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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
OF 1934
COMMISSION FILE NUMBER: 0-21487
CARVER BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3904174
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
75 WEST 125(TH) 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, 1998, 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 $13 5/8 per share of the registrant's Common Stock on May 29, 1998) was
approximately $28.6 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Stockholders are incorporated by reference into Items 10, 11, 12 and 13 hereof.
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EXPLANATORY NOTE
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 Registrant 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 Registrant's operations and investments, the ability of the Registrant to
originate loans with attractive terms and acceptable credit quality, and the
ability of the Registrant to realize cost efficiencies.
ITEM 1. BUSINESS.
GENERAL
Carver Bancorp, Inc.
Carver Bancorp, Inc. (the "Holding Company"), a Delaware corporation, is
the holding company for Carver Federal Savings Bank (the "Bank" or "Carver
Federal"), a federally chartered savings bank. 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 subsidiary, the Bank.
The Holding Company's executive offices are located at the home office of
the Bank at 75 West 125th Street, New York, New York 10027. The Holding
Company's telephone number is (212) 876-4747.
Carver Federal Savings Bank
The Bank was chartered in 1948 and began operations in 1949 as Carver
Federal Savings and Loan Association, a federally chartered mutual savings and
loan association, at 53 West 125th Street in New York City, 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
2,314,375 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. Beginning in the fiscal year which ended on March 31,
1997, Carver began a restructuring of its balance sheet placing primary emphasis
on increasing its whole loan portfolio through direct lending, as well as the
purchase of whole loans and decreasing its investment in mortgage-backed and
other investment securities (the "Restructuring"). As a result of this effort,
Carver's loan portfolio has substantially increased as a percentage of total
assets. Therefore, Carver's future earnings will likely be derived more from
direct lending and purchase activities than from investing in securities. Carver
is also continuing its strategy of growth by leveraging its strong capital
position through increased average borrowings to fund increases in average
interest-earning assets. Based on asset size as of March 31, 1998, Carver
Federal is the largest minority-run financial institution in the United States.
LENDING ACTIVITIES
General. Carver's principal lending activity is the origination of
residential mortgage loans for the purpose of purchasing or refinancing one- to
four-family and multi-family residential properties. Carver also originates or
participates in loans for the construction or renovation of commercial property
and residential
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housing developments and occasionally originates permanent financing upon
completion. In addition, Carver originates consumer loans secured by deposits,
second mortgages on residential property, or automobiles, as well as unsecured
personal loans and occasionally originates loans secured by commercial and
nonresidential real estate.
During the past fiscal year Carver has continued to increase its lending
activities with emphasis placed on mortgage lending. Carver has continued to
originate fixed-rate, 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 has
continued to engage in loan purchases during the past fiscal year. At the close
of the twelve month period ended March 31, 1998 ("fiscal 1998"), one- to
four-family mortgage loans totaled $188.8 million, or 66.85%, of Carver's total
gross loan portfolio, multi-family loans totaled $49.3 million or 17.46% of the
total gross loans, non-residential real estate loans totaled $12.8 million or
4.53% of total gross loans and construction loans totaled $16.0 million or 5.66%
of total gross loans. Net loans receivable increased by $77.0 million or 38.92%
to $275.0 million at March 31, 1998, compared to $197.9 million at March 31,
1997. During the past fiscal year Carver increased its consumer lending with
primary focus on indirect auto loans. At March 31, 1998 gross consumer loans
increased by $7.0 million or 94.63% to $15.5 million or 5.50% of gross loans of
which $4.3 million were auto loans. Carver's net loan portfolio as a percentage
of total assets increased to 62.95% at March 31, 1998 from 46.72% at March 31,
1997.
Loan Portfolio Composition. The following table sets forth selected data
relating to the composition of Carver's loan portfolio by type of loan at the
dates indicated. During fiscal 1998, multifamily real estate loans increased by
$29.4 million to $49.3 million at March 31, 1998. This increase reflects the
origination of approximately $31.2 million of multi-family real estate loans
combined with the reclassification of approximately $7.0 million of loans
formerly carried as non-residential offset by repayments of approximately $8.8
million. In addition, non-residential real estate loans decreased by $9.63
million or 42.94% during fiscal 1998, primarily reflecting the aforementioned
reclassification. Student loans decreased by approximately $800,000 reflecting
the sale of loans to the Student Loan Marketing Association. Other consumer
loans (gross) increased by approximately $7.0 million or 94.63%. This increase
primarily reflects a $1.7 million increase in personal loans and a $4.1 million
increase in auto loans. See "Consumer Lending."
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AT MARCH 31,
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1998 1997 1996 1995 1994
------------------ ------------------ ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Real estate loans:
One- to
four-family........ $188,761 66.85% $139,961 67.94% $58,547 69.23% $31,572 61.63% $32,302 59.93%
Multi-family......... 49,289 17.46 19,936 9.68 2,490 2.94 2,165 4.23 2,384 4.42
Nonresidential....... 12,789 4.53 22,415 10.88 11,138 13.18 8,660 16.90 8,862 16.45
Construction......... 15,993 5.66 14,386 6.98 6,971 8.24 3,179 6.21 3,932 7.30
Consumer and commercial
business loans:
Savings accounts..... 998 .35 955 .46 1,011 1.20 1,099 2.14 1,209 2.24
Student.............. 174 .06 975 .48 1,162 1.37 1,346 2.63 1,457 2.70
Other(1)............. 14,364 5.09 7,380 3.58 3,244 3.84 3,209 6.26 3,749 6.96
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
$282,368 100.00% $206,008 100.00% $84,563 100.00% $51,230 100.00% $53,895 100.00%
====== ====== ====== ====== ======
Add:
Premium on loans..... 1,555 1,805 882 366 537
Less:
Loans in
process(2)......... (4,752) (6,854) (1,406) (1,853) (1,911)
Deferred fees and
loan Discounts..... (1,080) (795) (225) (208) (233)
Allowance for loan
Losses............. (3,137) (2,246) (1,206) (1,075) (1,268)
-------- -------- ------- ------- -------
Total.............. $274,954 $197,918 $82,608 $48,460 $51,020
======== ======== ======= ======= =======
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(1) Other loans include second mortgage, home equity, personal, auto, credit
cards and commercial business loans.
(2) Represents undisbursed funds under 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. The Company
periodically purchases portfolios of first mortgages on existing one- to
four-family residences to augment originations. See "-- Purchases of Loans."
Carver originates and purchases one- to four-family residential mortgage
loans in amounts that range between $28,000 and $1,000,000 per loan. At March
31, 1998, $188.8 million, or 66.84%, of Carver's total loans were secured by
one- to four-family residences. Carver's one-to four-family residential mortgage
loan portfolio consisted of approximately 88.0% purchased loans and
approximately 12.0% originated loans of which approximately 93.0% had adjustable
rates and approximately 7.0% had fixed rates.
Carver's one- to four-family residential mortgage loans generally are for
terms of 25 to 30 years, amortized on a monthly basis, with principal and
interest due each month. Residential real estate 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 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 State of New York Mortgage Agency ("SONYMA") secured by
detached single family homes purchased by first time home buyers.
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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. All loans, whether
held in portfolio or serviced after sale, are serviced by an outside
sub-servicer. At March 31, 1998, the Company, through its sub-servicer, was
servicing approximately $4.3 million of loans for Fannie Mae and FHLMC.
Carver offers one-year, three-year, five/one 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 ("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 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. 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 1998, multi-family real
estate loans increased by $29.4 million or 147.24% to $49.3 million at March 31,
1998 compared to $19.9 million at March 31, 1997. See "--Loan Portfolio
Composition." At March 31, 1998, multi-family loans totaled $49.3 million and
comprised 17.35% of Carver's gross loan portfolio. The largest of such loans
outstanding was a $4.2 million loan on a 230 unit, multi-family apartment
building located in the Hempstead, Long Island, New York. This loan was
performing at March 31, 1998. Carver increased its origination of multi-family
real estate loans in order to benefit from the higher origination fees and
interest rates, as well as, shorter terms to maturity and repricing, than could
be obtained from one- to four-family mortgage loans. The Bank has emphasized a
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 very attractive. These factors have combined for substantial growth in
this loan category. 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 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
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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. Pursuant to regulation, Carver's
maximum loan amount for an individual loan is $4.6 million. In many cases on
five to ten unit properties, the Company requires that the borrower reside in
the subject property. Carver's multi-family product guidelines require: a low
LTV, typically not in excess of 65%, and in the case of 5-10 unit properties,
the maximum LTV does not generally exceed 75%. The Bank requires a high debt
coverage ratio ("DCR"), 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 1.30% for all
multi-family loans. The product is designed for, and the Company seeks to lend
to borrowers that are experienced in real estate management. On a case by case
basis, the Company 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 closing.
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. 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 for another five-year period. The Bank
on a case by case basis originates fifteen-year fixed rate loans.
Commercial Real Estate Lending (Nonresidential). At March 31, 1998,
non-residential real estate mortgage loans (including loans to churches) totaled
$25.7 million, or 9.0% of the gross loan portfolio. At March 31, 1998, the
largest non residential loan outstanding was a $4.0 million loan secured by an
office building located in the New York City borough of Manhattan. This loan was
performing at March 31, 1998. Carver's nonresidential real estate lending
activity is predominantly loans for the purpose of refinancing of 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.
Carver originates commercial (non residential) real estate first mortgage
loans in its service area. These mortgages are predominantly on the 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 such cases, Carver requires
that the borrower maintain some form of occupancy at the subject property,
either in the form of operating their primary business from the subject property
or residing in the subject property. Carver's maximum LTV on commercial real
estate mortgage loans is 65%. The minimum DCR is 1.30%. The Bank requires
properties must be managed and operated 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.
