -- March 31, 1999...... 23,144 21,423,574 10,721,168 (992,618) -- 31,175,268
------ ------- ----------- ----------- ----------- --------- -----------
Net loss for the year ended
March 31, 2000............... -- -- (1,135,436) -- -- (1,135,436)
Preferred Stock................ 1,000 -- 2,365,537 -- -- -- 2,366,537
Allocation of ESOP Stock....... -- -- -- 340,668 -- 340,668
Dividends paid................. -- (106,180) (106,180)
Decrease in unrealized, loss in
Securities available for
sale, net.................... -- -- -- -- -- --
------ ------- ----------- ----------- ----------- --------- -----------
Balance -- March 31, 2000...... $1,000 $23,144 $23,789,111 $ 9,479,552 $ (651,950) $ -- $32,640,857
====== ======= =========== =========== =========== ========= ===========
See Notes to Consolidated Financial Statements
F-4
63
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
----------------------------------------------
2000 1999 1998
------------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.............................. $ (1,135,436) $ (4,452,750) $ 1,046,286
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization.................. 1,221,742 1,042,659 695,192
Amortization of intangibles.................... 213,073 216,264 209,892
Other amortization and accretion, net.......... 355,109 1,108,675 402,662
Provision for loan losses...................... 1,099,300 4,029,996 1,259,531
Gain from sale of Alhambra..................... (728,000) -- --
Proceeds from maturity sale of loans........... -- -- 1,459,491
Net gain on sale of securities available for
sale......................................... -- (3,948) (188,483)
Deferred income taxes.......................... -- -- 58,555
Allocation of ESOP stock....................... 340,668 195,917 240,698
(Increase) decrease in accrued interest
receivable................................... 207,427 97,850 215,522
Increase (decrease) in refundable income
taxes........................................ -- 1,195,852 --
(Increase) decrease in other assets............ 2,776,042 (38,224) 2,818,687
Increase (decrease) in other liabilities....... 687,261 4,846,323 37,294
------------- ------------- ------------
Net cash provided by operating activities...... 5,037,186 8,238,614 8,255,327
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments on investments held to
maturity..................................... -- -- 194,476
Principal repayments on securities available
for sale..................................... -- 3,753,447 5,061,181
Purchases of securities available for sale..... (460,000,000) (331,888,674) (17,000,000)
Proceeds from maturity, sales and call of
securities available for sale................ 465,000,000 319,510,288 55,485,112
Purchase of investment securities held to
maturity..................................... (25,000,000) -- (1,946,326)
Proceeds from maturities and calls of
investment securities held to maturity....... -- 1,797,042 8,480,705
Principal repayment of mortgage-backed
securities held to maturity.................. 12,209,146 23,592,334 19,313,831
Net change in loans receivable................. (964,438) 4,432,486 (77,036,664)
Proceeds from sale of Alhambra................. 1,368,755 -- --
Additions to premises and equipment............ (512,093) (1,656,535) (897,030)
(Purchase) Federal Home Loan Bank stock........ -- -- (219,600)
------------- ------------- ------------
Net cash (used in) provided by investing
activities................................... (7,898,630) 19,540,388 (8,564,315)
------------- ------------- ------------
F-5
64
YEAR ENDED MARCH 31,
----------------------------------------------
2000 1999 1998
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits....................... 4,942,264 2,104,842 8,422,745
Net (decrease) in short-term borrowings........ (4,000,000) (51,683,000) (942,404)
Proceeds of long term borrowing................ -- -- 12,685,000
Repayment of FHLB Advances..................... (19,020,010) -- (8,658,686)
Federal Home Loan Bank Advances................ 20,000,000 28,966,780 --
Repayment of other borrowed money.............. (439,418) (191,238) (182,132)
Proceeds from issuance of Preferred Stock...... 2,366,537 -- --
Dividends Paid................................. (106,180) (115,714) (115,714)
Increase (decrease) in advance payments by
borrowers for taxes and insurance............ -- (659,995) (10,507)
------------- ------------- ------------
Net cash provided by (used in) financing
activities................................... 3,743,193 (21,578,325) 11,198,302
------------- ------------- ------------
Net increase (decrease) in cash and cash
equivalents.................................. 881,749 6,200,677 10,889,314
Cash and cash equivalents -- beginning......... 21,320,748 15,120,071 4,230,757
------------- ------------- ------------
Cash and cash equivalents -- ending............ $ 22,202,497 $ 21,320,748 $ 15,120,071
============= ============= ============
Supplemental disclosure of non-cash activities:
Unrealized Gain (loss) on securities available
for sale:
Unrealized Gain (loss)......................... -- -- (25,417)
Deferred income taxes.......................... -- -- 11,947
============= ============= ============
$ -- $ -- $ 13,470
============= ============= ============
Loans receivable transferred to real estate
owned........................................ $ 737,709 $ -- $ --
============= ============= ============
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest....................................... $ 13,505,854 $ 14,814,683 $ 15,019,024
============= ============= ============
Federal, state and city income taxes........... $ 29,354 $ -- $ 515,457
============= ============= ============
See Notes to Consolidated Financial Statements
F-6
65
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
Carver Bancorp, Inc. is a holding company that was incorporated in May 1996
and whose principal wholly owned subsidiaries are Carver Federal Savings Bank
and Alhambra Holding Corp. CFSB Realty Corp. and CFSB Credit Corp. are wholly
owned subsidiaries of the Bank. Alhambra Realty Corp. is a majority-owned
subsidiary of Alhambra. The Bank was chartered in 1948 and began operations in
1949 as Carver Federal Savings and Loan Association, a federally chartered
mutual savings and loan association. The Bank converted to a federal savings
bank in 1986 and changed its name at that time. On October 24, 1994, the Bank
converted from mutual stock form and issued 2,314,375 shares of its common
stock, par value $0.01 per share. On October 17, 1996, the Bank completed its
reorganization into a holding company structure and became a wholly owned
subsidiary of the Holding Company. In connection with the Reorganization, each
share of the Bank's outstanding common stock was exchanged for one share of the
Holding Company's common stock, par value $.01 per share. See Note 2.
NATURE OF OPERATIONS
Carver's banking subsidiary's principal business consists of attracting
passbook and other savings accounts through its branch offices and investing
those funds in mortgage loans and other investments permitted by federal savings
banks. Carver's banking subsidiary has six 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 Carver, the
Bank, its wholly owned subsidiary, CFSB Realty Corp., CFSB Credit Corp. and
Alhambra and its majority-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. 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-7
66
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Carver does not have trading securities, but does differentiate between
held to maturity securities and available for sale securities. When purchased,
securities are classified in either the investments held to maturity portfolio
or the securities available for sale portfolio. Securities can be classified as
held to maturity and carried at amortized cost only if the Company has a
positive intent and ability to hold those securities to maturity. If not
classified as held to maturity, such securities are classified as securities
available for sale. Available for sale securities are reported at fair value.
Unrealized holding gains or losses for securities available for sale are to be
excluded from earnings and reported net of deferred income taxes as a separate
component of other comprehensive income in the Consolidated Statements of
Changes in Stockholders' Equity.
Investment and mortgage-backed securities held to maturity are carried at
cost, adjusted for the amortization of premiums and the accretion of discounts
using the level-yield method over the remaining period until maturity.
Gains or losses on sales of securities of all classifications are
recognized based on the specific identification method.
LOANS RECEIVABLE
Loans receivable are carried at unpaid principal balances plus unamortized
premiums, less the allowance for loan losses and deferred loan fees and
discounts.
Carver defers loan origination fees and certain direct loan origination
costs and accretes such amounts as an adjustment of yield over the contractual
lives of the related loans using 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 the interest method.
Loans are generally placed on non-accrual status when they are past due
three months or more as to contractual obligations or when other circumstances
indicate that collection is questionable. When a loan is placed on non-accrual
status, any interest accrued but not received is reversed against interest
income. Payments received on a non-accrual loan are either applied to the
outstanding principal balance or recorded as interest income, depending on an
assessment of the ability to collect the loan. A non-accrual loan is restored to
accrual status when principal and interest payments become current and its
future collectibility is assured.
A loan is considered to be impaired, as defined by FAS No. 114, "Accounting
by Creditors for Impairment of a Loan," when it is probable that Carver will be
unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement. Carver tests loans covered under FAS
No. 114 for impairment if they are on nonaccrual status or have been
restructured. Consumer credit nonaccrual loans are not tested for impairment
because they are included in large groups of smaller-balance homogeneous loans
that, by definition along with leases, are excluded from the scope of FAS No.
114. Impaired loans are required to be measured based upon the present value of
expected future cash flows, discounted at the loan's initial effective interest
rate, or at the loan's market price or fair value of the collateral if the loan
is collateral dependent. If the loan valuation is less than the recorded value
of the loan, an impairment reserve must be established for the difference. The
impairment reserve is established by either an allocation of the reserve for
credit losses or by a provision for credit losses, depending on the adequacy of
the reserve for credit losses. Impairment reserves are not needed when interest
payments have been applied to reduce principal, or when credit losses have been
recorded so that the recorded investment in an impaired loan is less than the
loan valuation.
F-8
67
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at a level considered adequate
to provide for potential loan losses. Management, in determining the allowance
for loan losses, considers the risks inherent in its loan portfolio and changes
in the nature and volume of its loan activities, along with the general economic
and real estate market conditions.
Carver maintains a loan review system which allows for a periodic review of
its loan portfolio and the early identification of potential problem loans. Such
system takes into consideration, among other things, delinquency status, size of
loans, type of collateral and financial condition of the borrowers. Loan loss
allowances are established for problem loans based on a review of such
information and/or appraisals of the underlying collateral. On the remainder of
its loan portfolio, loan loss allowances are based upon a combination of factors
including, but not limited to, actual loan loss experience, composition of loan
portfolio, current economic conditions and management's judgment. Although
management believes that adequate loan loss allowances have been established,
actual losses are dependent upon future events and, as such, further additions
to the level of the loan loss allowance may be necessary in the future.
CONCENTRATION OF RISK
The Bank's principle lending activities are concentrated in loans secured
by real estate, a substantial portion of which is located in the State of New
York and the State of California. Accordingly, the ultimate 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 lower of cost or 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. Gain or loss on
sale of properties is recognized as incurred.
F-9
68
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EXCESS OF COST OVER NET ASSETS ACQUIRED
In connection with the acquisition of two branches, core deposit premiums
paid and other capitalized acquisition costs are being amortized to expense over
periods from five to fifteen years using the straight-line method. The company
reviews these assets annually for signs of permanent impairment.
INTEREST-RATE RISK
The Bank is principally engaged in the business of attracting deposits from
the general public and using these deposits, together with borrowings and other
funds, to originate and purchase loans secured by real estate and to purchase
investment and mortgage-backed securities. The potential for interest-rate risk
exists as a result of the shorter duration of interest-sensitive liabilities
compared to the generally longer duration of interest-sensitive assets. In a
rising rate environment, liabilities will reprice faster than assets, thereby
reducing the market value of long-term assets and net interest income. For this
reason, management regularly monitors the maturity structure of the assets and
liabilities in order to measure its level of interest-rate risk and plan for
future volatility.
INCOME TAXES
Carver accounts for income taxes using the asset and liability method.
Temporary differences between the basis of assets and liabilities for financial
reporting and tax purposes are measured as of the balance sheet date. Deferred
tax liabilities or recognizable deferred tax assets are calculated on such
differences, using current statutory rates which result in future taxable or
deductible amounts. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130") establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general -- purpose financial statements. SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional paid
in capital in the equity section of a statement of financial position. Carver
has included the required disclosures in the Consolidated Statements of Changes
in Stockholders' Equity.
NET INCOME (LOSS) PER COMMON SHARE
Basic EPS is computed by dividing income available to common shareholders
by the weighted-average number of common shares outstanding. Diluted EPS
includes any additional common shares as if all potentially dilutive common
shares were issued (e.g. convertible preferred stock). For the purpose of these
calculations, unreleased ESOP shares are not considered to be outstanding.
PENSION PLANS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. Carver has made the
required disclosures in the accompanying Notes to the Consolidated Financial
Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, and for
F-10
69
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
hedging activities. SFAS 133 supercedes the disclosure requirements in SFAS 80,
105 and 119 and is effective for fiscal periods beginning after June 15, 2000.
The adoption of SFAS No. 133 is not expected to have a material impact on the
financial position or results of operations of the Company.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements presented for
prior periods have been reclassified to conform with the 2000 presentation.
NOTE 2. CONVERSION TO STOCK FORM OF OWNERSHIP AND REORGANIZATION INTO A HOLDING
COMPANY
On October 24, 1994, the Bank issued an initial offering of 2,314,375
shares of common stock (par value $0.01) at a price of $10 per share resulting
in net proceeds of $21,519,000. As part of the initial public offering, the Bank
established a liquidation account at the time of conversion, in an amount equal
to the surplus and reserves of the Bank at September 30, 1994. In the unlikely
event of a complete liquidation of the Bank (and only in such event), eligible
depositors who continue to maintain accounts shall be entitled to receive a
distribution from the liquidation account. The total amount of the liquidation
account may be decreased if the balances of eligible deposits decreased as
measured on the annual determination dates. The balance of the liquidation
account was approximately $3,507,800 (unaudited), and $4,139,000 (unaudited) at
March 31, 2000 and 1999, respectively, based on an assumed decrease of 15.25% of
eligible deposits per annum. On October 17, 1996, the Bank completed the
Reorganization and became the wholly owned subsidiary of the Holding Company.
Pursuant to an Agreement and Plan of Reorganization, dated May 21, 1996, each
share of the Bank's outstanding common stock was exchanged for one share of the
Holding Company's common stock. In connection with the Reorganization, a
shareholder of the Bank exercised appraisal rights and 100 shares of the Bank's
common stock were purchased from such shareholder in the fourth fiscal quarter
of 1997. Accordingly 2,314,275 shares of the Company's common stock remain
outstanding. The Bank's shareholder approved the Reorganization at the Bank's
annual meeting of shareholders held on July 29, 1996. As a result of the
Reorganization, the Bank will not be permitted to pay dividends to the Holding
Company on its capital stock if the effect thereof would cause its net worth to
be reduced below either: (i) the amount required for the liquidation account or
(ii) the amount required for the Bank to comply with applicable minimum
regulatory capital requirements.
NOTE 3. SECURITIES AVAILABLE FOR SALE
At March 31, 2000 and 1999, the Company held no MBSs as available for sale.