Church Lending. Historically, Carver has been a New York City area leader
in the origination of loans to churches. At March 31, 1998, permanent loans to
churches totaled $5.5 million, or approximately 2.0% 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% loan- to-value ratio. The largest
permanent church loan was a $1.7 million loan to a church located in Mt. Vernon,
New York. This loan was performing according to the terms of the loan at March
31, 1998. 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 $310,000.
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
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the size of such loans and establishing the quality of the collateral securing
the loan. 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 construction of churches, multi-family buildings, planned
residential developments, community service facilities and affordable housing
programs. Carver also offers construction loans to qualified developers for
construction 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 which would
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.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value which is insufficient to assure full repayment.
The ability of a developer to sell developed lots or completed dwelling units
will depend on, among other things, demand, pricing, availability of comparable
properties and economic conditions. The Bank has sought to minimize this risk by
limiting construction lending to qualified borrowers in the Bank's market area
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, 1998, the Bank had $16.0 (including $4.8 million of
undisbursed funds) million in construction loans outstanding, comprising 5.66%
of the Bank's gross loan portfolio. The largest construction loan was to a
church for $2.0 million located in the New York City borough of Manhattan. At
March 31, 1998, this loan was performing according to its terms. The second
largest of such loans outstanding was a $1.8 million loan to a developer,
secured by a residential development which contains 22 2-family homes which are
substantially completed and ready for occupancy and are located in the New York
City borough of Brooklyn. This loan was not performing at March 31, 1998. See
"Asset Quality -- Nonperforming Assets."
Consumer Lending. During fiscal 1998, Carver refocused and increased
consumer lending through its wholly-owned subsidiary, CFSB Credit Corp. The
Bank's consumer loans primarily consist of automobile loans, personal loans,
home equity loans or second mortgages on single-family residences limited to 75%
of the appraised value of the residence in the Company's market area and, to a
lesser extent loans secured by deposit accounts at the Bank,
government-guaranteed loans to finance higher education (most of which are sold
in the secondary market). At March 31, 1998, the Bank had approximately $13.4
million in consumer loans, or 4.74% of the Bank's gross loan portfolio. Carver
originates indirect automobile loans to consumers through Carver's agreements
with automobile dealers. These loans are primarily secured by used automobiles.
The
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interest rate on such loans varies according to the credit of the consumer, and
range from 10-14 1/2%. The average term on such loans is 48 months. At March 31,
1998, the Bank had $4.3 million of such loans.
Carver grants loans secured by deposits for up to 90% of the amount of the
deposit. The interest rate on these loans generally is 10.00%, and interest is
billed on a quarterly basis. These loans are payable on demand, and the deposit
account must be pledged as collateral to secure the loan. The Bank originates
unsecured personal loans based on, but not limited to, an analysis of the
borrowers credit history, income, and ability to repay. At March 31, 1998 the
Bank had $896,000 in unsecured personal loans or .32% of the Bank's gross loan
portfolio.
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. At March
31, 1998, the student loan portfolio totaled approximately $174,000. During
fiscal 1998 the Bank sold approximately $801,000 in student loans to the Student
Loan Marketing Association to refocus on more profitable operations.
On March 1, 1996, Carver began its credit card operations subsidiary, CFSB
Credit Corp., issuing both secured, unsecured and business Visa-cards and
MasterCard-cards. The interest rate on these credit cards is generally 4.50%
above the Wall Street Journal Published Prime Lending Rate. As of March 31, 1998
the Bank had over 2,500 cards issued with lines of credit outstanding and an
aggregate outstanding balance of $4.3 million. During the fourth quarter of
fiscal 1998 the Bank discontinued the direct issuance of unsecured credit cards
except for a limited number of credit cards which were issued based on
applications received by the Bank prior to the decision of the Board of
Directors. The Company continues to issue secured credit cards. See "Asset
Quality -- Nonperforming Assets."
Consumer loans generally involve more risk than first mortgage loans.
Repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of damage, loss or
depreciation, and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In 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. The Bank's risks associated with
consumer loans are further minimized by the modest amount of consumer loans made
by the Bank that are not secured by certificates of deposit or otherwise
guaranteed as to repayment.
Commercial Business Loans. The Bank also makes a limited number of
commercial business loans, which may be secured in full by passbook and/or
certificate of deposit accounts. In addition, other commercial business loans
were granted that may be secured in part by government guarantees or other
collateral. From time to time, on a case-by-case basis, the Bank also makes
unsecured commercial business loans. At March 31, 1998, the Bank had
approximately $2.1 million in commercial business loans outstanding, of which
the largest loan was to a church for $600,000 secured in full by a $600,000
certificate of deposit. This loan was performing according to the terms of the
loan at March 31, 1998. Other loans were granted to individual businesses under
the SBA program for $411,000 which have an 80% federal government guarantee. See
"Asset Quality -- Nonperforming Assets."
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. Carver also originates mortgage loans from its loan center
located next to the Bank's St. Albans office.
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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.
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 has the overall responsibility and authority for
general supervision of Carver 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 of Directors
must approve loans at or above $100,000. The managing director of CFSB Credit
Corp. has authority to approve credit limits up to $50,000. All mortgage loans
that conform to FANNIE MAE standards and limits can be approved by the Chief
Lending Officer. The Management Lending Committee composed of the President, the
Chief Lending Officer and the Acting Chief Financial Officer, approves
non-conforming loans up to $750,000. Loans above $750,000 must be approved by
the executive committee of the Board of Directors, and loans above $1,000,000
must be approved by the full Board of Directors. It has been management's
experience that substantially all approved loans are funded.
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 to other surrounding areas. All such loans,
however, satisfy the Company's underwriting criteria regardless of location. In
fiscal 1998, Carver increased its emphasis on multi-family and non residential
lending. 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 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, 1998, 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 consistent with its business strategy, during fiscal
1998, Carver purchased a total of $80.2 million performing one- to four-family
adjustable rate mortgage loans which loans represented 28.40% of Carver's gross
loan portfolio at March 31, 1998. The Company purchases loans in order to
increase interest income and to manage its interest rate risk. Approximately
$32.0 million were purchased for settlement on April 1, 1997 in connection with
the Restructuring. The $80.2 million in performing one- to four-family
adjustable rate mortgages purchased during the fiscal year consist of: $5.0
million of 1Year adjustable-rate mortgage loans ("ARMs"), $34.5 million of
3/1Year ARMs, $10.3 million of 5/1Year ARMs and $30.4 million of 7/1Year ARMs.
The properties securing these loans are located in 34 states, none of which has
loans secured by properties located therein in an amount in excess of 5% of
Carver's total gross loan portfolio, with the exception of loans secured by
properties located in California, which amount to approximately $61.4 million.
At March 31, 1998, loans secured by properties located in California represented
21.74% of the Company's gross loans.
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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,
-----------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
Loans originated:
One- to four-family................................. $ 7,235 $ 8,103 $ 8,162
Multi-family........................................ 31,248 15,138 1,720
Nonresidential...................................... 3,300 16,855 1,953
Construction........................................ 4,226 11,207 828
Consumer............................................ 8,999 4,775 734
------- ------- -------
Total loans originated.............................. $55,008 $56,078 $13,397
======= ======= =======
Loans purchased(1).................................... $80,175 $83,026 $26,333
======= ======= =======
Loans sold(2)......................................... $ 1,459 $ -- $ 1,948
======= ======= =======
- ---------------
(1) Comprised solely of one- to four-family loans, with loans purchased with
servicing released.
(2) Comprised of one- to four-family loans and student loans, with loans sold
with servicing released.
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 firm, the Bank has sought to ensure that purchased
loans satisfy the Bank's underwriting standards and do not otherwise have a
higher risk of collection or loss than loans originated by the Bank although
specific rates and terms may differ from those offered by the Bank. A 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 legal documents. The
warrant 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 the 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
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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, 1998 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 AFTER DUE AFTER DUE AFTER
DUE DURING THE YEAR ENDING 3 THROUGH 5 THROUGH 10 THROUGH DUE AFTER
MARCH 31, 5 YEARS AFTER 10 YEARS AFTER 20 YEARS AFTER 20 YEARS AFTER
--------------------------- MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 2000 2001 1998 1998 1998 1998 TOTAL
------- ------- ------- -------------- -------------- -------------- -------------- --------
(DOLLARS IN THOUSANDS)
Real Estate loans:
One- to
four-family........ $ 9,632 $10,203 $ 6,700 $18,380 $ 4,359 $10,918 $128,569 $188,761
Multi-family......... 125 59 591 34,280 6,650 7,316 269 49,289
Nonresidential....... 216 783 437 3,699 3,165 4,489 -- 12,789
Construction......... 15,993 -- -- -- -- -- -- 15,993
Consumer and commercial
business loans:
Savings accounts..... 998 -- -- -- -- -- -- 998
Student.............. -- -- -- 174 -- -- -- 174
Other................ 3,481 6,189 4,593 -- -- -- -- 14,364
------- ------- ------- ------- ------- ------- -------- --------
Total.............. $30,446 $17,333 $12,321 $56,533 $14,174 $22,723 $128,838 $282,368
======= ======= ======= ======= ======= ======= ======== ========
The following table sets forth, at March 31, 1998, the dollar amount of
loans maturing subsequent to the year ending March 31, 1999 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............................. $33,439 $145,690 $179,129
Multi-family................................... 47,596 1,568 49,164
Nonresidential................................. -- 12,573 12,573
Construction................................... -- -- --
Consumer and commercial business loans:
Savings accounts............................... -- -- --
Student........................................ 174 -- 174
Other.......................................... 10,859 23 10,882
------- -------- --------
Total....................................... $92,068 $159,854 $251,922
======= ======== ========
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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
Nonperforming 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 in default, a letter is mailed to the borrower requesting payment by a
specified date. If a loan becomes 60 days past due, Carver seeks to make
personal contact with the borrower and also has the collateral property
inspected. If a mortgage becomes 90 days past due, 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, immediately
steps are taken by C.F.S.B. Credit Corp. sub-servicer to have the delinquency
cured and the loan restored to current status. With the exception for indirect
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 becomes thirty days in default a letter is mailed to the borrower
requesting payment by a specified date. If the loan becomes 60 days past due a
second letter goes to the borrower and the co-borrower (if any) demanding
payment by a specified date outlining the seriousness of the problem. If the
loan becomes 90 days in default a final warning letter is sent to the borrower
and the co-borrower, and the account is placed for collection.