MARCH 31, 2000
-----------------------------------------------
GROSS UNREALIZED
CARRYING ----------------- ESTIMATED
VALUE GAINS LOSSES FAIR-VALUE
----------- ------ ------- -----------
U.S. Government Agency securities................ $24,952,220 $-- $-- $24,952,220
----------- -- -- -----------
24,952,220 $-- $-- $24,952,220
=========== == == ===========
MARCH 31, 1999
-----------------------------------------------
GROSS UNREALIZED
CARRYING ----------------- ESTIMATED
VALUE GAINS LOSSES FAIR-VALUE
----------- ------ ------- -----------
U. S. Government Agency securities............... $29,918,137 $-- -- $29,918,137
----------- -- -- -----------
$29,918,137 $-- $ $29,918,137
=========== == == ===========
F-11
70
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At March 31, 2000 and 1999, U.S. Government Agency securities consisted of
short-term discount notes with maturities of 30 days or less. The estimated fair
value of the U.S. Government Agency securities approximates the carrying value
at March 31, 2000 and 1999.
Proceeds from the sales of investment securities available for sale during
the years ended March 31, 1999 and 1998, were $24,365,488 and $5,188,483,
respectively, resulting in gross gains of $3,948 and $188,483 respectively.
There were no sales of investment securities available for sale during the year
ended March 31, 2000.
NOTE 4. INVESTMENT SECURITIES HELD TO MATURITY, NET
MARCH 31, 2000
------------------------------------------------
GROSS UNREALIZED
CARRYING ------------------ ESTIMATED
VALUE GAINS LOSSES FAIR-VALUE
----------- ----- --------- -----------
U.S. Government Agency securities............ $24,995,850 $-- $(687,210) $24,308,640
----------- -- --------- -----------
$24,995,850 $-- $(687,210) $24,308,640
=========== == ========= ===========
There were no investment securities held to maturity at March 31, 1999.
There were no sales of securities held to maturity during the years ended March
31, 2000, 1999 and 1998.
NOTE 5. MORTGAGE-BACKED SECURITIES HELD TO MATURITY, NET
A summary of gross unrealized gains and losses and estimated fair value
follows:
MARCH 31, 2000
---------------------------------------------------
GROSS UNREALIZED
CARRYING --------------------- ESTIMATED
VALUE GAINS LOSSES FAIR-VALUE
----------- ------- ---------- -----------
Government National Mortgage
Association............................. $ 6,516,167 $ -- $ 271,846 $ 6,244,321
Federal Home Loan Mortgage Corporation.... 18,780,043 -- 787,917 17,992,126
Federal National Mortgage Association..... 26,222,474 -- 1,218,331 25,004,143
Small Business Administration............. 759,922 6,260 -- 766,182
Collateralized Mortgage Obligations:
Resolution Trust Corporation............ 1,708,032 -- 12,442 1,695,590
Other................................... 242,592 -- 5,792 236,800
----------- ------- ---------- -----------
$54,229,230 $ 6,260 $2,296,328 $51,939,162
=========== ======= ========== ===========
MARCH 31, 1999
---------------------------------------------------
GROSS UNREALIZED
CARRYING --------------------- ESTIMATED
VALUE GAINS LOSSES FAIR-VALUE
----------- ------- ---------- -----------
Government National Mortgage
Association............................. $ 7,630,635 $55,247 $ -- $ 7,685,882
Federal Home Loan Mortgage Corporation.... 24,635,700 -- 772,154 23,863,546
Federal National Mortgage Association..... 29,718,567 -- 140,411 29,578,156
Small Business Administration............. 1,325,753 4,255 -- 1,330,008
Collateralized Mortgage Obligations:
Resolution Trust Corporation............ 2,282,016 -- 36,023 2,245,993
Federal Home Loan Mortgage
Corporation.......................... 647,010 -- 1,820 645,190
Other................................... 344,766 27 -- 344,793
----------- ------- ---------- -----------
$66,584,447 $59,529 $ 950,408 $65,693,568
=========== ======= ========== ===========
F-12
71
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of final maturities as of March 31, 2000:
CARRYING ESTIMATED
VALUE FAIR VALUE
----------- -----------
After one through five years.............................. $ 525,207 $ 498,118
After five through ten years.............................. 5,193,818 5,017,419
After ten years........................................... 48,510,205 46,423,625
----------- -----------
$54,229,230 $51,939,162
=========== ===========
There were no sales of mortgage-backed securities held to maturity during
the years ended March 31, 2000, 1999 and 1998.
NOTE 6. LOANS RECEIVABLE, NET
YEAR ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
Real estate mortgage:
One- to four-family....................................... $152,457,753 $181,320,829
Multi-family.............................................. 86,184,032 52,365,984
Non-residential........................................... 22,721,310 23,092,010
Equity and second mortgages............................... 251,738 424,981
------------ ------------
261,614,833 257,203,804
------------ ------------
Real estate construction.................................... 6,392,759 11,047,185
------------ ------------
Commercial loans............................................ 699,844 616,325
------------ ------------
Consumer:
Deposit accounts.......................................... 294,495 376,227
Student education......................................... 67,191 147,064
Other..................................................... 5,412,059 7,883,501
------------ ------------
5,773,745 8,406,792
------------ ------------
Total loans................................................. 274,481,181 277,274,106
------------ ------------
Add: Premium................................................ 582,263 1,013,770
Less: Loans in process...................................... (1,062,242) (2,635,520)
Allowance for loan losses................................... (2,935,314) (4,020,099)
Deferred loan fees and discounts............................ (917,871) (1,110,406)
------------ ------------
(4,333,164) (6,752,255)
------------ ------------
$270,148,017 $270,521,851
============ ============
F-13
72
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is an analysis of the allowance for loan losses:
YEAR ENDED MARCH 31,
----------------------------------------
2000 1999 1998
----------- ----------- ----------
Balance -- beginning......................... $ 4,020,099 $ 3,138,000 $2,245,747
Provision charged to operations.............. 1,099,300 4,029,996 1,259,531
Recoveries of amounts previously charged
off........................................ 384,625 81,711 --
Loans charged off............................ (2,568,710) (3,229,608) (367,278)
----------- ----------- ----------
Balance -- ending............................ $ 2,935,314 $ 4,020,099 $3,138,000
=========== =========== ==========
Non-accrual loans consist of loans for which the accrual of interest has
been discounted as a result of such loans becoming three months or more
delinquent as to principal and/or interest payments. Interest income on
non-accrual loans is recorded when received. Restructured loans consist of loans
where borrowers have been granted concessions in regards to the terms of their
loans due to financial or other difficulties which rendered them unable to
service their loans under the original contractual terms. The balances of
non-accrual and restructured loans and their impact in interest income are as
follows:
YEAR ENDED MARCH 31,
--------------------------
2000 1999 1998
------ ------ ------
(IN THOUSANDS)
Non-accrual loans........................................ $2,126 $2,417 $5,568
Restructured loans....................................... -- -- 807
------ ------ ------
$2,126 $2,417 $6,375
====== ====== ======
YEAR ENDED MARCH 31,
---------------------
2000 1999 1998
----- ----- -----
(IN THOUSANDS)
Interest income which would have been recorded had loans
performed in accordance with original contracts........... $345 $419 $762
Interest income received.................................... -- 107 285
---- ---- ----
Interest income lost........................................ $345 $312 $477
==== ==== ====
At March 31, 2000 and 1999, the recorded investment in impaired loans was
$2,126,000 and $2,417,000, respectively. The related allowance for credit losses
was approximately $330,000 and $553,000 at December 31, 2000 and 1999,
respectively. The impaired loan portfolio is primarily collateral dependent. The
average recorded investment in impaired loans during the fiscal years ended
March 31, 2000 and 1999 was approximately $2,272,000 and $3,993,000,
respectively. For the years ended March 31, 2000, 1999 and 1998, the Company
recognized cash basis interest income on these impaired loans of $0, 107,000 and
$285,000, respectively.
At March 31, 2000, loans to officers totaled $111,722.
F-14
73
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of loans to the Bank's directors and officers
(and to any associates of such persons), exclusive of loans to any such person
which in aggregate did not exceed $60,000:
YEAR ENDED MARCH 31,
----------------------
2000 1999
--------- ---------
Balance -- beginning........................................ $ 659,491 $ 850,195
Loans originated............................................ -- --
Other(1).................................................... (530,534) --
Repayments.................................................. (17,235) (190,704)
--------- ---------
Balance -- ending........................................... $ 111,722 $ 659,491
========= =========
- ---------------
(1) Represents loans to individuals who are no longer directors and officers of
Carver at March 31, 2000.
NOTE 7. LOANS SERVICING
The mortgage loan portfolios serviced for the FHLMC and Fannie Mae are not
included in the accompanying financial statements. The unpaid principal balances
of these loans aggregated $2,775,000, $3,035,000 and $3,696,000 at March 31,
2000, 1999 and 1998, respectively.
Custodial escrow balances, maintained in connection with the foregoing loan
servicing, were approximately $56,000, $55,000 and $61,000 at March 31, 2000,
1999 and 1998, respectively.
NOTE 8. PREMISES AND EQUIPMENT, NET
The detail of premises and equipment is as follows:
MARCH 31,
--------------------------
2000 1999
----------- -----------
Land...................................................... $ 450,952 $ 450,952
Buildings and improvements................................ 8,521,565 8,501,923
Leasehold improvements.................................... 718,764 697,903
Furnishings and equipment................................. 6,017,827 5,546,237
----------- -----------
15,709,108 15,197,015
Less accumulated depreciation and amortization............ 4,533,774 3,312,032
----------- -----------
$11,175,334 $11,884,983
=========== ===========
Depreciation and amortization charged to operations for the years ended
March 31, 2000, 1999 and 1998 were $1,221,742, $1,042,659 and $695,192,
respectively.
NOTE 9. ACCRUED INTEREST RECEIVABLE
The detail of accrued interest receivable is as follows:
MARCH 31,
------------------------
2000 1999
---------- ----------
Loans....................................................... $1,768,295 $2,311,991
Mortgage-backed securities.................................. 849,471 522,530
Investments and other interest-bearing assets............... 35,500 26,172
---------- ----------
$2,653,266 $2,860,693
========== ==========
F-15
74
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. EXCESS OF COST OVER ASSETS ACQUIRED, NET
The excess of cost over assets acquired relates to the acquisition of the
Bedford-Stuyvesant office. The detail is as follows:
MARCH 31,
----------------------
2000 1999
-------- ----------
Core deposit premium........................................ $787,517 $ 992,956
Acquisition costs........................................... 29,263 36,897
-------- ----------
$816,780 $1,029,853
======== ==========
NOTE 11. DEPOSITS
MARCH 31,
-------------------------------------------------------------
2000 1999
----------------------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT PERCENT RATE AMOUNT PERCENT
-------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
DEMAND:
Interest-bearing.................. 1.66% $ 18,873 6.68% 1.94% $ 16,102 5.81%
Non-interest-bearing.............. -- 12,337 4.38 -- 10,609 3.83
1.00 31,210 11.06 1.17 26,711 9.64
SAVINGS:
Savings and club.................. 2.51 145,277 51.53 2.51 143,795 51.91
Money Management.................. 3.25 19,418 6.89 2.93 20,932 7.56
Certificate of deposit............ 4.70 86,036 30.52 4.55 85,561 30.89
3.31 250,731 88.94 3.24 250,288 90.36
3.06% $281,941 100.00% 3.04% $276,999 100.00%
The scheduled maturities of certificates of deposits are as follows:
MARCH 31,
------------------
2000 1999
------- -------
(IN THOUSANDS)
One year or less............................................ $22,860 $18,033
After one year to three years............................... 29,699 30,944
After three years to five years............................. 10,984 10,197
After five years............................................ 22,493 26,387
------- -------
$86,036 $85,561
======= =======
The aggregate amount of certificates of deposit with minimum denominations
of $100,000 or more was approximately $17,514,000 and $15,915,000 at March 31,
2000 and 1999, respectively.
F-16
75
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense on deposits consists of the following:
FOR YEAR ENDED MARCH 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
Demand......................................... $ 314,204 $ 313,391 $ 364,774
Savings and clubs.............................. 3,649,742 3,604,347 3,601,095
Money Management............................... 631,452 613,267 691,939
Certificates of deposit........................ 4,046,587 3,902,435 3,948,687
---------- ---------- ----------
8,641,985 8,433,440 8,606,495
Penalty for early withdrawals of certificate of
deposit...................................... (29,959) (12,214) (10,137)
---------- ---------- ----------
$8,612,026 $8,421,226 $8,596,358
========== ========== ==========
NOTE 12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The scheduled maturities of securities sold under agreements to repurchase
are as follows:
MARCH 31,
INTEREST --------------------------
LENDER MATURITY RATE 2000 1999
- ------ ----------------- ------------- ----------- -----------
Morgan Stanley Repo...... August 13, 1999 5.61% $ $ 4,000,000
Federal Home Loan Bank... March 2, 2000 5.82 7,000,000
Federal Home Loan Bank... May 22, 2000 5.88 4,400,000 4,400,000
Federal Home Loan Bank... July 26, 2000 5.41 8,000,000 8,000,000
Federal Home Loan Bank... September 5, 2000 5.40 6,750,000 6,750,000
Federal Home Loan Bank... October 26, 2000 4.81 5,187,000 5,187,000
Federal Home Loan Bank... December 4, 2000 6.44 7,000,000
----------- -----------
$31,337,000 $35,337,000
=========== ===========
Information concerning securities sold under agreements to repurchase are
summarized as follows:
FOR THE YEAR ENDED
MARCH 31,
------------------
2000 1999
------- -------
(IN THOUSANDS)
Average balance during the year............................. $32,670 $59,296
Average interest rate during the year....................... 5.46% 5.74%
Maximum month-end balance during the year................... $35,337 $85,720
Mortgage-backed securities underlying the agreements at year
end:
Carrying value............................................ $34,225 $39,343
Estimated fair value...................................... $32,878 $39,316
F-17
76
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK
Information relating to the maturities of advances from the Federal Home
Loan Bank of New York follows:
MARCH 31,
----------------------------------------------------------
2000 1999
MATURING --------------------------- ---------------------------
YEAR ENDED WEIGHTED WEIGHTED
MARCH 31, AVERAGE RATE AMOUNT AVERAGE-RATE AMOUNT
- ---------- ------------ ----------- ------------ -----------
2000............................ 5.78% $19,000,000
2001............................ 5.76% $51,000,000 5.44 31,000,000
2002............................ 5.17 15,000,000 5.17 15,000,000
2003............................ 3.58 358,700 3.58 358,700
2012............................ 3.50 329,756 3.50 349,766
---- ----------- ---- -----------
5.60 $66,688,456 5.46 $65,708,466
==== =========== ==== ===========
At March 31, 2000 and 1999, the advances were secured by pledges of the
Bank's investment in the capital stock of the Federal Home Loan Bank totaling
$5,754,600 respectively and a blanket assignment of the Bank's unpledged
qualifying mortgage, mortgage-backed securities and investment portfolios.