If an indirect automobile loan borrower fails to make a payment on a loan,
immediate steps are taken by C.F.S.B. Credit Corp's sub-servicer to have the
delinquency cured and the loan restored to current status. Once the payment
grace period has expired (10 days after the due date), a late notice is mailed
to the borrower immediately and a late charge is imposed if applicable. If
payment is not promptly received the borrower is contacted by telephone, with a
follow-up letter requesting payment. By the 25th 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 advance
monthly payments, coupled with repossession and storage charges. In
addition, the borrower must show proof that the vehicle is fully insured
and that C.F.S.B. Credit Corp. is the loss payee.
2. If C.F.S.B. Credit Corp. 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.
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The following table sets forth information with respect to Carver's
nonperforming assets at the dates indicated. Loans generally are placed on
non-accrual status when they become 90 days past due.
AT MARCH 31,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Loans accounted for on a non-accrual basis(1)
Real estate
One- to four-family...................... $1,134 $1,791(2) $ 672 $ 520 $1,027
Multi-family............................. 258 -- 478 -- --
Nonresidential........................... -- 284 284 339 893
Construction............................. 3,089 954 521 521 --
Consumer and commercial.................. 1,087 256 79 152 283
------ ------ ------ ------ ------
Total.................................. $5,568 $3,285 $2,034 $1,532 $2,203
====== ====== ====== ====== ======
Accruing loans contractually past due 90 days
or more:
Real Estate
One- to four-family...................... 1,049 279 4 -- --
Multi-family............................. -- 373 55 -- 85
Nonresidential........................... -- -- 217 -- 291
Construction............................. -- 2,069 611 -- 992
Consumer and commercial.................. 226 400 334 208 57
------ ------ ------ ------ ------
Total.................................. $1,275 $3,121 $1,221 $ 208 $1,425
====== ====== ====== ====== ======
Total of non-accrual and accruing 90 day
past due loans........................... $ 6843 $6,406 $3,255 $1,740 $3,628
------ ------ ------ ------ ------
Other nonperforming assets(3):
Real estate:
One- to four-family...................... 82 82 285 273 50
Multi-family............................. -- -- -- -- 140
Nonresidential........................... -- -- 29 29 --
------ ------ ------ ------ ------
Total other nonperforming assets....... 82 82 314 302 190
------ ------ ------ ------ ------
Total nonperforming assets............. $6,925 $6,488 $3,569 $2,041 $3,818
====== ====== ====== ====== ======
Non-accrual and accruing 90 day past due loans
to total loans.............................. 2.47% 3.15% 3.85% 4.20% 6.73%
Nonperforming assets to total assets.......... 1.58% 1.53% 0.97% 0.56% 1.24%
Troubled debt restructurings(4):
Real estate
Multi-family and commercial.............. $ 807 $ 413 $ -- $1,468 $1,758
====== ====== ====== ====== ======
- ---------------
(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, 1998, gross interest income of $762,000
would have been recorded on loans accounted for on a non-accrual basis at
the end of
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the year if the loans had been current throughout the year. Instead,
interest on such loans included in income during the period amounted to
$285,000.
(2) Includes $1.1 million of participation interests in pools of one-to
four-family mortgage loans. These pools where created by the Thrift
Association Service Corporation ("TASCO"), a lending consortium formed by
New York State thrift institutions to facilitate their participation in
larger real estate development projects, in loans secured by low-income
housing projects located in New York City.
(3) Other nonperforming 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.
(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, 1998, Carver had
$807,000 in restructured loans. During the year ended March 31, 1998, the
Bank would have recorded interest income of $93,000 on restructured loans
had such loans been performing in accordance with the original terms. The
Bank did not receive any interest income in accordance with the
restructuring terms during fiscal 1998.
During fiscal 1998, Carver experienced an increase in nonperforming assets.
The increase is principally attributable to an increase in consumer and
commercial loans accounted for as non-accruing coupled with an increase in
one-to-four family loans accounted for as accruing contractually 90 days or more
past due. Loans accounted for on a non-accrual basis increased by $2.3 million
primarily due to the reclassification of one construction loan previously
accounted for as an accruing loan contractually 90 days or more past due. Loans
accounted for as accruing contractually 90 days or more past due decreased by
$1.8 million primarily due to the aforementioned reclassification offset in part
by an increase in one-to-four family mortgage loans. During fiscal 1998,
non-accrual and accruing loans to total loans decreased from 3.15% at March 31,
1997 to 2.47% at March 31, 1998, in part reflecting Carver's increase in loans
receivable during such period. See "Lending Activities -- General."
During the fourth quarter of fiscal 1998 in response to an increase in non
performing consumer loans, the Company resolved to discontinue the direct
issuance of unsecured credit cards through the Bank's wholly-owned subsidiary,
CFSB Credit Corp. During fiscal 1998 the Company established an allowance of
$742,000 for the subsidiary and charged off approximately $368,000 in non
performing loans. At March 31, 1998 the Bank maintained $374,000 specific
allowance in connection with credit card lines. The Company has been proactive
and instituted a reorganization of the consumer lending activities of the
subsidiary. At March 31, 1998 the Bank was negotiating to sell the remaining
credit card portfolio and enter into an agent bank relationship with an
established credit card issuer and servicer.
Carver serves as the lead lender for a construction loan for the
development of 22 2-family units of affordable housing. The project is being
developed under a New York City new homes program. The total development cost of
the project is $4.8 million. The project has received a substantial subsidy from
state and local housing agencies. The construction loan for the project is $2.9
million. The Bank holds a participation interest in the construction loan of
$1.7 million (60%), of which $1.4 million has been disbursed, and has sold a
non-recourse participation interest in the loan of $1.2 million (40%) to another
New York area lender. At March 31, 1998, the loan was classified as non accruing
reflecting certain construction delays in connection with the completion of the
project. At March 31, 1998, construction on the project was more than 95%
complete and there were 15 homes under contract of sale to prospective
homeowners. Subsequent to March 31, 1998, the general contractor received
certificates of occupancy for the 22 units and 4 homes have been delivered to
purchasers resulting in a $416,000 reduction in the loan balance. Carver is in
first position as a lien holder with an LTV based on the market value approach
of 51% and believes that the remaining units will be sold and delivered. The
Bank has established a specific reserve of 20% of the outstanding balance of the
loan. Accordingly, Carver does not anticipate incurring a loss on the loan in
excess of the provision.
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 into office space. The lead lender on this project subsequently
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went into receivership with the FDIC and the FDIC assumed the lead position on
the loan. The first phase of the renovation has been completed and leased out,
the borrower is currently in bankruptcy and rents are being paid into the
bankruptcy court. The balance of the loan had been written down to $413,000, and
this amount was classified as non-accrual because it was not performing
according to its terms. 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 total original loan of $2.4 million and carried it on the
books at a value of $807,000. The Company is currently involved in legal action
to vacate the stay placed by the bankruptcy court on the collateral in order to
proceed with legal recourse which may include foreclosing on the property.
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, 1998, Carver Federal had $1.7 million of assets classified as substandard
(including $82,000 of real estate acquired in settlement of loans), $3.9 million
of assets classified as doubtful, and $870,000 of assets classified as loss. The
aggregate of the aforementioned classifications and designations totaled $6.5
million, which represented 1.48% of the Bank's total assets and 21.02% of the
Bank's tangible regulatory capital, at March 31, 1998.
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 monthly 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
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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 Board of Directors of the Bank has
designated the Internal Auditor to perform quarterly reviews of the Bank's asset
quality and his 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 "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 of Directors 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, 1998, the Bank held
$82,000, 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,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Balance at beginning of period................ $2,246 $1,206 $1,075 $1,268 $1,597
Loans charged-off(1)
Real estate
One- to four-family...................... -- -- -- 43 21
Multi-family............................. -- -- -- -- 276
Commercial............................... -- 624 -- 481 --
Consumer................................. 367 75 -- 3 52
------ ------ ------ ------ ------
Total charge-offs...................... 367 699 -- 527 349
------ ------ ------ ------ ------
Recoveries:
Construction................................ -- 50 19 -- 1
------ ------ ------ ------ ------
Total recoveries....................... -- 50 19 -- 1
------ ------ ------ ------ ------
Net loans charged-off/(Recoveries)............ 367 649 (19) 527 348
------ ------ ------ ------ ------
Provision for losses........................ 1,259 1,689 150 334 19
------ ------ ------ ------ ------
Balance at end of period.................... $3,138 $2,246 $1,206 $1,075 $1,268
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans
outstanding.............................. .15% 0.69% --% 1.06% 0.65%
Ratio of allowance to total loans............. 1.11% 1.09% 1.42% 2.10% 2.35%
Ratio of allowance to nonperforming loans..... 45.30% 35.06% 37.05% 61.79% 34.95%
Ratio of allowance to nonaccrual loans........ 56.34% 68.37% 59.29% 70.17% 57.56%
- ---------------
(1) Loans are charged-off when management determines that they are
uncollectible.