NOTE 14. INCOME TAXES
The components of income tax expense for the years ended March 31, 2000,
1999 and 1998 are as follows:
YEAR ENDED MARCH 31,
-------------------------------------
2000 1999 1998
-------- ----------- ----------
Federal income tax expense (benefit)
Current...................................... $ 0 $ (701,458) $ 521,917
Deferred..................................... 0 (688,823) 237,466
State and local income tax expense (benefit)
Current...................................... 110,030 152,059 444,083
Deferred..................................... 0 (261,145) 0
-------- ----------- ----------
Total provision for income tax expense......... $110,030 $(1,499,367) $1,203,466
======== =========== ==========
The reconciliation of the expected Federal tax rate to the consolidated
effective tax rate for the years ended March 31, 2000, 1999 and 1998 are as
follows:
YEAR ENDED MARCH 31,
------------------------------------------------------------------
2000 1999 1998
------------------- --------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ------- ----------- ------- ---------- -------
Statutory Federal income
tax........................ $(348,638) 34.0% $(2,023,720) 34.0% $ 764,916 34.0%
State and local income taxes,
net of Federal tax
benefit.................... 110,030 (10.7) (71,997) 1.2 293,094 13.0
Change in valuation
allowance.................. 297,492 (26.0) 596,350 (10.0) 145,456 6.5
Other........................ 51,146 (8.0) 0 0.0 0 0.0
--------- ----- ----------- ----- ---------- ----
Total income tax expense..... $ 110,030 (10.7)% $(1,499,367) 25.2% $1,203,466 53.5%
========= ===== =========== ===== ========== ====
F-18
77
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The bank has net operating loss carryforwards for Federal income tax
purposes at March 31, 2000 and 1999 of approximately $5,705,000 and $4,043,000
respectively. These net operating loss carryforwards begin to expire in the year
ended March 31, 2019.
The Bank's stockholders' equity includes approximately $2.94 million and
$4.02 million at March 31, 2000 and 1999, 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.
The tax effects of existing temporary differences that give rise to
significant portions of deferred tax assets and deferred tax liabilities are as
follows:
MARCH 31,
------------------------
2000 1999
---------- ----------
DEFERRED TAX ASSETS
Net operating loss carryforward............................. $1,939,777 $1,374,601
Allowance for loan losses................................... 1,376,364 1,885,017
Deferred loan fees.......................................... 430,388 520,667
Employees pension plan...................................... 84,305 21,843
Management recognition plan................................. 4,689 21,350
Directors' retirement plan.................................. 207,669 --
Contributions carryforward.................................. 28,278 --
---------- ----------
Total deferred tax assets before valuation allowance........ 4,071,470 3,823,478
Valuation allowance......................................... (2,281,334) (1,983,842)
---------- ----------
Total deferred tax asset.................................... 1,790,136 1,839,636
---------- ----------
DEFERRED TAX LIABILITIES
Excess of cost over net assets acquired..................... 328,077 399,827
Depreciation................................................ 423,606 401,356
Excess tax bad debt reserve................................. 16,428 16,428
---------- ----------
Total deferred tax liabilities.............................. 768,111 817,611
---------- ----------
Net deferred tax assets included in other assets............ $1,022,025 $1,022,025
========== ==========
Management believes it is more likely than not that the results of future
operations will generate sufficient future taxable income to realize the
deferred tax asset. The Company will have to generate approximately $2.5 million
of future taxable income to realize this asset.
F-19
78
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. EARNINGS PER SHARE
The following table reconciles the income available to common shareholders
(numerator) and the weighted average common stock outstanding (denominator) for
both basic and diluted earnings per share for the periods presented:
YEAR ENDED MARCH 31,
----------------------------------------
2000 1999 1998
----------- ----------- ----------
Net income (loss)............................ $(1,135,436) $(4,452,750) $1,046,286
Preferred income............................. (44,153) -- --
----------- ----------- ----------
Net income (loss) -- Basic................... $(1,179,589) $(4,452,750) $1,046,286
Impact of potential conversion of convertible
preferred stock to common stock............ 44,153 -- --
----------- ----------- ----------
Net income (loss) -- Diluted................. $(1,135,436) $(4,452,750) $1,046,286
=========== =========== ==========
Weighted average common shares outstanding --
Basic...................................... 2,238,846 2,206,133 2,187,619
Effect of dilutive securities Convertible
preferred stock............................ 46,107 -- --
----------- ----------- ----------
Weighted average common shares outstanding --
Diluted.................................... 2,284,953 2,206,133 2,187,619
=========== =========== ==========
NOTE 16. STOCKHOLDERS' EQUITY
Convertible Preferred Stock. On January 11, 2000, Carver sold, pursuant to
a Securities Purchase Agreement, dated January 11, 2000, in a private placement
40,000 shares of Series A Convertible Preferred Stock (the "Series A Preferred
Stock") to Morgan Stanley & Co. Incorporated ("MSDW") and 60,000 Shares of
Series B Convertible Preferred Stock (the "Series B Preferred Stock") to
Provender Opportunities Fund L.P. ("Provender"). In addition, Carver entered
into a Registration Rights Agreement, dated January 11, 2000 with MSDW and
Provender. The gross proceeds from the private placement were $2.5 million.
The Series A Preferred Stock and Series B Preferred Stock (collectively the
"Preferred Stock") accrue annual dividends at $1.97 per share. Dividends are
payable semi-annually commencing on June 15 and December 15 of each year. Each
share of Preferred Stock is convertible at the option of the holder, at any
time, into 2.083 shares of Carver's Common Stock, subject to certain
antidilution adjustments. Carver may redeem the Preferred Stock beginning
January 15, 2004. In the event of any liquidation, dissolution or winding up of
Carver, whether voluntary or involuntary, the holders of the shares of Preferred
Stock shall be entitled to receive $25 per share of Preferred Stock plus all
dividends accrued and unpaid thereon. Each share of Preferred Stock is entitled
to one vote for each share of Common Stock into which the Preferred Stock can be
converted.
At March 31, 2000 unpaid accrued dividends amounted to $44,153.
Regulatory Capital. The operations and profitability of the Bank are
significantly affected by legislation and the policies of the various regulatory
agencies. As required by the Financial Institutions Reform, Recovery, and
Enforcement Act, the OTS promulgated capital requirements for financial
institutions consisting of minimum tangible and core capital ratios of 1.5% and
3.0%, respectively, of the institution's adjusted total assets and a minimum
risk-based capital ratio of 8.0% of the institution's risk weighted assets.
Although the minimum core capital ratio is 3.0%, the FDICIA stipulates that an
institution with less than
F-20
79
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4.0% core capital is deemed undercapitalized. At March 31, 2000 and 1999, the
Bank exceeded all the current capital requirements.
The following table sets out the Bank's various regulatory capital
categories at March 31, 2000.
AT MARCH 31, 2000
---------------------
DOLLARS PERCENTAGE
------- ----------
(IN THOUSANDS)
Tangible equity............................................. $28,715 6.85%
Core/leverage capital....................................... 28,715 6.85
Tier 1 risk-based capital................................... 28,715 14.15
Total risk-based capital.................................... 31,213 15.38
The following table reconciles the Bank's stockholders' equity at March 31,
2000, under generally accepted accounting principles to regulatory capital
requirements:
REGULATORY CAPITAL REQUIREMENTS
------------------------------------------------
GAAP TANGIBLE TIER I/CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
------- -------- ----------- ----------
Stockholders' Equity at March 31, 2000(1)........ $29,532 $29,532 $29,532 $29,532
=======
Add:
General valuation allowances................... -- -- 2,538
Deduct:
Goodwill....................................... (817) (817) (817)
Asset required to be deducted.................. -- -- (40)
------- ------- -------
Regulatory capital............................. 28,715 28,715 31,213
Minimum capital requirement.................... 6,283 16,766 16,235
------- ------- -------
Regulatory capital excess...................... $22,432 $11,949 $14,978
======= ======= =======
- ---------------
(1) Reflects Bank only.
NOTE 17. BENEFIT PLANS
PENSION PLAN
Carver has a non-contributory defined benefit pension plan covering all
eligible employees. The benefits are based on each employee's term of service.
Carver's policy is to fund the plan with contributions which equal the maximum
amount deductible for federal income tax purposes. The following table sets
forth the
F-21
80
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plan's changes in benefit obligation, changes in plan assets and funded status
and amounts recognized in Carver's consolidated financial statements:
MARCH 31,
-------------------------
2000 1999
----------- ----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at the beginning of the year............ $ 3,144,934 $2,796,385
Service cost............................................. 159,270 161,729
Interest cost............................................ 190,648 188,592
Actuarial (gain)/loss.................................... (488,146) 154,737
Benefits paid............................................ (160,921) (156,509)
----------- ----------
Benefit obligation at the end of the year.................. $ 2,845,785 $3,144,934
=========== ==========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year............. $ 3,625,222 $3,275,671
Actual return on plan assets............................. 250,871 456,614
Employer Contributions................................... 75,637 49,446
Benefits paid............................................ (160,921) (156,509)
----------- ----------
Fair value of plan assets at end of year................... $ 3,790,809 $3,625,222
=========== ==========
Funded Status.............................................. $ 945,024 $ 480,288
Contributions............................................ -- 28,847
Unrecognized transition obligation....................... 259,170 294,873
Unrecognized gain........................................ (1,336,832) (943,321)
Unrecognized past service liability...................... 14,410 16,544
----------- ----------
Accrued pension cost....................................... $ (118,228) $ (122,769)
=========== ==========
Net periodic pension cost included the following components:
YEAR ENDED MARCH 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Service cost.................................... $ 159,270 $ 161,729 $ 158,235
Interest cost................................... 190,648 188,592 182,273
Expected return on plan assets.................. (283,757) (260,201) (233,435)
Amortization of:
Unrecognized transition obligation............ 35,703 35,703 35,703
Unrecognized gain............................. (61,749) (46,076) (58,131)
Unrecognized past service liability........... 2,134 2,134 2,134
--------- --------- ---------
Net periodic pension cost....................... $ 42,249 $ 81,881 $ 86,779
========= ========= =========
Significant actuarial assumptions used in determining plan benefits are:
YEAR ENDED MARCH 31,
--------------------
2000 1999 1998
---- ---- ----
Annual salary increase...................................... 5.50% 4.50% 5.50%
Long-term return on assets.................................. 8.00% 8.00% 8.00%
Discount rate used in measurement of benefit obligations.... 8.00% 6.50% 7.50%
F-22
81
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SAVINGS INCENTIVE PLAN
The Bank has a savings incentive plan, pursuant to Section 401(k) of the
Code, for all eligible employees of the Bank. Employees may elect to defer up to
the lesser of 15% or the maximum amount allowed under law of their compensation
and may receive a 50% matching contribution from the Bank up to the maximum
allowed by law. Total incentive plan expenses for the years ended March 31,
2000, 1999 and 1998 were $56,000, $68,000 and $73,000 respectively.
DIRECTORS' RETIREMENT PLAN
Concurrent with the conversion to the stock form of ownership, the Bank
adopted a retirement plan for non-employee directors. The benefits are payable
based on the term of service as a director.
MARCH 31,
----------------------
2000 1999
--------- ---------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at the beginning of the year............. $ 795,439 $ 479,672
Service cost.............................................. -- 42,403
Interest cost............................................. 50,918 31,562
Actuarial (gain)/loss..................................... (151,202) 265,977
Benefits paid............................................. (25,025) (24,175)
--------- ---------
Benefit obligation at the end of the year................... $ 670,130 $ 795,439
========= =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $ -- $ --
Actual return on plan assets.............................. -- --
Employer Contributions.................................... 25,025 24,175
Benefits paid............................................. (25,025) (24,175)
--------- ---------
Fair value of plan assets at end of year.................... $ -- $ --
========= =========
Funded Status............................................... $(670,130) $(795,439)
Contributions............................................. 6,256 6,256
Unrecognized loss......................................... 165,758 343,826
Unrecognized past service liability....................... 55,228 110,464
--------- ---------
Accrued pension cost........................................ $(442,888) $(334,893)
========= =========
Net periodic pension cost for the years ended March 31, 2000, 1999 and 1998
included the following:
2000 1999 1998
-------- -------- --------
Service cost....................................... $ -- $ 42,403 $ 24,330
Interest cost...................................... 50,918 31,562 31,395
Expected return on plan assets..................... -- -- --
Amortization of:
Unrecognized gain................................ 26,866 3,522 88
Unrecognized past service liability.............. 55,236 55,236 55,236
-------- -------- --------
Net periodic pension cost.......................... $133,020 $132,723 $111,049
======== ======== ========
The actuarial assumptions used in determining plan benefits include annual
fee increases of 5.50%, 4.50% and 4.50%, and a discount rate of 8.00%, 6.50% and
6.75%, for the years ended March 31, 2000, 1999 and 1998, respectively.
F-23
82
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to March 31, 2000 the directors voted to terminate the
Directors' Retirement Plan.
MANAGEMENT RECOGNITION PLAN
Pursuant to the management recognition plan approved at the stockholders
meeting held on September 12, 1995, the Bank recognized $178,000, $62,000 and
$93,000 as expense for the years ended March 31, 2000, 1999 and 1998,
respectively.
NOTE 18. EMPLOYEE STOCK OWNERSHIP PLAN
Effective upon conversion, an ESOP was established for all eligible
employees. The ESOP used $1,821,320 in proceeds from a term loan obtained from a
third-party institution to purchase 182,132 shares of Bank common stock in the
initial public offering. The term loan principal is payable over forty equal
quarterly installments through September 2004. Interest on the term loan is
payable quarterly, at a rate of 3.00% over the average federal funds rate. Each
year, the Bank intends to make discretionary contributions to the ESOP which
will be equal to principal and interest payments required on the term loan less
any dividends received by the ESOP on unallocated shares.
Shares purchased with the loan proceeds were initially pledged as
collateral for the term loan and are held in a suspense account for future
allocation among the participants on the basis of compensation, as described by
the Plan, in the year of allocation.