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,
------------------------------------------------------------------------
1998 1997 1996 1995
------------------- ------------------- ------------------- ------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
------ ---------- ------ ---------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
Loans:
Real estate
One- to
four-family....... $1,691 53.91% $1,065 47.40% $ 165 69.23% $ 165
Multi-family........ 400 12.75 264 11.76 75 2.94 75
Nonresidential...... 111 3.54 414 18.44 616 13.18 616
Construction........ 340 10.84 212 9.44 15 8.24 15
Consumer, commercial and
other................. 596 18.97 291 12.96 335 6.41 204
------ ------ ------ ------ ------ ------ ------
Total allowance for loan
losses................ $3,138 100.00% $2,246 100.00% $1,206 100.00% $1,075
====== ====== ====== ====== ====== ====== ======
AT MARCH 31,
--------------------------------
1995 1994
---------- -------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
EACH EACH
CATEGORY CATEGORY
TO TOTAL TO TOTAL
LOANS AMOUNT LOANS
---------- ------ ----------
(DOLLARS IN THOUSANDS)
Loans:
Real estate
One- to
four-family....... 64.80% $ 231 63.97%
Multi-family........ 4.23 49 4.42
Nonresidential...... 16.90 782 16.44
Construction........ 6.20 15 7.30
Consumer, commercial and
other................. 7.87 191 7.87
------ ------ ------
Total allowance for loan
losses................ 100.00% $1,268 100.00%
====== ====== ======
16
18
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" 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, 1998 constituted 55.73% of the
mortgage-backed securities portfolio. Mortgage-backed securities, however,
expose Carver to certain unique risks. In a declining rate environment,
accelerated prepayments of loans underlying these securities expose Carver to
the risk that it will be unable to obtain comparable yields upon reinvestment of
the proceeds. In the event the mortgage-backed security has been funded with an
interest-bearing liability with a maturity comparable to the original estimated
life of the mortgage-backed security, the Bank's interest rate spread could be
adversely affected. Conversely, in a rising interest rate environment, the Bank
may experience a lower than estimated rate of repayment on the underlying
mortgages, effectively extending the estimated life of the mortgage-backed
security and exposing the Bank to the risk that it may be required to fund the
asset with a liability bearing a higher rate of interest.
The increased effort by Carver 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 been reinvested in residential mortgage
loans. This has resulted in a significant 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, 1998, mortgage-backed securities
constituted 27.32% of total assets, as compared to 46.42% at March 31, 1997, and
54.58% at March 31, 1996.
17
19
The following table sets forth the carrying value of Carver's investments
at the dates indicated.
YEAR ENDED MARCH 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
HELD TO MATURITY
GNMA..................................................... $ 8,855 $ 11,689 $ 13,297
FANNIE MAE............................................... 36,685 41,344 46,246
FHLMC.................................................... 35,901 44,890 55,420
SBA...................................................... 1,770 2,249 2,603
RTC...................................................... 6,565 8,354 11,137
FHLMC.................................................... 1,340 1,690 1,703
FANNIE MAE............................................... -- -- --
Other.................................................... -- 637 699
-------- -------- --------
Total CMOs............................................ 7,905 10,681 13,539
-------- -------- --------
Total Held to Maturity........................... 91,116 110,853 131,105
-------- -------- --------
AVAILABLE-FOR-SALE:
GNMA..................................................... 15,192 16,907 23,058
FANNIE MAE............................................... 8,541 9,176 10,433
FHLMC.................................................... 4,674 6,622 8,239
-------- -------- --------
Total Available-for-Sale.............................. 28,407 32,705 41,730
-------- -------- --------
Total Mortgage-Backed Securities................. $119,523 $143,558 $172,836
======== ======== ========
- ---------------
(1) Equity securities were classified as available-for-sale at March 31, 1998,
1997 and 1996.
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Carver's mortgage-backed securities at
March 31, 1998. Expected maturities will differ from contractual maturities due
to scheduled repayments and because borrowers may have the right to call or
prepay obligations with or without prepayment penalties. The following table
does not take into consideration the effects of scheduled repayments or the
effects of possible prepayments.
ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS TOTAL INVESTMENT PORTFOLIO
------------------ ------------------ -------------------- -----------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE VALUE YIELD
-------- ------- -------- ------- --------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
GMNA(1).............. $ -- --% $ -- --% $ 24,047 6.61% $ 24,047 $ 24,119 6.61%
FANNIE MAE(2)........ -- -- 9,816 6.12 35,410 6.50 45,226 44,904 6.31
FHLMC(3)............. 6,514 6.99 1,780 6.96 32,282 6.58 40,576 40,046 6.84
SBA.................. -- -- -- -- 1,770 6.62 1,770 1,807 6.62
CMO:
RTC................ -- -- -- -- 6,564 6.60 6,564 6,447 6.60
FHLMC.............. 1,340 6.42 -- -- -- -- 1,340 1,329 6.42
------- ------- -------- -------- --------
TOTAL............ $ 7,854 $11,596 $100,073 $119,523 $118,652
======= ======= ======== ======== ========
- ---------------
(1) Includes $15.2 million in securities available for sale.
(2) Includes $8.5 million in securities available for sale.
(3) Includes $4.7 million in securities available for sale.
18
20
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."
During the fourth quarter of fiscal 1997, Carver sold a significant portion
of its mutual fund portfolio. On April 1, 1997, the Bank sold the remaining
$49.0 million that it held in mutual funds in order to purchase higher yielding
mortgage loans pursuant to Carver's strategy to restructure the balance sheet.
These actions were in accordance with the Company's investment strategy which
was modified in the year ended March 31,1996 ("fiscal 1996") and fiscal 1997.
19
21
AT MARCH 31,
--------------------------
1998 1997 1996
------ ------- -------
(IN THOUSANDS)
HELD TO MATURITY:
Debt securities:
U.S. government and agency securities..................... $ -- $ 1,675 $ 8,937
Other investments
FHLB stock................................................ 5,755 5,535 3,120
------ ------- -------
Total held to maturity................................. 5,755 7,210 12,057
------ ------- -------
AVAILABLE FOR SALE:
Equity securities:
Capstone Government Investment Fund....................... -- 49,008 63,619
Federated ARMs Fund -- Institutional Shares............... -- -- 6,789
Asset Management Fund Adjustable-Rate Mortgage Portfolio
Share Funds............................................ -- 100 99
Common and preferred stocks............................... -- 2,050 2,090
Other investments:
Federal funds sold........................................ 3,000 -- 6,800
------ ------- -------
Total available for sale............................... 3,000 51,158 79,397
------ ------- -------
Total investment securities....................... $8,755 $58,368 $91,454
====== ======= =======
- ---------------
(1) Equity securities were classified as available-for-sale at March 31, 1998,
1997 and 1996.
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Carver's investments at March 31, 1998.
ONE YEAR OR LESS ONE TO FIVE YEARS TOTAL INVESTMENT PORTFOLIO
------------------ ------------------ ---------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE
VALUE YIELD VALUE YIELD VALUE VALUE YIELD
-------- ------- -------- ------- -------- ------ -------
(DOLLARS IN THOUSANDS)
U.S. government and Agency
securities..................... $ -- --% $-- --% $ -- $ -- --%
Federal funds sold............... 3,000 5.25 -- -- 3,000 3,000 5.25
Equity securities................ -- -- -- -- -- -- --
Common and preferred stock....... -- -- -- -- -- -- --
FHLB stock....................... 5,755 6.35 -- -- 5,755 5,755 6.35
------ -- ------ ------
Total investments........... $8,755 $0 $8,755 $8,755
====== == ====== ======
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 ("IRAs"). Carver's
policies are designed primarily to attract deposits from local residents through
20
22
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 due to the interest rate
sensitivity of such deposits. 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.
WEIGHTED PERCENTAGE
AVERAGE MINIMUM MINIMUM AGGREGATE OF TOTAL
INTEREST RATE TERM CATEGORY BALANCE BALANCE DEPOSITS
- ------------- ------------ -------- ------- --------- ----------
(IN THOUSANDS)
2.23% None NOW Accounts $ 500 $ 19,230 6.99%
2.50 None Savings and club 300 145,448 52.91
3.22 None Money market savings accounts 500 21,496 7.82
-- None Other demand accounts 500 9,687 3.52
-------- ------
Total Savings accounts 195,861 71.25
-------- ------
CERTIFICATES OF DEPOSIT
-----------------------------
4.13 91 days Fixed-term, fixed rate 2,500 2,199 .80
4.58 182-365 days Fixed-term, fixed rate 2,500 14,384 5.23
5.33 1-2 years Fixed-term, fixed rate 1,000 26,706 9.72
5.36 2-3 years Fixed-term, fixed rate 1,000 11,899 4.33
4.40 3-4 years Fixed-term, fixed rate 1,000 18 .01
4.55 4-5 years Fixed-term, fixed rate 1,000 11 .00
5.77 5-10 years Fixed-term, fixed rate 500 16,634 6.05
5.80 30 days Negotiable 80,000 7,182 2.61
-------- ------
Total Certificates of Deposit 79,033 28.75
-------- ------
Total Deposits $274,894 100.00%
======== ======
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
1998 DEPOSITS (DECREASE) 1997 DEPOSITS (DECREASE) 1996 DEPOSITS
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Savings and club.......... $145,448 52.91% $2,495 $142,953 53.65% $1,080 $141,873 55.21%
Money market savings...... 21,496 7.82 418 21,078 7.91 1,634 19,444 7.57
NOW and demand accounts... 28,917 10.52 2,662 26,255 9.85 3,293 22,962 8.94
Certificates of deposit... 79,033 28.75 2,423 76,185 28.59 3,512 72,673 28.28
-------- ------ ------ -------- ------ ------ -------- ------
Total deposits........ $274,894 100.00% $8,423 $266,471 100.00% $9,519 $256,952 100.00%
======== ====== ====== ======== ====== ====== ======== ======
21
23
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,
-----------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Non-interest-bearing demand.... $ 8,625 0.00% $ 4,774 0.00% $ 4,761 0.00%
Savings and club............... 144,466 2.49 142,410 2.49 140,204 2.50
Certificates................... 76,990 5.13 74,583 5.15 74,060 5.36
Money market savings
accounts..................... 21,514 3.22 20,398 3.23 18,770 3.19
NOW accounts................... 18,725 1.89 19,909 1.56 15,539 2.02
-------- -------- --------
Total..................... $270,320 $262,074 $253,334
======== ======== ========
The following table sets forth time deposits in specified weighted average
interest rate categories as of the dates indicated.