Accordingly, the ESOP shares pledged as collateral are reported as unearned
ESOP shares in the consolidated statements of financial condition. As shares are
committed to be released from collateral, the Bank reports compensation expense
equal to the current market price of the shares, and the shares become
outstanding for net income per common share computations. ESOP compensation
expense was $326,000, $171,000 and $241,000 for the years ended March 31, 2000,
1999 and 1998 respectively.
The ESOP shares at March 31, 2000 and 1999 are as follows:
MARCH 31,
--------------------
2000 1999
-------- --------
Allocated shares............................................ 116,937 75,755
Shares committed to be released............................. -- 19,995
Unreleased shares........................................... 65,195 86,382
Total ESOP shares........................................... 182,132 182,132
Fair value of unreleased shares............................. $570,456 $755,843
NOTE 19. 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.
F-24
83
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bank has outstanding various loan commitments as follows:
MARCH 31,
--------------------------
2000 1999
----------- -----------
Commitments to originate loans mortgage................... $ 2,472,000 $ 7,440,520
Commitments to purchase loans mortgage.................... 15,000,000 --
Consumer loans............................................ 4,488,000 4,096,000
----------- -----------
Total........................................... $21,960,000 $11,536,520
=========== ===========
At March 31, 2000, of the $2,472,000 in outstanding commitments to
originate mortgage loans, $1,465,000 represents commitments to originate
multi-family mortgage loans at fixed rates within a range of 8% to 9 3/4% and
$1,007,000 represent the undisbursed balance of construction loans at rates
ranging from 8.25% to 8.83%.
The commitment to purchase mortgage loans consists of one- to four- family
mortgage loans at rates ranging from 7% to 8.375%.
At March 31, 2000, undisbursed funds from approved commercial lines of
credit totaled $4,579,000. All such lines are secured, including $1,000,000 in
warehouse lines of credit secured by the underlying warehoused mortgages, expire
within one year, and carry interest rates that float at 1.00% above the prime
rate.
At March 31, 2000, undisbursed funds from approved consumer lines of
credit, primarily credit cards, totaled $4,488,000. $4,256,000 of such lines are
unsecured and $232,000 of such lines are secured. All such lines carry
adjustable rates.
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 $273,000, $266,000, and $263,000
for the years ended March 31, 2000, 1999 and 1998, respectively. As of March 31,
2000, minimum rental commitments under all noncancellable leases with initial or
remaining terms of more than one year and expiring through 2011 are as follows:
YEAR ENDED MARCH 31, MINIMUM RENTAL
- -------------------- --------------
(IN THOUSANDS)
2001 $ 283
2002 288
2003 293
2004 298
2005 144
Thereafter 994
------
$2,300
======
F-25
84
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. At March 31, 2000, except as set forth below, there
were no legal proceedings to which Carver Federal or its subsidiaries was a
party, or to which any of their property was subject, which were expected by
management to result in a material loss.
At March 31, 2000, two properties as to which the Bank is mortgagee are the
subject of criminal forfeiture action pending in U.S. District Court. The
forfeiture proceeding arises from the criminal conviction of principals of the
borrowers on the properties. One property is carried as a loan on the Bank's
books at an approximate value of $500,000 while the second property is carried
as real estate owned, also with an approximate value of $500,000. It is the
Bank's position that it is a good faith holder for value and the Bank is
opposing the government's attempt to forfeit the properties in disregard of the
Bank's interest as mortgagee. The proceedings are in the preliminary stages. See
"Asset Quality -- Asset Classification and Allowances for Losses."
On or about January 18, 2000, a complaint was filed in the Court of
Chancery of the State of Delaware in and for New Castle County entitled BBC
Capital Market, Inc. v. Carver Bancorp, Inc., et al., C.A. No. 17743, naming the
Holding Company, the individual defendants, Morgan Stanley and Provender as
defendants. The complaint alleged, among other things, that plaintiff BBC is a
7.4% stockholder of the Holding Company and sought to challenge the Holding
Company's issuance on January 11, 2000 of 40,000 shares of the Holding Company's
Series A Preferred Stock to Morgan Stanley and 60,000 shares of the Holding
Company's Series B Preferred Stock to Provender. The complaint further alleged,
among other things, that: (i) the individual defendants approved the
Transactions for the primary purpose of interfering with effective stockholder
action at the Holding Company's annual meeting of stockholders on February 24,
2000 at which two director-defendants were up for re-election; (ii) Morgan
Stanley sought to intimidate Plaintiff's representatives into dropping any
challenge to the election of directors at the Holding Company and that the
individual defendants conspired with Morgan Stanley in the alleged intimidation;
and (iii) the Holding Company issued a false and misleading proxy statement in
connection with the Annual Meeting by not disclosing, among other things,
certain facts relating to Plaintiff's nomination of directors at the Annual
Meeting and the circumstances surrounding the calling of the Annual Meeting. The
complaint alleged four counts: (1) breach of fiduciary duty of loyalty against
the individual defendants; (2) breach of fiduciary duty of disclosure against
the individual defendants; (3) aiding and abetting breaches of fiduciary duty
against Morgan Stanley and Provender; and (4) pursuant to 10 Del. C. sec. 6501,
a determination that the individual defendants, Morgan Stanley and Provender,
could not cast in excess of 10% of their collective vote at the Annual Meeting.
The complaint sought, among other things: (1) an order preliminarily and
permanently enjoining the Holding Company, the individual defendants and others
from: (a) treating the stock issued to Morgan Stanley and Provender as validly
issued for purposes of voting at the Annual Meeting: (b) taking any steps to
solicit proxies in favor of the Holding Company's nominees at the Annual Meeting
until such time that all alleged disclosure violations were cured; and (c)
taking any action to obstruct a proxy solicitation by Plaintiff; (2) an order
preliminarily and permanently enjoining Morgan Stanley, Provender and others
from aiding and abetting the individual defendants' alleged breach of fiduciary
duties and taking any action to obstruct a proxy solicitation by Plaintiff; (3)
an order rescinding the Transactions; (4) a declaration that the defendants,
Morgan Stanley and Provender, could not cast in excess of 10% of their
collective vote at the Annual Meeting; and (5) an award to Plaintiff of the cost
and disbursements of the action, including reasonable attorneys' fees and
experts' fees. On or about January 29, 2000, defendants filed an answer denying
the substantive allegations
F-26
85
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the complaint and seeking, among other things, an order dismissing the
complaint in its entirety, with prejudice.
On or about January 31, 2000, Plaintiff filed an amended complaint
repeating the allegations in the original complaint and adding a count pursuant
to 8 Del. C. sec. 220 seeking an order requiring the Holding Company to
immediately produce all information requested in Plaintiff's letter demanding
that the Holding Company produce certain information relating to the Holding
Company's ESOP and 401(k) Savings Plan in RSI Retirement Trust. On or about
February 22, 2000, defendants filed an answer denying the substantive
allegations of the amended complaint and seeking, among other things, an order
dismissing the complaint in its entirety, with prejudice.
On or about January 18, 2000, Plaintiff also made a motion for a
preliminary injunction to obtain the injunctive relief sought in the complaint
and a motion for expedited proceedings to obtain discovery in support of its
application for preliminary injunctive relief. The parties engaged in expedited
discovery and the Court heard Plaintiff's motion for a preliminary injunction on
February 16, 2000. On February 16, 2000, the Court denied Plaintiff's motion for
a preliminary injunction in its entirety.
On or about March 7, 2000, after the Holding Company's Inspector of
Election declared that the Holding Company's nominees had defeated Plaintiff's
nominees at the Annual Meeting, Plaintiff filed a second amended complaint which
repeated the substantive allegations made in the complaint and the amended
complaint and added certain additional allegations, including, among others: (i)
further allegations that the Holding Company's proxy statement and related
materials issued in connection with the Annual Meeting contained false and
misleading statements; and (ii) allegations that the Inspector of Election
improperly counted the votes of certain unallocated shares in the ESOP in favor
of the Holding Company's nominees. The second amended complaint alleged five
counts: (1) breach of fiduciary duty against the individual defendants; (2)
breach of fiduciary duty of disclosure against the individual defendants; (3)
aiding and abetting breaches of fiduciary duty against Morgan Stanley and
Provender, (4) pursuant to 10 Del. C. sec. 6501, a determination that the
individual defendants, Morgan Stanley and Provender, could not cast in excess of
10% of their collective vote at the Annual Meeting; and (5) pursuant to 8 Del.
C. sec. 225, a determination that the Inspector of Election improperly counted
the votes of certain unallocated shares in the ESOP in favor of the Holding
Company's nominees.
The second amended complaint sought, among other things: (1) an order
permanently enjoining the Holding Company, the individual defendants and others
from treating any stock issued to Morgan Stanley and Provender as validly issued
for purposes of voting; (2) an order rescinding the Transactions; (3) an order
declaring that Plaintiff's nominees were elected as directors of the Holding
Company at the Annual Meeting; (4) an award to Plaintiff of the cost and
disbursements of the Action, including reasonable attorneys' fees and experts'
fees; and (5) an award to Plaintiff of its costs and disbursements in the proxy
contest, including legal fees, proxy solicitor fees, printing fees and the like.
On or about March 27, 2000, defendants filed an answer denying the substantive
allegations of the second amended complaint and seeking, among other things, an
order dismissing the second amended complaint in its entirety, with prejudice.
On or about March 2, 2000, Blaylock filed an application in the Court
pursuant to section 8 Del. C. sec. 231(c). The Application alleged that Blaylock
is a beneficial holder of approximately 100,000 shares of common stock of the
Holding Company and that the Inspector of Election improperly declined to accept
and count Blaylock's vote at the Annual Meeting. The Application sought, among
other things, an order directing the Inspector of Election to accept and count
Blaylock's votes at the Annual Meeting. On or about March 8, 2000, defendants
filed an answer to the Application and took no position with respect to the
relief sought in the Application.
F-27
86
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUBSEQUENT EVENTS
On or about April 6, 2000, Plaintiff filed a motion for partial summary
judgment with respect to Count V in its second amended complaint seeking a
determination that the Inspector of Election improperly counted the votes of
certain unallocated shares in the ESOP in favor of the Holding Company's
nominees and an order declaring that Plaintiff's nominees had won the election
at the Annual Meeting. On April 24, 2000, the Court granted the Partial Summary
Judgment Motion and declared that the Inspector of Election improperly counted
the votes attaching to the unallocated ESOP shares at the Annual Meeting. The
effect of the Court's decision was Plaintiff's nominees, not the Holding
Company's nominees, had won the election.
By order dated April 20, 2000, the Application was consolidated with the
Action and entitled In Re the Carver Bancorp, Inc., Cons. C.A. No. 17743. The
issues in the Consolidated Action were scheduled to be tried before the Court
beginning on May 15, 2000. The trial was expected to last between 5 and 10 days.
On or about April 26, 2000, certain defendants filed motions in the Court
seeking; (1) an order directing the entry of a final judgment on the Court's
decision and order on the Partial Summary Judgment Motion or, in the
alternative, an order certifying an appeal from the Court's interlocutory order
on the Partial Summary Judgment Motion, and (2) to stay the proceedings in the
Consolidated Action pending appeal of the Partial Summary Judgment Motion. On or
about May 4, 2000, the Court denied these motions.
On or about May 2, 2000, Plaintiff filed a motion for summary judgment with
respect to the Application seeking, among other things, to dismiss the
Application.
On or about May 19, 2000, with the exception of Blaylock, the parties to
the Consolidated Action entered into a Settlement Agreement and Mutual Release.
Pursuant to the terms of the Settlement Agreement, among other things, the
parties agreed that: (a) BBC's nominees at the Annual Meeting were appointed to
the boards of directors of the Holding Company and Carver Federal effective May
19, 2000 for a term expiring at the annual meeting of stockholders for the
fiscal year ending March 31, 2002; (b) the Holding Company will hold the 2000
Annual Meeting on or before March 24, 2001; (c) in connection with the 2000
Annual Meeting, the Holding Company will ensure that a sufficient number of
directors are made eligible for election to the board of directors of the
Holding Company so that the sum of (i) the number two and (ii) the number of
directorships up for election at the 2000 Annual Meeting will constitute a
majority of the number of directors on the board of directors of the Holding
Company as of the date of the 2000 Annual Meeting; (d) certain directors of the
Holding Company agreed to pay and will cause their insurance carrier to pay
$475,000 to BBC; (e) all claims concerning the subject matter of the
Consolidated Action are mutually released and forever discharged; and (f) the
parties would promptly execute and file a stipulation and order dismissing the
Consolidated Action with respect to the parties to the Settlement Agreement.
On or about May 22, 2000, the parties to the Settlement Agreement executed
and filed with the Court a Stipulation and Order of Dismissal With Prejudice
providing, among other things, that the Consolidated Action is dismissed with
prejudice as to the parties to the Settlement Agreement. On May 24, 2000, the
Stipulation was entered as an Order of the Court.
In light of, among other things, the Settlement Agreement and Stipulation,
Blaylock agreed to withdraw the Application with prejudice. Accordingly, by
Order dated May 26, 2000, the Court dismissed the Application with prejudice.
NOTE 20. 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
F-28
87
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK, SECURITIES SOLD UNDER
AGREEMENT TO REPURCHASE AND OTHER BORROWED MONEY
The fair values of advances from Federal Home Loan Bank of New York,
securities sold under agreement to repurchase and other borrowed money are
estimated using the rates currently available to the Bank for debt with similar
terms and remaining maturities.
COMMITMENTS
The fair market value of unearned fees associated with financial
instruments with off-balance sheet risk at March 31, 2000 approximates the fees
received. The fair value is not considered material.
F-30
88
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts and estimated fair values of the Company's financial
instruments at March 31, 2000 and 1999 are as follows:
AT MARCH 31,
------------------------------------------------
2000 1999
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
Financial Assets:
Cash and cash equivalents..................... $ 22,202 $ 22,202 $ 21,321 $ 21,321
Securities available for sale................. $ 24,952 $ 24,952 $ 29,918 $ 29,918
Investment securities held to maturity........ $ 24,996 $ 24,309 $ -- $ --
Mortgage backed securities.................... $ 54,229 $ 51,939 $ 66,584 $ 65,694
Loans receivable.............................. $270,148 $254,439 $270,522 $272,711
Accrued interest receivable................... $ 2,653 $ 2,653 $ 2,861 $ 2,861
Financial Liabilities:
Deposits...................................... $281,941 $279,773 $276,999 $276,999
Securities sold under agreements to
purchase................................... $ 31,337 $ 31,337 $ 35,337 $ 35,337
Advances from Federal Home Loan Bank of New
York....................................... $ 66,688 $ 66,688 $ 65,708 $ 65,708
Other borrowed money.......................... $ 553 $ 553 $ 993 $ 993
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 on an off
balance sheet financial instruments without attempting to value anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets and liabilities include premises and equipment and
advances from borrowers for taxes and insurance. In addition, the tax
ramifications related to the realization of unrealized gains and losses can have
a significant effect on fair value estimates and have not been considered in any
of the estimates.
Finally, reasonable comparability between financial institutions may not be
likely due to the wide range of permitted valuation techniques and numerous
estimates which must be made given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
introduces a greater degree of subjectively to these estimated fair values.
F-30
89
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 21. QUARTERLY FINANCIAL DATA (UNAUDITED)
YEAR ENDED MARCH 31, 2000(1)
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS)
Interest income........................................ $6,865 $6,694 $6,960 $ 6,848
Interest expense....................................... (3,580) (3,563) (3,500) (3,366)
Net interest income.................................... 3,285 3,131 3,460 3,482
Provision for loan losses.............................. (150) (230) (225) (494)
Non-interest income.................................... 475 513 539 1,012
Non-interest expense................................... (2,824) (3,155) (3,202) (6,642)
Income taxes........................................... (23) (87)
------ ------ ------ -------
Net income (loss)...................................... $ 786 $ 259 $ 549 $(2,729)
====== ====== ====== =======
Net income (loss) per common share..................... $ .35 $ .11 $ .25 $ (1.23)
====== ====== ====== =======
YEAR ENDED MARCH 31, 1999(1)
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Interest income........................................ $7,585 $7,001 $ 6,931 $6,956
Interest expense....................................... (3,887) (3,633) (3,523) (3,772)
Net interest income.................................... 3,698 3,368 3,408 3,184
Provision for loan losses.............................. (450) (300) (3,061) (218)
Non-interest income.................................... 575 572 347 888
Non-interest expense................................... (3,269) (3,337) (8,270) (3,089)
Income taxes (benefit)................................. 236 110 (1,847) --
------ ------ ------- ------
Net income (loss)...................................... $ 318 $ 193 $(5,729) $ 765
====== ====== ======= ======
Net income (loss) per common share..................... $ 0.14 $ 0.09 $ (2.59) $ 0.35
====== ====== ======= ======
- ---------------
(1) Sum of four quarter results may not equal year-end results due to rounding.
NOTE 22. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
statement also requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and those
instruments at fair value. This statement, as amended, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of
this statement is not anticipated to have a material impact on the financial
position or results of operations.
NOTE 23. SUBSEQUENT EVENTS (UNAUDITED)
On May 12, 2000, the Holding Company announced the completion of the sale
of the Bank's branch office located in Roosevelt, New York (the "Branch"), to
City National Bank of New York ("CNBNY"), an interim national bank formed by
City National Bank of New Jersey ("CNBNJ") to acquire substantially all the
assets of the Branch. CNBNY assumed approximately $8.5 million of deposit
liabilities and acquired the related branch assets consisting of cash, fixed
assets and loans secured by deposits. CNBNY paid a premium of $255,325,
representing 3% of deposits. Immediately upon the consummation of the sale,
CNBNY merged with and into CNBNJ.
F-31
90
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In December, 1999, Carver engaged KPMG LLP ("KPMG") as its independent
auditors for the fiscal year ending March 31, 2000. Since November, 1995,
Mitchell & Titus LLP ("Mitchell & Titus") has been Carver's independent auditor.
The decision to change auditors was recommended by Carver's Audit Committee and
was approved by Carver's Board of Directors based on a review by Carver of its
accounting and tax service needs for future operations.
The reports of Mitchell & Titus on Carver's consolidated financial
statements for the fiscal years ended March 31, 1999 and 1998 did not contain an
adverse opinion or a disclaimer of opinion, and the reports were not qualified
or modified as to uncertainty, audit scope or accounting principles.
In connection with Carver's audits of consolidated financial statements for
each of the two fiscal years ended March 31, 1999 and 1998, there were no
disagreements with Mitchell & Titus on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which,
if not resolved to the satisfaction of Mitchell & Titus would have caused
Mitchell & Titus to make reference to the matter in their report.
In connection with the audits of Carver's consolidated financial statements
for each of the two fiscal years ended March 31, 1999 and 1998;
(a) Mitchell & Titus did not advise Carver that the internal controls
necessary for Carver to develop reliable financial statements do not exist;
(b) Mitchell & Titus did not advise Carver that information had come
to the attention of Mitchell & Titus that had led it to no longer be able
to rely on Carver's management representations, or that had made Mitchell &
Titus unwilling to be associated with the financial statements prepared by
Carver's management;
(c) Mitchell & Titus did not advise Carver that Mitchell & Titus would
need to expand significantly the scope of its audit, or that information
had come to the attention of Mitchell & Titus during such time period that
if further investigated may (i) materially impact the fairness or
reliability of either a previously issued audit report or the underlying
financial statements, or the financial statements issued or to be issued
covering the fiscal periods subsequent to the date of the most recent
financial statements covered by an audit report (including information that
may prevent it from rendering an unqualified audit report on those
financial statements) or (ii) cause Mitchell & Titus to be unwilling to
rely on Carver's management representations or be associated with Carver's
consolidated financial statements; and
(d) Mitchell & Titus did not advise Carver that information had come
to the attention of Mitchell & Titus of the type described in subparagraph
(c) above, the issue not being resolved to the satisfaction of Mitchell &
Titus prior to its dismissal.
The Company provided Mitchell & Titus with a copy of report Form 8-K and
received from Mitchell & Titus a letter addressed to the Securities and Exchange
Commission stating that it agrees with the statements made therein.
Effective as of December 14, 1999, Carver has entered into an agreement
with KPMG that provides for, among other things, the engagement of KPMG as the
independent accounting firm that will audit the financial statements of Carver
for the fiscal year ending March 31, 2000 and 2001;
During Carver's fiscal years ended March 31, 1999 and 1998 and the
subsequent period prior to engaging KPMG, Carver (or anyone on Carver's behalf)
did not consult KPMG regarding:
(1) Either the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit opinion
that might be rendered on Carver's financial statements; and as such no
written report was provided to Carver and no oral advice was provided that
the new accountant concluded was an important factor considered by Carver
in reaching a decision as to any accounting, auditing or financial
reporting issue; or
(2) Any matter that was either the subject of disagreement or a
reportable event.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
INFORMATION WITH RESPECT TO DIRECTORS
The following table sets forth certain information with respect to each
director of the Holding Company. Pursuant to the terms of a Securities Purchase
Agreement relating to the issuance of the Holding Company's Series B Preferred
Stock to Provender, Mr. Frederick O. Terrell was appointed to the Boards of the
Holding Company and the Bank for a term expiring at the annual meeting of
stockholders for the fiscal year ending March 31, 2001. Pursuant to the terms of
the Settlement Agreement, Mr. Kevin Cohee and Ms. Teri Williams were appointed
to the Boards of the Holding Company and the Bank for terms expiring at the
annual meeting of stockholders for the fiscal year ending March 31, 2002. There
are no other arrangements or understandings between the Holding Company and any
director pursuant to which such other person was elected to be a director of the
Holding Company.
END OF POSITION HELD WITH THE
NAME AGE(1) TERM COMPANY AND THE BANK DIRECTOR SINCE
- ---- ------ ------ -------------------------- --------------
Deborah C. Wright................... 42 2001 President, Chief Executive 1999
Officer and Director
Robert J. Franz..................... 62 2000 Director 1997
Pazel G. Jackson, Jr................ 65 2001 Director 1997
Frederick O. Terrell................ 46 2001 Director 2000
Kevin Cohee......................... 43 2002 Director 2000
Teri Williams....................... 42 2002 Director 2000
- ---------------
(1) As of April 30, 2000.
The principal occupation and business experience of each director is set
forth below.
Deborah C. Wright is currently President, Chief Executive Officer and
Director of the Holding Company and the Bank, positions she assumed on June 1,
1999. Prior to assuming her current positions, Ms. Wright was President & CEO of
the Upper Manhattan Empowerment Zone Development Corporation, a position she
held since May 1996. She previously served as Commissioner of the Department of
Housing Preservation and Development under Mayor Rudolph W. Giuliani from
January 1994 through March 1996. Prior to that appointment, Ms. Wright was named
to the New York City Housing Authority Board, by Mayor David N. Dinkins, which
manages New York City's 189,000 public housing units. She serves on the boards
of the Empire State Department Corporation, the Initiative for a Competitive
Inner City, The New York City Partnership, Inc., PENCIL, 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.
Robert J. Franz is a retired Senior Vice President of Booz-Allen &
Hamilton, Inc. and former head of the firm's financial industries information
technology practice. His entire business career has been focused on the
financial services industries in technology and operations consulting,
technology management and financial management. He began his business career at
The Travelers Corporation where he managed the implementation of one of the
first large-scale on-line computer systems in the country. Subsequently, he
founded and managed their Corporate Systems Department. Mr. Franz spent twelve
years at Arthur Andersen & Co. in New York where he was partner-in-charge of
their worldwide capital markets and insurance consulting practices. He also was
a member of their global management team for the banking industries.
Subsequently, he was Managing Director at Morgan Stanley where he was Controller
and Director of Financial Planning and Analysis.
Pazel G. Jackson, Jr. is currently employed as a Senior Vice President in
the Community Development Group of Chase Manhattan Bank. Since January, 1995,
Mr. Jackson has been responsible for new business
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development in targeted markets throughout the United States. Mr. Jackson is
also responsible for assisting the Chase Manhattan Mortgage Corporation's staff
in the development and implementation of a national low and moderate income
outreach program. Prior to joining Chase Manhattan Bank, Mr. Jackson served as
the Senior Credit Officer of the Residential Mortgage Division of Chemical Bank.
As Senior Credit Officer, Mr. Jackson was directly responsible for Credit and
Risk Management which included oversight of the following areas: credit policy,
underwriting, appraisals, quality control, portfolio administration, asset
recovery (workouts), post-closing operations and supervision of the Affordable
Housing Unit. Mr. Jackson's previous business experience also includes
employment as a Senior Vice President in charge of Commercial and Residential
Lending at The Bowery Savings Bank. Mr. Jackson joined The Bowery in 1969 and
held various positions at this financial savings institution including, Senior
Vice President, Assistant to the Chairman (1985-1986); Senior Vice President,
Division Head, Real Estate Finance (1981-1985); Senior Vice President, Marketing
Director (1977-1981); and Vice President, Asset Recovery (1973-1977). Mr.
Jackson also served as Assistant Commissioner, New York City Department of
Buildings (1967-1968) and as Chief of Engineering Design for the 1964-1965 New
York World's Fair Corporation (1962-1966).
Frederick O. Terrell is currently Managing Partner and Chief Executive
Officer of Provender Capital Group, LLC, a private equity investment firm based
in New York and Los Angeles. Prior to forming Provender in 1997, Mr. Terrell was
a Managing Director and Partner with the international investment banking firm
of Credit Suisse First Boston, beginning his association with the firm in 1983.
In addition to Carver, he is a member of the Boards of Vanguarde Media, Inc., a
major urban publishing and Internet content platform, PacPizza, the nation's
second largest Pizza Hut franchisee, and the Yale School of Management. Mr.
Terrell received his B.A. degree from La Verne College, an M.A. from Occidental
College and his MBA from the Yale School of Management.
Teri Williams is currently employed as a Senior Vice President of Boston
Bank of Commerce. Ms. Williams is also a board member of the Boston Bank of
Commerce. Ms. Williams began her business career over 17 years ago at American
Express TRS Company where she became one of the youngest vice presidents in the
company's history. Ms. Williams is very involved in community projects including
Vice Chairperson of Dimock Community Health Center, Treasurer of UNICEF/New
England and on the Board of Overseers for WGBH (public tv). Ms. Williams holds a
B.A. with distinctions in economics from Brown University and an M.B.A. with
honors from Harvard Graduate School of Business Administration.
Kevin Cohee is currently Chairman and Chief Executive Officer of Boston
Bank of Commerce. Mr. Cohee is also a board member of the Boston Bank of
Commerce. Mr. Cohee has an extensive background as an executive and an
entrepreneur. In 1979, he founded a consulting firm that specialized in the
acquisition of radio and television stations by minorities. By 1988, through a
leverage buyout, Mr. Cohee obtained Military Professional Services, Inc., a 29
year old company that marketed Visa and Master Card credit cards to military
personnel. Mr. Cohee purchased a majority controlled interest in Boston Bank of
Commerce in 1995. Mr. Cohee holds a B.A. and M.B.A. from the University of
Wisconsin and a J.D. from Harvard Law School.
RECENT DEVELOPMENTS
As previously announced by the Company in a press release issued on May 25,
2000 (the "May Release"), Messrs. Robert Holland, Jr. and Strauss Zelnick have
agreed to join the Boards of the Holding Company and Carver Federal. Each of
Messrs. Holland and Zelnick will commence his service as a director on July 18,
2000, the date of the next regularly scheduled meeting of the Boards of the
Holding Company and Carver Federal.
Mr. Holland is Chairman and Chief Executive Officer of Workplace
Integrators, a Southeast Michigan company he acquired in June 1997 and has since
built into one of the largest Steelcase Office Furniture dealerships in the
United States. Mr. Holland is the former President and Chief Executive Officer
of Ben & Jerry's and previously served as the Chairman and Chief Executive
Officer of Rokher-J, Inc., a New York-based holding company participating in
business development projects and providing strategy development assistance to
senior management of major corporations. Prior to these positions, Mr. Holland
was a long-
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standing partner with McKinsey & Company. Mr. Holland is a member of the Boards
of The MONY Group, AC Nielsen Corporation, Lexmark International, Inc., Tricon
Restaurants, Inc., Trumark, Inc., and Mazaruni Granite Products. He spent ten
years as the Chairman of the Board of Trustees of Spelman College, where he
currently serves as Vice Chairman, and is a member of the Board of the Harlem
Junior Tennis Program and the Executive Board of the Harvard Journal of
African-American Public Policy.
Mr. Zelnick is President and Chief Executive Officer of BMG Entertainment,
a $4.7 billion music and entertainment unit of Bertelsmann A.G. BMG
Entertainment includes the record labels Arista, RCA, Windham Hill and Ariola,
among many others, as well as one of the largest music publishing companies in
the world, the world's largest record club and significant online activities,
including a joint partnership in GetMusic, which promotes artists and sells
their music over the Internet. Mr. Zelnick has spent his career in the
entertainment industry and has a broad background in managing and developing
creative organizations, including businesses in film, television, video and
multimedia. Before joining BMG, Mr. Zelnick was President and Chief Executive
Officer of Crystal Dynamics, a leading producer and distributor of interactive
entertainment software. Prior to that, he worked for four years as President and
Chief Operating Officer of 20th Century Fox. He spent three years at Vestron
Inc. as a senior executive, becoming President and Chief Operating Officer. Mr.