AT MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
2%-3.99%.............................................. $ -- $ 1 $ 1,686
4%-5.99%.............................................. 78,958 61,674 58,950
6%-7.99%.............................................. 75 14,510 12,037
8%-9.99%.............................................. -- -- --
------- ------- -------
Total............................................ $79,033 $76,185 $72,673
======= ======= =======
The following table sets forth the amount and maturities of time deposits
in specified weighted average interest rate categories at March 31, 1998.
AMOUNT DUE
----------------------------------------------
LESS THAN AFTER
RATE ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
---- --------- --------- --------- ------- -------
(DOLLARS IN THOUSANDS)
2%-3.99%........................ $ -- $ -- $ -- $ -- $ --
4%-5.99%........................ 23,765 26,704 11,899 16,590 23,765
6%-7.99%........................ 2 73 75
------- ------- ------- ------- -------
Total...................... $23,765 $26,706 $11,899 $16,663 $79,033
======= ======= ======= ======= =======
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,
1998.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------- --------------
(IN THOUSANDS)
Three months or less........................................ $ 3,678
Three through six months.................................... 3,572
Six through 12 months....................................... 1,582
Over 12 months.............................................. $ 2,793
-------
Total.................................................. $11,625
=======
22
24
The following table sets forth Carver's deposit reconciliation for the
periods indicated.
YEAR ENDED MARCH 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
Deposits at beginning of period............................ $266,471 $256,952 $248,446
Net increase (decrease) before interest credited........... (173) 1,137 134
Interest credited.......................................... 8,596 8,382 8,372
-------- -------- --------
Deposits at end of period.................................. $274,894 $266,471 $256,952
======== ======== ========
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.
One of the elements of Carver's investment strategy is to leverage the
balance sheet by increasing the level of 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. To accomplish the leveraging objective the
Bank increased borrowing during fiscal 1998 and reinvested the proceeds in
primarily adjustable rate mortgages. At March 31, 1998, Carver had $36.7 million
in advances and $87.0 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,
-----------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
Amounts outstanding at end of period:
FHLB advances............................................... $36,742 $45,400 $25,400
Securities sold under agreements to repurchase.............. 87,020 74,335 47,000
Weighted average rate paid at period end:
FHLB advances............................................... 5.82% 6.93% 6.84%
Securities sold under agreements to repurchase.............. 5.85% 5.67% 5.60%
Maximum amount of borrowing outstanding at any month end:
FHLB advances............................................... $39,744 $45,400 $62,400
Securities sold under agreements to repurchase.............. 93,673 74,335 47,000
Approximate average amounts outstanding for period:
FHLB advances............................................... $31,273 $26,250 $45,538
Securities sold under agreements to repurchase.............. 78,310 42,398 25,654
Approximate weighted average rate paid during period (1):
FHLB advances............................................... 5.96% 6.05% 7.52%
Securities sold under agreements to repurchase.............. 5.79% 5.61% 6.36%
- ---------------
(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.
23
25
SUBSIDIARY ACTIVITIES
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, 1998, the net book value of the Bank's service corporations investments was
$601,000 which includes Carver's investment in a captive insurance corporation.
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, 1998, this subsidiary had
$317,000 in total capital and net operating expenses of $15,000.
On September 19, 1996, the Bank formed CFSB Credit Corp., ("CCC") as a
wholly-owned subsidiary to undertake Carver's credit card issuance. During the
fourth quarter of fiscal 1997, the Bank transferred all consumer lending
activities to CCC. During the fourth quarter of fiscal 1998, in response to
delinquencies in the credit card portfolio the Board of Directors directed the
discontinuance of the direct issuance of unsecured credit cards. At March 31,
1998, this subsidiary had negative equity of approximately $2,000 in total
capital and net operating expense of $1,274,000, and a revolving line of credit
of $15.0 million.
MARKET AREA AND COMPETITION
General. The Company's primary market area for deposits consists of the
areas served by its seven 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 and Nassau Counties, New York.
The Company has entered into on agreement to sell its branch located in Nassau
County, New York. See "-- Branch Sale Agreement." Carver's branches are
primarily located in economically disadvantaged areas of New York City which
have traditionally been characterized by high unemployment, low income and low
levels of home ownership. The majority of the Company's branches are located in
areas where the number of persons below the poverty line is greater than 27% of
the population and constitutes as much as 41% of the population in some areas
according to 1990 census figures. The number of persons on some form of public
assistance exceeds 30% of the population in these areas according to the same
census. Although the New York metropolitan area enjoys a fairly diversified
economy, the manufacturing base which has traditionally provided jobs to
residents of the communities served by Carver has been steadily shrinking and
the other sectors of the economy have failed to provide comparable employment
opportunities.
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. The Roosevelt branch
office is located in Nassau County and has deposits of approximately $10
million. Due to certain regulatory issues, the transaction, that was expected to
close by March 31, 1998, has not yet been consummated.
EMPLOYEES
As of March 31, 1998, Carver had 108 full-time equivalent employees, none
of whom was represented by a collective bargaining agreement.
24
26
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
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 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.
REGULATION OF FEDERAL SAVINGS ASSOCIATIONS
Business Activities. The Bank derives its lending and investment powers
from the Home Owner's Loan Act, as amended ("HOLA"), and the regulations of the
OTS thereunder. Under these laws and regulations, the Bank may invest in
mortgage loans secured by residential and commercial real estate, commercial and
consumer loans, certain types of debt securities, and certain other assets. The
Bank may also establish service corporations that may engage in activities not
otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage. These investment powers are
subject to various limitations, including (a) a prohibition against the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories; (b) a limit of 400% of an association's capital on
the aggregate amount of loans secured by non-residential real estate property;
(c) a limit of 20% of an association's assets on commercial loans, with the
amount of commercial loans in excess of 10% of assets being limited to small
business loans; (d) a limit of 35% of an association's assets on the aggregate
amount of consumer loans and acquisitions of certain debt securities; (e) a
limit of 5% of assets on nonconforming loans (loans in excess of the specific
limitations of HOLA); and (f) a limit of the greater of 5% of assets or an
association's capital on certain construction loans made for the purpose of
financing what is or is expected to become residential property.
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, 1998, the Bank's limit
on loans to one borrower was $4.6 million. At March 31, 1998, the Bank's largest
aggregate amount of loans to one borrower was $4.2 million and the second
largest borrower had an aggregate balance of $4.0 million.
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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, 1998, the Bank
maintained approximately 81.88% 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 regulations require savings associations to
meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 3% of core capital to such adjusted total assets, and a
risk-based capital ratio requirement of 8% of core and supplementary capital to
total risk-based assets. In determining the amount of risk weighted assets for
purposes of the risk-based capital requirement, a savings association must
compute its risk-based assets by multiplying its assets and certain off balance
sheet items by riskweights, which range from 0% for cash and obligations issued
by the United States Government or its agencies to 100% for consumer and
commercial loans, as assigned by the OTS capital regulation based on the risks
OTS believes are inherent in the type of asset.
The OTS and the federal banking regulators have proposed amendments to
their minimum capital regulations to provide that the minimum leverage capital
ratio for a depository institution that has been assigned the highest composite
rating of 1 under the Uniform Financial Institutions Rating System will be 3%
and that the minimum leverage capital ratio for any other depository institution
will be 4%, unless a higher leverage capital ratio is warranted by the
particular circumstances or risk profile of the depository institution. Tangible
capital is defined, generally, as common stockholder's equity (including
retained earnings), certain noncumulative perpetual preferred stock and related
earnings, minority interests in equity accounts of fully consolidated
subsidiaries, less intangibles other than certain mortgage servicing rights and
investments in and loans to subsidiaries engaged in activities not permissible
for a national bank. Core capital is defined similarly to tangible capital, but
core capital also includes certain qualifying supervisory goodwill and certain
purchased credit card relationships. Supplementary capital currently includes
cumulative preferred stock, longterm perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, and
the allowance for loan and lease losses. The allowance for loan and lease losses
included in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets, and the amount of supplementary capital that may be
included as total capital cannot exceed the amount of core capital.
The OTS has adopted regulations to require a savings association to account
for interest rate risk when determining its compliance with the risk-based
capital requirement, a savings association with "above normal" interest rate
risk is required to deduct a portion of its total capital to account for any
"above normal" interest rate risk. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and
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offbalance sheet contracts) resulting from a hypothetical 2% increase or
decrease in market rates of interest, divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set forth
by the OTS. At the times when the 3 month Treasury bond equivalent yield falls
below 4%, an association may compute its interest rate risk on the basis of a
change equal to half of that Treasury rate rather than on the basis of 2%. A
savings association whose measured interest rate risk exposure exceeds 2% would
be considered to have "above normal" risk. The interest rate risk component is
an amount equal to half of the difference between the association's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's total
capital in calculating compliance with its risk based capital requirement. Any
required deduction for interest rate risk becomes effective on the last day of
the third quarter following the reporting date of the association's financial
data on which the interest rate risk was computed. The OTS has indefinitely
deferred the implementation of the interest rate risk component in the
computation of an institution's risk-based capital requirements. The OTS
continues to monitor the interest rate risk of individual institutions and
retains the right to impose additional capital requirements on individual
institutions.