Zelnick also served as Vice President, International Television for Columbia
Pictures. Mr. Zelnick's educational board memberships include Wesleyan
University and Pencil Inc. He also serves on the board of several other
charitable, corporate and entertainment organizations. Mr. Zelnick holds a J.D.
and an M.B.A. from Harvard University and a B.A. from Wesleyan University.
Also announced in the May Release were the resignations of Messrs. David N.
Dinkins and David R. Jones, both effective May 25, 2000, and the retirement of
Mr. Herman Johnson, effective May 19, 2000.
INFORMATION WITH RESPECT TO OFFICERS
The following table sets forth certain information with respect to each
officer of the Holding Company. There are no arrangements or understandings
between the Holding Company and any officer pursuant to which such person was
selected to be a officer of the Holding Company.
END OF POSITION HELD WITH THE
NAME AGE(1) TERM COMPANY AND THE BANK OFFICER SINCE(2)
- ---- ------ ------ ---------------------- ----------------
Deborah C. Wright...... 42 President, Chief Executive Officer and 1999
Director
Walter T. Bond......... 42 Senior Vice President and Special 1993
Assistant to the President and Chief
Executive Officer
James Boyle............ 50 Senior Vice President and Chief
Financial Officer
Anthony M. Galleno..... 58 Vice President and Controller 1998
Margaret D. Peterson... 50 Senior Vice President and Chief 1999
Administrative Officer
J. Kevin Ryan.......... 50 Senior Vice President and Chief Lending 2000
Officer
Judith Taylor.......... 57 Acting Senior Vice President and Chief 1999
of Retail Banking
- ---------------
(1) As of April 30, 2000.
(2) Includes terms as officers of the Bank prior to the incorporation of the
Holding Company in 1996.
The principal occupation and business experience of each officer is set
forth below.
Walter T. Bond is Senior Vice President and Special Assistant to the
President and Chief Executive Officer. Mr. Bond is also a member of the Bank's
Investment Committee. Mr. Bond joined the Bank in February 1993, as Assistant
Vice President, Mortgage Lender. Mr. Bond is a member of the New York Society of
Securities Analyst and the Financial Managers Society.
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James Boyle is Senior Vice President and Chief Financial Officer. Mr.
Boyle, whose experience as a finance professional spans more than 28 years, was
formerly Senior Vice President and Chief Financial Officer of Broad National
Bank, which was recently acquired by Independence Community Bank. During his
career, he has managed reporting, budgeting, taxes and investment management. At
Broad National Bank, Mr. Boyle was instrumental in reducing the bank's
efficiency ratio, strengthening accounting controls and procedures, and
developing a budget system and managerial reports to clearly define profit and
expense goals and ensure accountability. He was instrumental in helping Broad
National return to profitable operations and in raising new capital, after it
suffered loan losses in the early 1990's. Mr. Boyle has also held senior level
financial positions at National Westminister Bancorp NJ and First Jersey
National Bank. He began his career at Peat, Marwick, Mitchell & Company.
Anthony Galleno is Vice President and Controller. After serving 35 years
in the banking business, Mr. Galleno joined the Bank in September, 1998. During
his previous 35 years of service in a thrift financial environment, he served in
various capacities including Senior Vice President-District Manager Community
Lending (Home Savings of America, FSB), Senior Vice President-Chief Financial
Officer (The Bowery Savings Bank), Vice President-Controller (The Bowery Savings
Bank) and Senior Vice President-Corporate Secretary of both Home Savings of
America, FSB-NY and The Bowery Savings Bank. He has served as a Board member of
Home Savings of America, FSB-NY, The Bowery Savings Bank, Long Island Housing
Partnership, Queens Child Guidance Center and various other organizations.
Margaret D. Peterson is Senior Vice President and Chief Administrative
Officer, integrating Human Resources, Information Technology, Facilities, Vendor
Management and other support activities. Ms. Peterson joined Carver Federal in
November 1999. Ms. Peterson came to Carver from Deutsche Bank where she served
as a Compensation Planning Consultant in Corporate Human Resources. Prior to
joining Deutsche Bank, Ms. Peterson was a Vice President and Senior HR
Generalist for Citibank Global Asset Management. Besides her 11 years in Human
Resources, Ms. Peterson has 10 years of Systems and Technology experience from
various positions held at JP Morgan and Chase. Ms. Peterson earned a B.S. from
Pace University, a M.B.A. from Columbia University as a Citicorp Fellow, and has
been designated a Certified Compensation Professional by the American
Compensation Association.
J. Kevin Ryan is Senior Vice President and Chief Lending Officer. Mr. Ryan
joined Carver Federal in June 2000 and has over 20 years' experience in real
estate and lending. Prior to joining Carver, Mr. Ryan served as Vice
President-Team Leader for Commercial Real Estate at Greenpoint Mortgage Funding
Co., where he was employed since 1996. From 1985 through 1996, Mr. Ryan served
as President of a commercial and residential real estate appraisal company,
which he founded in New York City. Mr. Ryan also served in various positions at
Dime Savings Bank of NY from 1977 to 1985, including Vice President, and as an
Adjunct Professor of Management & Economics at St. John's University from
1981-1984. He also is a member of the Queens County Board of Habitat for
Humanity. Mr. Ryan received a BBA in Management from Hofstra University and an
MBA in Finance from Fordham University.
Judith Taylor is Acting Senior Vice President and Chief of Retail Banking.
Ms. Taylor joined Carver Federal in November 1999. Ms. Taylor was most recently
with The Resolution Trust Corporation, where she served as CEO of four savings
and loan associations. Prior to joining the Resolution Trust Corporation, Ms.
Taylor was a Vice President at Chemical Bank. She brings over 30 years of
experience to Carver.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Holding Company's directors and certain officers
and persons who own more than ten percent of a registered class of the Holding
Company's equity securities to file reports of ownership and changes in
ownership with the SEC and the American Stock Exchange. Officers, directors and
greater than ten percent shareholders are required by SEC regulation to furnish
the Holding Company with copies of all Section 16(a) forms they file.
Based solely on a review of copies of such reports of ownership furnished
to the Holding Company, or written representations that no forms were necessary,
the Holding Company believes that, during the last fiscal year, all filing
requirements applicable to its officers, directors and greater than ten percent
shareholders of the
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Company were complied with, except for the late filing with the SEC of one Form
3 "Initial Statement of Beneficial Ownership of Securities" by James Boyle upon
first becoming an executive officer of the Holding Company, the late filing of a
Form 5 "Annual Statement of Changes in Beneficial Ownership" by Herman Johnson a
former director, reporting two transactions involving the disposition of 1398
shares of Common Stock, and the late filing of a Form 5 "Annual Statement of
Beneficial Ownership of Securities" by Walter T. Bond, reporting the late filing
of the disposition of 354 shares of Common Stock.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth cash and noncash compensation for the fiscal
year ended March 31, 2000 awarded to or earned by the Holding Company's Chief
Executive Officer and by each other executive officer whose compensation
exceeded $100,000 for services rendered in all capacities to the Holding Company
and the Bank during the fiscal year ended March 31, 2000 ("Named Executive
Officers"). No other officers received total compensation in excess of $100,000
in the fiscal year ended March 31, 2000.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
---------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- -------------------- ----------------------
OTHER RESTRICTED
ANNUAL STOCK LTIP ALL OTHER
NAME AND FISCAL SALARY COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
PRINCIPAL POSITIONS YEAR(1) ($) BONUS ($)(2) ($)(3) ($)(3)(4) (#) ($) ($)
- ------------------- ------- ------- ------------ ------------ ---------- ------- ------- ------------
Deborah C. Wright..... 2000 201,558 -- -- $60,937.50 -- -- --
President and Chief
Executive Officer
Judith Taylor......... 2000 106,309 -- -- -- -- -- --
Acting Senior Vice
President and Chief of
Retail Banking
- ---------------
(1) Information is provided for fiscal year ended March 31, 2000 only, as Ms.
Wright and Ms. Taylor were not providing services to the Holding Company in
the fiscal years ended March 31, 1999 and 1998.
(2) Does not include perquisites and other personal benefits the value of which
did not exceed the lesser of $50,000 or 10% of salary and bonus.
(3) Pursuant to her employment agreement, an award of 7,500 shares of restricted
stock was made to Ms. Wright as of June 1, 1999, which vest in equal
installments over a three-year period. The dollar amount in the table for
this award is based on the closing price of $8.125 per share of Common Stock
on June 1, 1999, the award date, as reported on the Nasdaq Stock Market.
When shares become vested and are distributed, the recipient also receives
an amount equal to accumulated dividends and earnings thereon, if any.
EMPLOYEE BENEFIT PLANS
Management Recognition Plan. The MRP provides for automatic grants of
restricted stock to certain employees as of the September 12, 1995 adoption of
the MRP. In addition, the MRP provides for additional 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.
Incentive Compensation Plan. The Incentive Compensation Plan provides
incentive compensation to certain eligible employees in the form of bonuses,
stock options and restricted stock. For each fiscal year,
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96
eligible employees will receive a bonus equal to 4% of such employee's
compensation, multiplied by the lesser of 8 and the "Multiplier." In addition,
each such employee may receive a restricted stock award of shares having a
market value equal to 30% of the employee's bonus and an option to purchase 4
times the number of shares of restricted stock awarded to such employee.
Option Plan. The Option Plan provides for automatic option grants to
certain employees as of September 12, 1995. In addition, the Option Plan
provides for additional discretionary option grants to those employees selected
by the committee established to administer the Option Plan with an exercise
price equal to the fair market value of a share of Common Stock on the date of
the grant. Options granted under the Option Plan generally vest in three to five
equal annual installments commencing on the first anniversary of the effective
date of the grant, provided the recipient is still an employee of the Holding
Company or the Bank on such date. Upon death or disability, all options
previously granted automatically become exercisable.
The following table provides certain information with respect to the
options and SARs granted to Ms. Wright and Ms. Taylor during the fiscal year
ended March 31, 2000.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
- -------------------------------------------------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS/ APPRECIATION FOR
UNDERLYING SARS GRANTED EXERCISE OF OPTION TERM
OPTION/SARS TO EMPLOYEES BASE PRICE ---------------------
NAME GRANTED (#) IN FISCAL YEAR ($/SH) EXPIRATION DATE 5% ($) 10% ($)
- ---- ------------------- -------------- ----------- --------------- --------- ---------
Deborah C.
Wright(1)........... 30,000 100% $8.125 6/01/09 153,243 388,475
Judith Taylor......... -- -- -- -- -- --
- ---------------
(1) Pursuant to the terms of Ms. Wright's employment agreement, options for
15,000 shares were immediately exercisable upon grant. Options for the
remaining 15,000 shares under the award become exercisable in three equal
annual installments commencing as of the first anniversary of the date of
grant and on each of the next two anniversary dates thereof, provided Ms.
Wright remains in employment as of the applicable anniversary date.
The following table provides certain information with respect to the number
of shares of Common Stock acquired through the exercise of, or represented by,
outstanding stock options held by Ms. Wright and Ms. Taylor on March 31, 2000.
Also reported is the value for any "in-the-money" options, which represent the
positive spread between the exercise price of any such existing stock options
and the fiscal year-end price of Common Stock, which was $8.75 per share.
FISCAL YEAR END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES VALUE OPTIONS/SARS AT FISCAL OPTIONS/SARS AT FISCAL
ACQUIRED ON REALIZED ON YEAR-END (1) YEAR-END (1)
EXERCISE EXERCISE (#) ($)
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- ----------- ------------------------- -------------------------
Deborah C. Wright.............. -- -- 15,000/15,000 --
Judith Taylor.................. -- -- -- --
- ---------------
(1) Ms. Wright held no options that were "in-the-money" as of March 31, 2000.
Pension Plan. The Bank maintains a non-contributory, tax-qualified defined
benefit plan (the "Pension Plan"). As required, the Bank annually contributes an
amount to the Pension Plan necessary to satisfy the actuarially determined
minimum funding requirements in accordance with the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
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Employees who are 18 years of age or older and who have completed one year
of service with the Bank are eligible to participate in the Pension Plan.
Participants become 100% vested after five years of service, death, or
termination of the Pension Plan, regardless of the participant's years of
service. The Pension Plan also provides for early retirement benefits, on an
actuarially reduced basis, at the election of a participant who terminates
employment after age 55.
Under the Pension Plan, each participant is entitled to a retirement
benefit equal to the greater of (a) the product of 50% of final earnings (as
defined in the Pension Plan) reduced by 50% of the social security amount (as
defined in the Pension Plan) times the ratio of number of years of credited
service (as defined in the Pension Plan) up to a maximum of 15, over 15 if the
participant's employment ceased after the normal retirement age (as defined in
the Pension Plan) or multiplied by the ratio of the number of years of credited
service divided by the greatest of (i) 15 and (ii) the number of years of
credited service he or she would have had on his or her normal retirement date,
if the participant's employment ceased prior to the normal retirement age (as
defined in the Pension Plan), or (b) $25 multiplied by the number of the
participants' months of credited service.
The following table sets forth the estimated annual benefits that would be
payable under the Pension Plan in the form of a single life annuity before
reduction for the social security amount upon retirement at the normal
retirement date. The amounts are expressed at various levels of compensation and
years of service.
YEARS OF CREDITED SERVICE
----------------------------------------------------
FINAL EARNINGS(1) 15 20 25 30 35
- ----------------- -------- -------- -------- -------- --------
$100,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
150,000 75,000 75,000 75,000 75,000 75,000
200,000(2) 100,000 100,000 100,000 100,000 100,000
250,000(2) 125,000 125,000 125,000 125,000 125,000
- ---------------
(1) Final earnings equal the average of the participant's highest three
consecutive calendar years of taxable compensation during the last 10 full
calendar years of employment prior to termination, or the average of the
Participant's annual compensation over his or her total service, if less.
(2) Under Section 401(a)(17) of the Code, a participant's compensation in excess
of $170,000 (as adjusted to reflect cost-of-living increases) is disregarded
for purposes of determining final earnings. The amounts shown in the table
include the supplemental retirement benefits payable to Ms. Wright under her
employment agreement to compensate for the limitation on includible
compensation.
EMPLOYMENT AGREEMENTS AND SEVERANCE PROVISIONS
Employment Agreement with Deborah C. Wright. As of June 1, 1999, both the
Holding Company and the Bank entered into employment agreements to secure the
services of Deborah C. Wright as President and Chief Executive Officer of the
Holding Company and the Bank. The employment agreement with the Holding Company
is intended to set forth the aggregate compensation and benefits payable to Ms.
Wright for all services rendered to the Holding Company and any of its
subsidiaries, including the Bank, and to the extent that payments under the
Holding Company's employment agreement and the Bank's employment agreement are
duplicative, payments due under the Holding Company's employment agreement would
be offset by amounts actually paid by the Bank for services rendered to it. Both
employment agreements provide for an initial term of three years beginning June
1, 1999. Prior to the second anniversary date of the agreements, and each
anniversary date thereafter, the term of the agreements may be extended an
additional year after a review by the Board of the Bank and the Holding Company
of Ms. Wright's performance. Unless the Board or Ms. Wright determines not to
extend the agreements, in general the remaining term of the agreements will not
exceed two years.
The employment agreements provide for an annual base salary of $235,000
which will be reviewed annually by the Board. Under the agreements, as of June
1, 1999, Ms. Wright is entitled to a restricted stock award of 7,500 shares of
Common Stock, which will vest in equal installments over a three year period,
and
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the grant of an option to purchase 30,000 shares of Common Stock, 50% of which
is immediately exercisable and 50% of which will become exercisable in equal
installments over a three year period. In addition, the employment agreements
provide for an annual incentive payment based on the achievement of certain
performance goals, future grant of stock awards, a supplemental retirement
benefit, additional life insurance protection and participation in the various
employee benefit plans maintained by the Holding Company and the Bank from time
to time. The agreements also provide customary corporate indemnification and
errors and omissions insurance coverage throughout the term of the agreements
and for six years thereafter.
The Bank or the Holding Company may terminate Ms. Wright's employment at
any time for cause as defined in the employment agreements. In the event the
Bank or the Holding Company terminates Ms. Wright's employment for reasons other
than for cause, she would be entitled to a severance benefit equal in value to
the cash compensation, retirement and other fringe benefits she would have
earned had she remained employed for the remaining term of the agreements. The
same severance benefits would be available if Ms. Wright resigns during the term
of the employment agreements following: a loss of title, office or membership on
the Board; a material reduction in her duties, functions or responsibilities;
involuntary relocation of her principal place of employment by over 30 miles
from its location as of June 1, 1999; other material breach of contract by the
Holding Company or the Bank that is not cured within 30 days; or a change in
control. In the event of a change in control, the remaining term of Ms. Wright's
Agreement with the Holding Company at any point in time will be three years
unless written notice of non-renewal is given by the Board or Ms. Wright.
A portion of the severance benefits payable to Ms. Wright under the
employment agreements in the event of a change in control might constitute
"excess parachute payments" current federal tax laws. Federal tax laws impose a
20% excise tax, payable by the executive, on excess parachute payments. In the
event that any amounts paid to Ms. Wright following a change of control would
constitute "excess parachute payments", the employment agreement with the
Holding Company provides that she will be indemnified for any excise taxes
imposed due to such excess parachute payments, and any additional income and
employment taxes imposed as a result of such indemnification of excise taxes.
Any excess parachute payments and indemnification amounts paid will not be
deductible compensation expenses for the Holding Company or the Bank.
DIRECTORS' COMPENSATION
Directors' Fees. The Bank's directors, other than the Chief Executive
Officer, receive $600 per meeting attended of the Bank's Board of Directors,
except that the Chairman receives a fee of $850 per meeting. In addition, the
Chairman of the Board receives a quarterly retainer fee of $1,000. Fees for
executive committee meetings are $700 per meeting and $475 for all other
committee meetings. Ms. Wright does not receive fees for her attendance at
meetings of either the Holding Company's or Bank's Board of or their respective
committees. Directors of the Bank also serve as directors of the Holding
Company, but do not receive additional fees for service as directors of the
Holding Company.
Option Plan. The Holding Company maintains the Option Plan for the benefit
of its directors and certain key employees. Any individual who becomes an
outside director following the effective date of the Option Plan will be granted
options to purchase 1,000 shares of Common Stock with an exercise price equal to
the fair market value of a share of Common Stock on the date of the grant.
Options granted under the Option Plan generally vest in five equal annual
installments commencing on the first anniversary of the effective date of the
grant, provided the recipient is still a director of the Holding Company or the
Bank on such date. In September, 1997, the Option Plan was amended to provide
the Committee with discretion to grant stock options that will vest and become
exercisable pursuant to a vesting schedule that differs from the Option Plan's
standard five-year schedule. The Option Plan continues to provide that upon the
death or disability of an option holder, all options previously granted to such
individual will automatically become exercisable.
Management Recognition Plan. The Holding Company maintains the MRP for the
benefit of its directors and certain key employees. Any individual who becomes
an outside director following the effective date of the MRP will be granted
1,000 shares of restricted stock. Awards granted under the MRP will generally
vest in five equal annual installments commencing on the first anniversary date
of the award,
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provided the recipient is still a director of the Holding Company or the Bank on
such date. Awards will become 100% vested upon termination of service due to
death or disability. When shares become vested and are distributed, the
recipients will receive an amount equal to any accrued dividends with respect
thereto. The MRP was also amended in September, 1997, to permit the Committee,
in its discretion, to grant restricted stock awards with vesting schedules that
differ from the Plan's standard five-year schedule.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as to those persons
believed by management to be beneficial owners of more than 5% of the
outstanding shares of Common Stock or Preferred Stock on May 31, 2000, as
disclosed in certain reports regarding such ownership filed by such persons,
with the Holding Company or the SEC in accordance with Section 13 of the
Exchange Act. Other than those persons listed below, the Company is not aware of
any person or group, as such term is defined in the Exchange Act, that
beneficially owns more than 5% of the outstanding shares of Common Stock as of
May 31, 2000. For purposes of the table set forth below and the table set forth
under "-- Stock Ownership of Management," an individual is considered to
"beneficially own" any securities (a) over which such individual exercises sole
or shared voting or investment power, or (b) of which such individual has the
right to acquire beneficial ownership, including the right to acquire beneficial
ownership by the exercise of stock options within 60 days after May 31, 2000. As
used herein, "voting power" includes the power to vote, or direct the voting of,
such securities, and "investment power" includes the power to dispose of, or
direct the disposition of, such securities.
AMOUNT AND PERCENT OF
NATURE OF SHARES OF
NAME AND ADDRESS BENEFICIAL CLASS OF STOCK
TITLE OF CLASSES OF BENEFICIAL OWNER OWNERSHIP OUTSTANDING(1)
- ---------------- --------------------------------- ---------- --------------
Common Stock....................
EQSF Advisers, Inc. 218,500(2) 9.44%
767 Third Avenue
New York, NY 10017
Common Stock....................
Carver Bancorp, Inc. 166,656(3) 7.20%
Employee Stock Ownership Plan
Trust (the "ESOP Trust")
75 West 125th Street
New York, NY 10027
Common Stock....................
Koch Asset Management, L.L.C 222,550(4) 9.64%
1293 Mason Road
Town & Country, MO 63131
Common Stock....................
BBC Capital Market, Inc. 170,700(5) 7.38%
133 Federal Street
Boston, MA 02110
Series A........................
Morgan Stanley & Co. Incorporated 40,000(6) 100.00%
Preferred Stock
1585 Broadway
New York, New York 10036
Series B........................
Provender Opportunities Fund L.P. 60,000(7) 100.00%
Preferred Stock
17 State Street
New York, NY 10004
- ---------------
(1) The total number of shares of Common Stock outstanding on May 31, 2000 was
2,314,275 shares.
(2) Based on a Schedule 13G, dated February 14, 2000, and filed with the SEC
jointly by EQSF Advisers, Inc. ("EQSF") and Martin J. Whitman, the Chief
Executive Officer and controlling person of EQSF. EQSF beneficially owns
218,500 shares of Common Stock. Mr. Whitman disclaims beneficial ownership
of such stock. Third Avenue Value Fund, Inc., an investment Company
registered under the Investment Company Act of 1940, has the right to
receive dividends with respect to, and proceeds from the sale of, such
shares. EQSF has sole voting and dispositive power over such shares.
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(3) Based on a Schedule 13G, dated February 14, 2000, and filed with the SEC by
the Carver Bancorp, Inc. ESOP Committee (the "Administrative Committee").
The Administrative Committee established to administer the ESOP consists of
officers of the Bank. The ESOP's assets are held in the ESOP Trust, for
which HSBC Bank USA serves as trustee (the "ESOP Trustee"). The
Administrative Committee instructs the ESOP Trustee regarding the investment
of funds contributed to the ESOP. Common Stock purchased by the ESOP Trust
is held in a suspense account and allocated to participants' accounts
annually based on contributions made to the ESOP by the Bank. Shares
released from the suspense account are allocated among participants in
proportion to their compensation, as defined in the ESOP, for the year the
contributions are made, up to the limits permitted under the Code. The ESOP
Trustee must vote all allocated shares held in the ESOP Trust in accordance
with the instructions of participants. As of December 31, 1999, a total of
101,461 shares had been allocated, but not distributed, to participants.
Under the ESOP, unallocated shares or shares for which no voting
instructions have been received will be voted by the ESOP Trustee in the
same proportion as allocated shares with respect to which the ESOP Trustee
receives instructions. In the absence of any voting instructions with
respect to allocated shares, the Board, on behalf of the Holding Company,
directs the voting of all shares of unallocated stock, or in the absence of
such directions from the Board, the ESOP Trustee has sole discretion with
respect to the voting of such shares. Each member of the Board disclaims
beneficial ownership of the shares held in the ESOP Trust.
(4) Based on a Schedule 13G, dated February 25, 1999, as subsequently amended
and filed with the SEC jointly by Koch Asset Management, L.L.C. ("KAM") and
Donald Leigh Koch, the sole Managing Member of KAM. KAM is a registered
investment adviser which furnishes investment advice to individual clients
by exercising trading authority over securities held in accounts on behalf
of such clients (collectively, the "Managed Portfolios"). In its role as an
investment adviser to its clients, KAM has sole dispositive power over the
Managed Portfolios and may be deemed to be the beneficial owner of shares of
Common Stock held by such Managed Portfolios. However, KAM does not have the
right to vote or to receive dividends from, or proceeds from the sale of,
the Common Stock held in such Managed Portfolios and disclaims any ownership
associated with such rights. Mr. Koch may be deemed to have the power to
exercise any dispositive power that KAM may have with respect to the Common
Stock held by the Managed Portfolios. Mr. Koch, individually, owns and holds
voting power with respect to Managed Portfolios containing approximately
44,400 shares of Common Stock, or an aggregate of approximately 1.9% of the
total number of outstanding shares of Common Stock (the "Koch shares").
Other than with respect to the Koch shares, all shares reported in the
Schedule 13G have been acquired by Koch Asset Management, L.L.C., and Mr.
Koch does not have beneficial ownership, voting rights, rights to dividends,
or rights to sale proceeds associated with such shares.
(5) Based on a Schedule 13D, dated April 2, 1999, as subsequently amended and
filed with the SEC jointly by BBOC and BBC. Kevin Cohee, the Chairman,
President and Chief Executive Officer of BBOC, and Teri Williams, the Senior
Vice President-Marketing/Human Resources of BBOC, collectively own as joint
tenants 66.6% of the outstanding common stock of BBOC. Mr. Cohee and Ms.
Williams disclaim beneficial ownership of the Common Stock owned
beneficially by BBOC or BBC Capital. BBOC and BBC Capital have sole voting
and sole dispositive power over all of the shares of Common Stock shown.
(6) Morgan Stanley holds 40,000 shares of the Holding Company's Series A
Preferred Stock, which Carver issued on January 11, 1999 through a private
placement. The Series A Preferred Stock accrues annual dividends at $1.96875
per share. Dividends are payable semi-annually commencing on June 15 and
December 15 of each year. Each share of Series A Preferred Stock was
purchased for $25.00 and is convertible at the option of the holder at any
time into 2.083 shares of the Holding Company's Common Stock, subject to
certain antidilution adjustments. The Holding Company may redeem the Series
A Preferred Stock beginning January 15, 2004. In the event of any
liquidation, dissolution or winding up of the Holding Company, whether
voluntary or involuntary, the holders of the shares of Series A Preferred
Stock shall be entitled to receive $25 per share of Series A Preferred Stock
plus all dividends accrued and unpaid thereon. Morgan Stanley is deemed to
have beneficial ownership of 83,333 shares of the Holding Company's Common
Stock since it may elect to convert the Series A Preferred Stock at any
time. Pursuant to a Securities Purchase Agreement, dated January 11, 2000,
among Morgan Stanley,
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101
Provender (as defined below) and the Holding Company, Morgan Stanley has agreed
not to grant any proxies with respect to the Series A Preferred Stock or any
Common Stock of the Holding Company other than as recommended by the Holding
Company's Board of Directors without first obtaining the Holding Company's
prior consent.
(7) Provender holds 60,000 shares of the Holding Company's Series B Preferred
Stock, which the Holding Company issued on January 11, 1999 through a
private placement. The Series B Preferred Stock accrues annual dividends at
$1.96875 per share. Dividends are payable semi-annually commencing on June
15 and December 15 of each year. Each share of Series B Preferred Stock was
purchased for $25.00 and is convertible at the option of the holder at any
time into 2.083 shares of the Holding Company's Common Stock, subject to
certain antidilution adjustments. The Holding Company may redeem the Series
B Preferred Stock beginning January 15, 2004. In the event of any
liquidation, dissolution or winding up of the Holding Company, whether
voluntary or involuntary, the holders of the shares of Series B Preferred
Stock shall be entitled to receive $25 per share of Series B Preferred Stock
plus all dividends accrued and unpaid thereon. Provender is deemed to have
beneficial ownership of 125,000 shares of the Holding Company's Common Stock
since it may elect to convert the Series B Preferred Stock at any time.
Pursuant to a Securities Purchase Agreement, dated January 11, 2000, among
Morgan Stanley, Provender and the Holding Company, Provender has agreed not
to grant any proxies with respect to the Series B Preferred Stock or any
Common Stock of the Holding Company other than as recommended by the Holding
Company's Board without first obtaining the Holding Company's prior consent.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information, determined as of May 31, 2000,
as to the total number of shares of Common Stock beneficially owned by each
director and each Named Executive Officer, as defined herein, identified in the
Summary Compensation Table, appearing elsewhere herein, and all directors and
executive officers of the Holding Company or the Bank as a group. Ownership
information is based upon information furnished by the respective individuals.