At March 31, 1998, the Bank met each of its capital requirements. The table
below presents the Bank's regulatory capital as compared to the OTS regulatory
capital requirements at March 31, 1998:
CAPITAL
BANK REQUIREMENTS EXCESS CAPITAL
------- ------------ --------------
(IN THOUSANDS)
Tangible capital................................ $30,201 $ 6,562 $23,639
Core capital.................................... 30,249 13,124 17,125
Risk-based capital.............................. 31,731 15,856 15,875
A reconciliation between regulatory capital and GAAP capital at March 31,
1998 in the accompanying financial statements is presented below:
TANGIBLE CAPITAL CORE CAPITAL RISK BASED CAPITAL
----------------- ------------ ------------------
(IN THOUSANDS)
GAAP capital........................... 31,434 31,434 31,434
Unrealized loss on securities
available-for-sale, net.............. 13 13 13
General valuation allowances........... -- -- 1,522
Qualifying intangible assets........... 48 48
Goodwill............................... (1,246) (1,246) (1,246)
Excess of net deferred tax............. -- -- --
Assets required to be deducted......... -- -- (40)
------ ------ ------
Regulatory capital..................... 30,201 30,249 31,731
====== ====== ======
Minimum cap requirement................
Limitation on Capital Distributions. OTS regulations currently 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. At least 30-days written notice must be given to the
OTS of a proposed capital distribution by a savings association, and capital
distributions in excess of specified earnings or by certain institutions are
subject to approval by the OTS. An association that has capital in excess of all
fully phased in regulatory capital requirements before and after a proposed
capital distribution and that is not otherwise restricted in making capital
distributions, could, after prior notice but without the approval of the OTS,
make capital distributions during a calendar year equal to the greater of (a)
100% of its net earnings to date during the calendar year plus the amount that
would reduce by half its "surplus capital ratio" (the excess capital over its
fully phased in capital requirements) at the beginning of the calendar year, or
(b) 75% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior OTS approval. In addition, the OTS can
prohibit a proposed capital distribution, otherwise permissible under the
regulation, if the OTS
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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."
The OTS has proposed amendments of its capital distribution regulations to
reduce regulatory burdens on savings associations. If adopted as proposed,
certain savings associations will be permitted to pay capital distributions
within the amounts described above for Tier 1 institutions 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, will continue to have to file a
notice unless the specific capital distribution requires an application.
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 preceeding 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 average
liquidity ratio for the year ended March 31, 1998 was 12.26%, which exceeded the
applicable requirements. The Bank has never been subject to monetary penalties
for failure to meet its liquidity requirements.
Assessments. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a quarterly basis, is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported in
the association's latest quarterly Thrift Financial Report. During fiscal 1998,
the Bank paid an assessment of $122,000.
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 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 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.
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Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an
affiliate of the Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions. The OTS
regulations prohibit a savings association (a) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the BHC Act and (b) from purchasing the
securities of any affiliate other than a subsidiary. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings association and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings association's
capital and surplus. Extensions of credit to affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A, and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
association as those prevailing at the time for comparable transactions with
nonaffiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
nonaffiliated companies.
The Bank's authority to extend credit to its directors, executive officers,
and 10% shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the Federal Reserve Board thereunder. Among other things,
these provisions require that extensions of credit to insiders (a) be made on
terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features and (b) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the association's capital. In addition, extensions of credit in excess
of certain limits must be approved by the association's board of directors.
Enforcement. Under the Federal Deposit Insurance Act ("FDI Act"), the OTS
has primary enforcement responsibility over savings associations and has the
authority to bring enforcement action against all "institution affiliated
parties," including any controlling stockholder or any shareholder, attorney,
appraiser and accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other significant adverse effect on an insured savings association.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders, and
certain written agreements and conditions continue, up to $1 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 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
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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 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. 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.
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 new risk based assessment system
for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the new assessment system, which began in 1993,
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
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category (i.e., undercapitalized and substantial supervisory concern). The
Bank's annual assessment rate for the first half of 1998 was 0.00% 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. Until December
31, 1999, or such earlier date on which the last savings association ceases to
exist, the rate of assessment for BIF-assessable deposits shall be one-fifth of
the rate imposed on SAIF-assessable deposits. The annual rate of assessments on
SAIF-assessable deposits for the payments on the FICO bonds for the semi-annual
period beginning on January 1, 1997 was 0.0648%, for the quarterly period
beginning on October 1, 1997, the annual rate was 0.0622%, and the rate of
assessment for the period ended March 31, 1998 was 0.0622%.
The Funds Act also provides for the merger of the BIF and SAIF on January
1, 1999, with such merger being conditioned upon the prior elimination of the
thrift charter. The Funds Act required the Secretary of the Treasury to conduct
a study of relevant factors with respect to the development of a common charter
for all insured depository institutions and the abolition of separate charters
for banks and thrifts and to report the Secretary's conclusions and the findings
to the Congress. The Secretary of the Treasury has recommended that the separate
charter for thrifts be eliminated only if other legislation is adopted that
permits bank holding companies to engage in certain non-financial activities.
Absent legislation permitting such non-financial activity, the Secretary of the
Treasury recommended retention of the thrift charter. The Secretary of the
Treasury also recommended the merger of the BIF and the SAIF irrespective of
whether the thrift charter is eliminated. Other proposed legislation has been
introduced in Congress that would require thrift institutions to convert to bank
charters. However, the current version of bank modernization legislation, The
Financial Services Act of 1998, H.R. 10, which was passed by the U.S. House of
Representatives in May 1998 and is currently being considered by the U.S.
Senate, does not require thrift institutions to convert to bank charter.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Federal Home Loan Bank System. The Bank is a member of the FHLB, 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, is required to acquire and hold shares of capital stock in
the FHLB 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 or 1/20 of its advances (borrowing)
from the FHLB. The Bank was in compliance with this requirement with an
investment in the capital stock of the FHLB at March 31, 1998, of $5.8 million.
Any advances from a FHLB must be secured by specified types of collateral, and
all longterm 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 $358,000 for the twelve months ended March 31, 1998 and dividends of
$182,000 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.
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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
$47.8 million. The amount of aggregate transaction accounts in excess of $47.8
million are currently subject to a reserve ratio of 10%, which ratio the Federal
Reserve Board may adjust between 8% and 12%. The Federal Reserve Board
regulations currently exempt $4.7 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 noninterestbearing 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.
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, 1997.
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, 1998, 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
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AMTI can be offset by net operating loss carryovers. AMTI is also adjusted by
determining the tax treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of those items.
Thus, the Company's AMTI is increased by an amount equal to 75% of the amount by
which the Company's adjusted current earnings exceeds its AMTI (determined
without regard to this adjustment and prior to reduction for net operating
losses).
Although the corporate environmental tax of 0.12% of the excess of AMTI
(with certain modifications) over $2.0 million has expired, under current
Administration proposals, such tax will be retroactively reinstated for taxable
years beginning after December 31, 1997 and before January 2009.
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 fiscal years 1997 and 1998 was 10.755%
and 10.53%, respectively (including Metropolitan Commuter Transportation
District Surcharge) of net income. In general, the Holding Company is not be
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, except for Walter T. Bond and Guy Brea, who are
executive officers of the Bank, and as such, are deemed to be executive officers
of the Holding Company pursuant to SEC regulations.
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NAME AGE POSITION
---- --- --------
Thomas L. Clark, Jr. ..................... 54 President and Chief Executive Officer,
Director
Howard R. Dabney.......................... 55 Senior Vice President and Chief Lending
Officer
Raymond L. Bruce.......................... 46 Senior Vice President, Corporate Counsel
and Corporate Secretary
Walter T. Bond............................ 39 Vice President and Acting Chief Financial
Officer
Guy Brea.................................. 56 Vice President and Branch Operations
Coordinator
THOMAS L. CLARK, JR., is currently President and Chief Executive Officer, a
position he assumed on February 1, 1995. Mr. Clark is also a member of the
Bank's Board of Directors. Prior to assuming his current position, Mr. Clark was
employed by the New York State Banking Department from 1976 until 1995 and from
1987 until 1995, served as Deputy Superintendent of Banks for New York State
Banking Board. In addition, Mr. Clark serves on the Thrift Institutions Advisory
Panel of the Federal Reserve Bank of New York; as Chairman of the Community
Investment and Affordable Housing Committee of the Community Bankers of New York
State and Chairman of the American League of Financial Institutions, the
national trade association representing minority savings institutions, (based in
Washington, D.C.); Mr. Clark also serves on the Boards of Directors of the New
York City Partnership and Chamber of Commerce, Inc., and the New York City
Housing Partnership, and is a member of the Advisory Board of Small Business
Development Centers of New York State.
HOWARD R. DABNEY is Senior Vice President and Chief Lending Officer of the
Bank, formerly, Vice President/Loan Officer positions he has held since joining
the Bank in 1982. Mr. Dabney currently serves on the board of directors of the
Latimer Wood Economic Development Corporation and on the advisory board of
Bridge Street Community Development Center. He is a member of the Community
Bankers Association of New York State (Mortgages and Real Estate Committee),
Mortgage Bankers Association of America and Metropolitan Mortgage Officers
Society of New York.
RAYMOND L. BRUCE, ESQ. is Senior Vice President, Corporate Counsel and
Corporate Secretary, and oversees the Bank's litigation, contracts, compliance
and other legal concerns. Prior to joining Carver in April of 1995, Mr. Bruce
was an Assistant Counsel at the New York State Banking Department (from 1992 to
1995), which is responsible for regulating New York State-chartered banking
organizations. From 1988 to 1992, Mr. Bruce served as Counsel both to
Assemblyman Herman D. Farrell, Jr. (then Chairman to the Assembly Banks
Committee) and to the New York State Assembly Banks Committee. There, he was
responsible for the planning, development and management of New York State
legislation which addressed an assortment of critical issues in the banking
industry. Mr. Bruce is a member of the Banking Committee of the Association of
the Bar of the City of New York and a member of the Regulatory Committee of the
Community Bankers Association of New York State. In addition, he is an Advisor
to the Tioga-Carver Community Foundation.
WALTER T. BOND is Vice President and Acting Chief Financial Officer. Mr.
Bond joined the Bank in February 1993, as Assistant Vice President, Mortgage
Lender. Mr. Bond was assigned to the position of Investment Officer in November
1995 and promoted to his current position in September 1997. Mr. Bond is
Chairman of the Bank's Investment Committee and serves as the Company's Investor
Relations Officer. Mr. Bond is a member of the New York Society of Securities
Analyst and the Financial Managers Society.
GUY BREA is the Vice President and Branch Operations Coordinator. Mr. Brea
joined the Bank in December 1972 as a Management Trainee. Since 1972 he has
managed various branch offices of the Bank. Mr. Brea was promoted to Assistant
Vice President, Branch Coordinator in April 1981 and in that capacity has
overseen the acquisition of various branches, changes of systems and the
development of various new products and services. Mr. Brea also serves as the
Bank's security director and fraud prevention officer. Mr. Brea serves on the
Community Bankers' Association of the New York State Bank Operations Committee
and the Group IV, V, VI Depositor Service Committee.
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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, 1998.
LEASE NET BOOK
YEAR OWNED OR EXPIRATION VALUE AT
OPENED LEASED DATE MARCH 31, 1998
------ --------- ----------- --------------
(DOLLARS IN THOUSANDS)
MAIN OFFICE:
75 West 125th Street 1996 Owned -- $ 7,987
New York, New York
BRANCH OFFICES:
2815 Atlantic Avenue 1990 Owned -- 447
Brooklyn, New York
(East New York Office)
1281 Fulton Street 1989 Owned -- 1,399
Brooklyn, New York
(Bedford-Stuyvesant Office)
1009-1015 Nostrand Avenue 1975 Owned -- 694
Brooklyn, New York
(Crown Heights Office)
261 8th Avenue 1964 Leased 10/31/04 --
New York, New York
(Chelsea Office)
115-02 Merrick Boulevard 1982 Leased 02/28/11 --
Jamaica, New York
(St. Albans Office)
302 Nassau Road 1985 Leased 06/30/05
Roosevelt, New York
(Roosevelt Office)
LOAN CENTER 1997 Leased 11/30/97
49 Gramatan Ave.
Mt. Vernon, New York
(Mt. Vernon Loan Center)
-------
Total $10,527
=======
The net book value of Carver's investment in premises and equipment totaled
approximately $11.5 million at March 31, 1998.
ITEM 3. LEGAL PROCEEDINGS
From time to time, Carver Federal is a party to various legal proceedings
incident to its business. At March 31, 1998, except as set forth below, there
were no legal proceedings to which the Bank 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 January 2, 1996, the United States District Court for the Southern
District of New York dismissed the class action encaptioned Dougherty v. Carver
Federal Savings Bank for lack of subject matter jurisdiction. The class action
alleged that the offering circular, used by Carver to sell its stock in its
public offering, contained material misstatements and omissions. Further, the
complaint alleged that the Bank's shares were not appraised by an independent
appraiser. By separate order on the same date, the court made its ruling
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applicable to Gomberg v. Carver Federal Savings Bank and Uminer v. Carver
Federal Savings Bank, two other class actions filed in the Southern District of
New York which asserted claims essentially identical to those asserted in the
Dougherty suit.
The plaintiffs filed a consolidated notice of appeal on January 29, 1996
with the United States Court of Appeals for the Second Circuit. In April 1997
the Circuit Court concluded that the District had subject matter jurisdiction
over the plaintiffs' complaint, the Circuit Court reversed and remanded the case
back to the District Court. On July 10, 1997, upon request of all counsel, the
trial judge directed that discovery be completed by March 31, 1998 and that the
case be ready for trial in May of 1998. As of the date hereof, no trial date has
been set by the court. Carver believes that the allegations made in this action
are without merit and intends to aggressively defend its interest with respect
to this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 1998.
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 30, 1998, there were
2,314,275 shares of the Common Stock outstanding, held by approximately 1,200
holders of record. The following table shows the high and low per share sales
prices of the Common Stock.
CLOSING SALES PRICE QUARTER ENDED (1)
HIGH LOW
---- ---
Year Ended March 31, 1998
First Quarter................. $11 3/4 $ 9 5/8
Second Quarter................ $12 5/8 $12 3/8
Third Quarter................. $17 5/8 $12 3/4
Fourth Quarter................ $15 1/8 $14 1/4
HIGH LOW
---- ---
Year Ended March 31, 1997
First Quarter................. $ 9 $ 7 5/8
Second Quarter................ $ 9 $ 7 3/4
Third Quarter................. $ 8 5/8 $ 7 3/4
Fourth Quarter................ $10 5/8 $ 8 1/4
- ---------------
(1) Prior to October 18, 1996, the prices indicated are for the common stock of
Carver Federal Savings Bank. On that date, the Holding Company became the
parent company of the Bank and each outstanding share of the Bank's common
stock was converted into one share of the Holding Company's common stock.
The Board of Directors declared Carver's first cash dividend of $0.05 (five
cents) per share on June 17, 1997 for stockholders of record on July 2, 1997.
The Board has not determined to establish a regular dividend at this time, but
will review the Company's position after the quarter ended December 31, 1997,
for the possible declaration of additional dividends. The timing and amount of
future dividends will be within the discretion of Carver's Board of Directors
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 of
Directors.
The Bank will not be permitted to pay dividends to the Holding Company on
its capital stock if its stockholders' equity would be reduced below applicable
regulatory capital requirements or the amount required to be maintained for the
liquidation account. The OTS capital distribution regulations applicable to
savings institutions (such as the Bank) that meet their regulatory capital
requirements, generally limit dividend payments in any year to the greater of
(i) 100% of year-to-date net income plus an amount that
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38
would reduce surplus capital by one-half or (ii) 75% of net income for the most
recent four quarters. Surplus capital is the excess of actual capital at the
beginning of the year over the institution's minimum regulatory capital
requirement. 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 on the net proceeds retained by the
Holding Company and earnings thereon and may 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,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
FINANCIAL CONDITION DATA:
TOTAL AMOUNT OF:
Assets.............................. $437,458 $423,614 $367,657 $367,962 $308,507
Loans, net.......................... 274,954 197,918 82,608 48,460 51,020
Mortgage-backed securities.......... 119,523 110,853 131,105 181,134 153,843
Investment securities............... 0 1,675 8,937 18,035 12,018
Securities available for sale(1).... 28,407 83,863 114,328 93,328 71,572
Excess of cost over assets
acquired.......................... 1,246 1,456 1,669 1,899 2,141
Cash and cash equivalents........... 15,120 4,231 10,026 11,818 9,053
Deposits............................ 274,894 266,471 256,952 248,446 252,474
Borrowed funds...................... 124,946 121,101 73,948 82,318 39,930
Stockholders' equity................ 35,534 33,984 34,765 34,801 14,170
NUMBER OF:
Deposit accounts.................... 51,550 49,142 45,815 44,324 44,593
Offices............................. 7 7 8 8 8
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YEAR ENDED MARCH 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ------------- ------------- ------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Interest income.............. $ 27,828 $ 22,847 $ 23,529 $ 19,750 $ 17,464
Interest expense............. 15,019 12,483 13,594 10,532 10,167
---------- ---------- ---------- ---------- ---------
Net interest income.......... 12,809 10,364 9,935 9,218 7,297
Provision for loan losses.... 1,260 1,690 131 334 19
---------- ---------- ---------- ---------- ---------
Net interest income after
provision for loan
losses..................... 11,549 8,764 9,804 8,884 7,278
---------- ---------- ---------- ---------- ---------
Non-interest income:
Gain (loss) on sales of
asset...................... 188 (927) -- -- 1,127
Other........................ 2,163 845 608 576 565
---------- ---------- ---------- ---------- ---------
Total non-interest income.... 2,351 113 608 576 1,692
---------- ---------- ---------- ---------- ---------
Non-interest expenses:
Loss on sale of foreclosed
real estate................ 0 38 77 34 159
Other........................ 11,651 11,764 8,976 7,907 7,690
---------- ---------- ---------- ---------- ---------
Total non-interest expense... 11,651 11,802 9,053 7,941 7,849
---------- ---------- ---------- ---------- ---------
Income loss before income
taxes, Extraordinary income
and cumulative effect of
change in accounting
principle.................. 2,249 (3,015) 1,359 1,519 1,121
---------- ---------- ---------- ---------- ---------
Income taxes................. (1,203) (1,275) 606 674 613
---------- ---------- ---------- ---------- ---------
Income loss before
extraordinary income and
cumulative effect of change
in accounting principle.... 1,046 (1,740) 753 845 508
Extraordinary income, net of
income taxes............... -- -- -- -- 323
---------- ---------- ---------- ---------- ---------
Income before cumulative
effect of change in
accounting principle....... 1,046 (1,740) 753 845 831
Cumulative effect of change
in accounting principle.... -- -- -- -- 252
---------- ---------- ---------- ---------- ---------
Net income (loss)............ $ 1,046 $ (1,740) $ 753 $ 845 $ 1,083
========== ========== ========== ========== =========
Net (loss) income per common
share...................... 0.48 (0.80) $ 0.35 $ 0.40(1) $ NA
Weighted average number of
common shares
outstanding................ 2,187,619 2,156,346 2,169,276 2,136,615 NA
- ---------------
(1) Historical net income per common share for fiscal 1995 is based on net
income from October 24, 1994 (the date of the Bank's conversion to stock
form) to March 31, 1995 was $0.17.24, 1994 (the date of the Bank's
conversion to stock form) to March 31, 1995 was $0.17.