Except as otherwise indicated, each person and the group shown in the table has
sole voting and investment power with respect to the shares indicated.
AMOUNT AND PERCENT OF
NATURE OF COMMON
BENEFICIAL STOCK
NAME TITLE OWNERSHIP(1)(2) OUTSTANDING(3)
- ---- ----------------------------- --------------- --------------
Deborah C. Wright(4)............. President and Chief Executive 25,800 *
Officer, Director
Robert J. Franz.................. Director 2,700 *
Pazel G. Jackson, Jr............. Director 1,500 *
Frederick O. Terrell(5).......... Director 125,000 5.40%
Kevin Cohee(6)................... Director 170,700 7.38%
Teri Williams(7)................. Director 170,700 7.38%
All directors, former directors and executive officers as a
group (13 persons)(8)(9)(10)(11).............................. 474,567 20.51%
- ---------------
* Less than 1% of outstanding Common Stock.
(1) Includes 20,000, 400 and 400 shares which may be acquired by Ms. Wright and
Messrs. Franz and Jackson, respectively, pursuant to options granted under
the Carver Bancorp, Inc. 1995 Stock Option Plan (the "Option Plan").
(2) Excludes 5,000, 600 and 600 shares of restricted stock granted to Ms.
Wright and Messrs. Franz and Jackson, respectively, pursuant to the Carver
Bancorp, Inc. Management Recognition Plan (the "MRP") and/or the Incentive
Compensation Plan with respect to which such individuals have neither
voting nor dispositive power.
(3) Percentages with respect to each person or group of persons have been
calculated on the basis of 2,314,275 shares of Common Stock, the total
number of shares of the Holding Company's Common
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Stock outstanding as of May 31, 2000, plus the number of shares of Common
Stock which such person or group has the right to acquire within 60 days
after May 31, 2000, by the exercise of stock options.
(4) Ms. Wright was awarded 30,000 options to purchase the Holding Company's
Common Stock at a price per share of $8.125 under the Option Plan, 15,000
of which vested as of June 1, 1999, 5,000 of which vested on June 1, 2000,
and the remainder of which vest in two equal installments of 5,000
beginning on June 1, 2001. Ms. Wright was also awarded 7,500 shares of
restricted stock under the MRP, 2,500 of which vested on June 1, 2000, and
the remainder will vest in two equal installments of 2,500 beginning on
June 1, 2001.
(5) Includes 60,000 Shares of the Series B Preferred Stock owned by Provender.
Provender is also deemed to have beneficial ownership of 125,000 shares of
Common Stock, which represents 5.12% of the Holding Company's outstanding
Common Stock (since the Series B Preferred Stock may be converted at any
time.) As a Managing General Partner of Provender, Mr. Terrell may be
deemed to beneficially own such securities. Mr. Terrell disclaims
beneficial ownership to such securities.
(6) Represents shares owned by BBC Capital, a subsidiary of Boston Bank of
Commerce, in which Kevin Cohee is an executive officer and controlling
shareholder.
(7) Represents shares owned by BBC Capital, a subsidiary of Boston Bank of
Commerce, in which Teri Williams is an executive officer and controlling
shareholder.
(8) Includes 3,224 shares in the aggregate held by the ESOP Trust that have
been allocated as of December 31, 1999 to the individual accounts of
executive officers under the ESOP and as to which an executive officer has
sole voting power for the shares allocated to such person's account, but no
dispositive power, except in limited circumstances. Also includes 65,795
unallocated shares held by the ESOP Trust as to which the Board shares
voting and dispositive power. Each member of the Board disclaims beneficial
ownership of the shares held in the ESOP.
(9) Includes 105 shares in the aggregate attributable to the individual
accounts of executive officers under the 401(k) Plan and as to which each
executive officer has sole dispositive power for the shares allocated to
such person's account and shared voting power with the members of the
committee established to administer the 401(k) Plan.
(10) Includes 3,140 shares which may be acquired by executive officers pursuant
to options granted under the Option Plan. Also includes 309 shares which
may be acquired by the executive officers pursuant to options granted under
the Incentive Compensation Plan. Excludes the 240 shares of restricted
stock awarded to the executive officers under the MRP and Incentive
Compensation Plan with respect to which such executive officers have
neither voting nor dispositive power.
(11) Includes 125,000 shares of Common Stock issuable on conversion of the
Series B Preferred Stock held by Provender Opportunities Fund L.P.
Excluding the effect of the Series B Preferred Stock, the directors, former
directors and executive officers of the Holding Company own 347,467 shares
of the Common Stock representing 15.04% of such securities. See footnote 6
above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") requires that all loans or extensions of credit to executive officers
and directors must be made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. Carver Federal offers
loans to its directors, officers and employees, which loans are made in the
ordinary course of business, and are not made with more favorable terms nor do
they involve more than the normal risk of collectibility or present unfavorable
features. Furthermore, loans above the greater of $25,000 or 5% of the Bank's
capital and surplus (up to $500,000) to the Bank's directors and executive
officers must be approved in advance by a disinterested majority of the Bank's
Board. Under prior law, however, Carver had a policy of offering loans to
directors, officers, employees and their immediate family members residing at
the same address on terms substantially equivalent to those offered to the
public, except the interest rates on loans were reduced so long as the director,
officer or employee remained at the Bank.
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103
The following table sets forth information at March 31, 2000 relating to
loans made to directors and executive officers of the Bank whose terms included
reduced interest rates or other preferential terms and whose total aggregate
balances exceeded $60,000 at any time since April 1, 1999.
HIGHEST
BALANCE
BALANCE AT SINCE
NAME AND RELATION ORIGINAL INTEREST MARCH 31, APRIL 1,
TO COMPANY TYPE OF LOAN DATE ORIGINATED AMOUNT RATE 2000 1999
- ----------------- ------------ --------------- --------------- ------------- ---------- --------
Herman Johnson,
Director.............. Mortgage 10/18/89 $150,000 8.50% $102,581 $110,375
On January 11, 2000, the Holding Company sold 60,000 shares of its Series B
Preferred Stock to Provender Opportunities Fund L.P., a limited partnership, at
$25 per share, in a private placement. Mr. Terrell is Managing General Partner
of Provender. For additional information on the Series B Preferred Stock and Mr.
Terrell's appointment to the Board of Directors, see "-- Security Ownership of
Certain Beneficial Owners," "-- Security Ownership of Management" and "Directors
and Executive Officers of the Registrant."
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. The following are incorporated by
reference from Item 8 hereof.
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104
INDEPENDENT AUDITORS' REPORT
Consolidated Statements of Financial Condition as of March 31, 2000 and
1999
Consolidated Statements of Operations for Each of the Years in the
Three-Year Period Ended March 31, 2000
Consolidated Statements of Changes in Stockholders' Equity for Each of the
Years in the Three-Year Period Ended March 31, 2000
Consolidated Statements of Cash Flows for Each of the Years in the
Three-Year Period Ended March 31, 2000
(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, 2000
The following reports on Form 8-K were filed during the fourth quarter of
the Company's fiscal year ended March 31, 2000:
(1) Form 8-K dated January 14, 2000 announcing the sale of Series A
and Series B Convertible Preferred Stock.
(2) Form 8-K dated March 3, 2000 announcing the results of the Annual
Meeting of Stockholders.
(c) Exhibits required by Item 601 of Regulation S-K:
Exhibits. The following is a list of exhibits filed as part of this
Annual Report and is also the Exhibit Index.
NO. EXHIBIT
--- -------
3.1 Certificate of Incorporation of Carver Bancorp, Inc.(1)
3.2 Bylaws of Carver Bancorp, Inc.(1)
4.1 Stock certificate of Carver Bancorp, Inc.(1)
4.2 Federal Stock Charter of Carver Federal Savings Bank(1)
4.3 Bylaws of Carver Federal Savings Bank(1)
4.4 Amendments to Bylaws of Carver Federal Savings Bank(3)
4.5 Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock(5)
4.6 Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock(5)
10.1 Carver Bancorp, Inc. 1995 Stock Option Plan, effective as of
September 12, 1995(1)
10.2 Carver Federal Savings Bank Retirement Income Plan, as
amended and restated effective as of January 1, 1989(1)
10.3 Carver Federal Savings Bank 401(k) Savings Plan in RSI
Retirement Trust, as amended and restated effective as of
May 1, 1993(1)
10.4 Carver Bancorp, Inc. Employee Stock Ownership Plan,
effective as of January 1, 1993(1)
10.5 Carver Federal Savings Bank Deferred Compensation Plan,
effective as of August 10, 1993(1)
10.6 Carver Federal Savings Bank Retirement Plan for Nonemployee
Directors, effective as of October 24, 1994(1)
10.7 Carver Bancorp, Inc. Management Recognition Plan, effective
as of September 12, 1995(1)
10.8 Carver Bancorp, Inc. Incentive Compensative Plan, effective
as of September 12, 1995(1)
10.9 Employment Agreement by and between Carver Federal Savings
Bank and Thomas L. Clark, entered into as of April 1,
1997(2)
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105
NO. EXHIBIT
--- -------
10.10 Employment Agreement by and between Carver Bancorp, Inc. and
Thomas L. Clark, entered into as of April 1, 1997(2)
10.11 Employment Agreement by and between Carver Federal Savings
Bank and Deborah C. Wright, entered into as of June 1,
1999(4)
10.12 Employment Agreement by and between Carver Bancorp, Inc. and
Deborah C. Wright, entered into as of June 1, 1999(4)
10.13 Securities Purchase Agreement by and among Carver Bancorp,
Inc., Morgan Stanley & Co. Incorporated and Provender
Opportunities Fund L.P.
10.14 Registration Rights Agreement by and among Carver Bancorp,
Inc., Morgan Stanley & Co. Incorporated and Provender
Opportunities Fund L.P.
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.
10.16 Stipulation and Order of Dismissal with Prejudice
21.1 Subsidiaries of the Registrant
23.1 Consent of Mitchell & Titus LLP
23.2 Consent of KPMG LLP
27.1 Financial Data Schedule (only submitted with filing in
electronic format)
- ---------------
(1) Incorporated herein by reference to Registration Statement No. 333-0559 on
Form S-4 of Carver Bancorp. Inc., filed with the Securities and Exchange
Commission during July 1997, as amended.
(2) Incorporated herein by reference to the Exhibits to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997.
(3) Incorporated herein by reference to the Exhibits to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1998.
(4) Incorporated herein by reference to the Exhibits to the Registrant's Annual
Report of 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.
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106
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.
July 14, 2000 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 by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ DEBORAH C. WRIGHT President, Chief Executive Officer July 14, 2000
- --------------------------------------------------- and Director (Principal Executive
Deborah C. Wright Officer)
/s/ JAMES BOYLE Senior Vice President and Chief July 14, 2000
- --------------------------------------------------- Financial Officer (Principal
James Boyle Financial and Accounting Officer)
Director July 14, 2000
- ---------------------------------------------------
Robert J. Franz
/s/ PAZEL G. JACKSON, JR. Director July 14, 2000
- ---------------------------------------------------
Pazel G. Jackson, Jr.
/s/ FREDERICK O. TERRELL Director July 14, 2000
- ---------------------------------------------------
Frederick O. Terrell
Director July 14, 2000
- ---------------------------------------------------
Kevin Cohee
Director July 14, 2000
- ---------------------------------------------------
Teri Williams
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107
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation of Carver Bancorp, Inc.(1)
3.2 Bylaws of Carver Bancorp, Inc.(1)
4.1 Stock certificate of Carver Bancorp, Inc.(1)
4.2 Federal Stock Charter of Carver Federal Savings Bank(1)
4.3 Bylaws of Carver Federal Savings Bank(1)
4.4 Amendments to Bylaws of Carver Federal Savings Bank(3)
4.5 Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock(5)
4.6 Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock(5)
10.1 Carver Bancorp, Inc. 1995 Stock Option Plan, effective as of
September 12, 1995(1)
10.2 Carver Federal Savings Bank Retirement Income Plan, as
amended and restated effective as of January 1, 1989(1)
10.3 Carver Federal Savings Bank 401(k) Savings Plan in RSI
Retirement Trust, as amended and restated effective as of
May 1, 1993(1)
10.4 Carver Bancorp, Inc. Employee Stock Ownership Plan,
effective as of January 1, 1993(1)
10.5 Carver Federal Savings Bank Deferred Compensation Plan,
effective as of August 10, 1993(1)
10.6 Carver Federal Savings Bank Retirement Plan for Nonemployee
Directors, effective as of October 24, 1994(1)
10.7 Carver Bancorp, Inc. Management Recognition Plan, effective
as of September 12, 1995(1)
10.8 Carver Bancorp, Inc. Incentive Compensative Plan, effective
as of September 12, 1995(1)
10.9 Employment Agreement by and between Carver Federal Savings
Bank and Thomas L. Clark, entered into as of April 1,
1997(2)
10.10 Employment Agreement by and between Carver Bancorp, Inc. and
Thomas L. Clark, entered into as of April 1, 1997(2)
10.11 Employment Agreement by and between Carver Federal Savings
Bank and Deborah C. Wright, entered into as of June 1,
1999(4)
10.12 Employment Agreement by and between Carver Bancorp, Inc. and
Deborah C. Wright, entered into as of June 1, 1999(4)
10.13 Securities Purchase Agreement by and among Carver Bancorp,
Inc., Morgan Stanley & Co. Incorporated and Provender
Opportunities Fund L.P.
10.14 Registration Rights Agreement by and among Carver Bancorp,
Inc., Morgan Stanley & Co. Incorporated and Provender
Opportunities Fund L.P.
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.
10.16 Stipulation and Order of Dismissal with Prejudice
21.1 Subsidiaries of the Registrant
23.1 Consent of Mitchell & Titus LLP
23.2 Consent of KPMG LLP
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EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1 Financial Data Schedule (only submitted with filing in
electronic format)
- ---------------
(1) Incorporated herein by reference to Registration Statement No. 333-0559 on
Form S-4 of Carver Bancorp. Inc., filed with the Securities and Exchange
Commission during July 1997, as amended.
(2) Incorporated herein by reference to the Exhibits to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997.
(3) Incorporated herein by reference to the Exhibits to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1998.
(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, 1999.
(9) Incorporated herein by reference to the Exhibits to the Registrant's Current
Report on Form 8-K, dated January 14, 2000.
F-50