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AT OR FOR THE YEAR ENDED MARCH 31,
-----------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
KEY OPERATING RATIOS:
Return on average assets(1)(2)..................... .25% (0.47)% 0.21% 0.25% 0.35%
Return on average equity(2)(3)..................... 3.00 (5.00) 2.16 3.61 7.88
Interest rate spread(4)............................ 3.14 2.90 2.57 2.74 2.38
Net interest margin(5)............................. 3.27 3.04 2.85 2.91 2.43
Operating expenses to average assets(2)(6)......... 2.80 3.22 2.48 2.38 2.46
Equity-to-assets(7)................................ 8.12 8.03 9.45 9.46 4.59
Efficiency Ratio(2)(8)............................. 76.85 96.78 85.87 81.08 87.32
Average interest-earning assets to average
Interest-bearing liabilities..................... 1.03x 1.04x 1.07x 1.05x 1.02x
ASSET QUALITY RATIOS:
Non-performing assets to total assets(9)........... 1.58% 1.52% 0.97% 0.56% 1.24%
Non-accrual loans and accruing loans 90 days or
more past due to total loans..................... 2.47 3.11 3.85 3.39 6.73
Allowance for loan losses to total loans........... 1.11 1.09 1.42 2.10 2.35
Allowance for loan losses to non-performing
loans............................................ 45.30 35.06 37.05 61.79 34.95
Allowance for loan losses to non-accrual loans..... 56.34 68.38 59.29 70.17 57.56
Net loan charge-offs to average loans.............. .15 0.69 0.00 1.06 0.65
- ---------------
(1) Net income divided by average total assets.
(2) Excluding the SAIF assessment the return on average assets, return on
average equity, operating expenses to average assets and net interest income
to operating expenses for the fiscal year ended March 31, 1998 were
(0.022%), (2.29%), 2.77% and 1.02x, 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. Carver has
undertaken a restructuring of its balance sheet and is now placing primary
emphasis on its whole loan portfolio through the origination of loans, as well
as the purchase of whole loans. As a result of this effort, the loan portfolio
has substantially increased as a percentage of total assets. In addition, Carver
is placing increased emphasis on the origination of consumer loans. Therefore,
Carver's future earnings will be derived from direct lending and purchase
activities replacing investing in securities. During fiscal 1998, Carver's net
income was also increased by the generation of non-interest income, such as loan
fees and service charges. In addition, net income is affected by the level of
provision for loan losses, as well as operating expenses.
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The operations of the Bank and the entire thrift industry 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
nationwide.
RECAPITALIZATION OF THE SAVINGS ASSOCIATION INSURANCE FUND (SAIF)
During the second quarter of fiscal 1997, Carver experienced a one time
pre-tax assessment of $1.6 million for recapitalization of the SAIF pursuant to
legislation which was signed into law in September of 1996. The legislation to
recapitalize the SAIF was anticipated by the industry and reduced Carver
Federal's deposit insurance premium from 23 basis points, on insured deposits of
approximately $248.4 million, to 6.5 basis points effective January 1, 1997.
As a result of the legislation, Carver's deposit insurance premium
decreased by $356,000 or 73.94% to $126,000 for the twelve month period ended
March 31, 1998 ("fiscal 1998") compared to $482,000 for the twelve month period
ended March 31, 1997 ("fiscal 1997").
RESTRUCTURING OF BALANCE SHEET
During fiscal 1998, Carver continued to pursue the strategy designed by the
Board of Directors in December 1996 to reallocate the Company's assets by
increasing loans and decreasing the Company's portfolio of investment securities
(the "Restructuring").
As a result of the Restructuring, the Company's loan portfolio increased by
140% from $82.6 million at March 31, 1996, to $197.9 million at March 31, 1997,
an increase of $115.3 million. During fiscal 1998, the Company continued to
reallocate assets into loans. At March 31, 1998 the loan portfolio totaled
$275.0 million or 62.85% of total assets. Carver added approximately $1.6
million to its provisions for loan losses during the fourth quarter of fiscal
1997 and an additional $1.3 million during fiscal 1998 in order to maintain the
allowance for loan losses at an adequate level consistent with the Bank's
policies. At March 31, 1998, the allowance for loan losses as a percentage of
total loans was 1.11% as compared to 1.09% at March 31, 1997. See "Comparison of
Operating Results for the Years Ended March 31, 1998 and 1997 -- Provision for
Loan Losses."
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 and shorter-term mortgage-backed 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. During fiscal year 1998, loan
portfolio increased by $77.0 million, or 38.92%. The growth in the loan
portfolio was funded primarily by matched funding from FHLB advances and reverse
repurchase agreements. See "-- Restructuring of Balance Sheet."
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
40
42
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 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 exceed 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 5.54% of total rate-sensitive assets at March 31, 1998, as
a result of which its net interest income could be adversely affected by rising
interest rates, and positively affected by falling interest rates.
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43
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, 1998. 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.
THREE OVER ONE
OR FOUR TO THROUGH OVER THREE OVER FIVE OVER
LESS TWELVE THREE THROUGH THROUGH TEN
MONTHS MONTHS MONTHS YEARS FIVE YEARS TEN YEARS YEARS TOTAL
- ------ ------- -------- -------- ---------- --------- ------- --------
(DOLLARS IN THOUSANDS)
RATE-SENSITIVE ASSETS:
Loans................................. $79,737 $ 57,740 $ 46,742 $ 38,493 $ 32,995 $19,247 $274,954
Federal Funds Sold.................... $ 3,000 -- -- -- -- -- 3,000
Investment Securities(1).............. -- -- -- -- -- -- --
Mortgage-Backed Securities............ -- 6,506 -- -- 11,585 101,432 119,523
Total................................. 82,737 64,246 46,742 38,493 44,580 120,679 397,477
RATE-SENSITIVE LIABILITIES:
Deposits.............................. 30,238 46,731 57,728 38,486 60,477 41,234 274,894
Borrowings............................ 27,700 64,320 31,000 373 -- 369 123,762
Other Borrowings...................... -- -- -- -- 1,184 -- 1,184
Total................................. 57,938 111,051 88,728 38,859 61,661 41,603 399,840
Interest Sensitivity Gap.............. $24,799 $(46,805) $(41,986) $ (366) $(17,081) $79,076 $ (2,363)
Cumulative Interest Sensitivity Gap... $24,799 $(22,006) $(63,992) $(64,358) $(81,439) $(2,363) --
Ratio of Cumulative Gap to Total Rate-
Sensitive Assets.................... 6.24% (5.54)% (16.10)% (16.19)% (20.49)% (0.59)%
- ---------------
(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 as of December 31, 1995. 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
----------------------------------
COUPON RATE 30-YEAR 15-YEAR 5-YEAR BALLOON
----------- ------- ------- --------------
6.50%.................................................. 9.00% 8.00% 13.00%
7.00................................................... 9.00 9.00 16.00
7.50................................................... 11.00 11.00 19.00
8.00................................................... 13.00 14.00 25.00
8.50................................................... 16.00 -- --
9.00................................................... 20.00 -- --
9.50................................................... 25.00 -- --
10.00.................................................. 28.00 -- --
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 and 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.
42
44
Certain shortcomings are inherent in the method of analysis presented in
the table above. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in the market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, generally have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayments and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Additionally, an
increased credit risk may result as the ability of many borrowers to service
their debt may decrease in the event of an interest rate increase. Virtually all
of the adjustable-rate loans in Carver's portfolio contain conditions which
restrict the periodic change in interest rate.
The ratio of cumulative gap to total rate sensitivity assets was negative
5.54% at March 31, 1998 compared to negative 9.95% at March 31, 1997. Adjustable
rate assets represented 65.96% of the Bank's total interest sensitive assets at
March 31, 1998.
NPV Analysis. As part of its efforts to maximize net interest income and
manage the risks associated with changing interest rates, management uses the
"market value of portfolio equity" ("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, 1998, 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 interest rate risk exposure lies at the Bank
level, management believes the table below also accurately reflects an analysis
of the Company's IRR.
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
NET PORTFOLIO VALUE NPV AS % OF PV OF ASSETS
------------------------------ ------------------------
CHANGE IN RATE $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
- -------------- -------- -------- -------- ----------- ----------
+400 bp 38,137 (10,025) (21)% 8.85 (189) bp
+300 bp 42,534 (5,627) (12) 9.73 (101) bp
+200 bp 46,036 (2,125) (4) 10.41 (34) bp
+100 bp 48,128 (33) -- 10.78 4 bp
-- bp 48,161 10.74
(100) bp 48,634 473 +1 10.79 5 bp
(200) bp 50,044 1,882 +4 11.01 27 bp
(300) bp 51,695 3,534 +7 11.28 54 bp
(400) bp 54,299 6,138 +13 11.73 99 bp
3/31/98 12/31/97 3/31/97
------- -------- -------
RISK MEASURES: 200 BP RATE SHOCK
Pre-Shock NPV Ratio: NPV as % of PV of Assets............... 10.74% 9.43% 9.76%
Post-Shock NPV Ratio........................................ 10.41 9.26 7.36
Sensitivity Measure; Decline in NPV Ratio................... 34 bp 17 bp 240 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
43
45
Table presented assumes that the composition of the Company's interest sensitive
assets and liabilities existing at the beginning of a period remains constant
over the period being measured and also assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or repricing of specific assets and liabilities.
Accordingly, although the NPV Table provides an indication of the Company's
interest rate risk exposure at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of changes
in market interest rates on the Company's net interest income and will differ
from actual results.
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to Carver's
average interest-earning assets and average interest-bearing liabilities and
reflects the average yield on assets and the average cost of liabilities for the
years indicated. Such yields and costs are derived by dividing income or expense
by the average balances of assets or liabilities, respectively, for the periods
shown. Average balances are derived from average month-end balances, except for
federal funds which are derived from daily balances. Management does not believe
that the use of average monthly balances instead of average daily balances on
all other accounts has caused any material difference in the information
presented.
The table also presents information for the years indicated with respect to
the difference between the weighted average yield earned on interest-earning
assets and the weighted average rate paid on interest-bearing liabilities, or
"interest rate spread," which savings institutions have traditionally used as an
indicator of profitability. Another indicator of an institution's net interest
income is its "net interest margin," which is its net interest income divided by
the average balance of interest-earning assets. Net interest income is affected
by the interest rate spread and by the relative amounts of interest-earning
assets and interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income.
44
46
AT MARCH 31, YEAR ENDED MARCH 31,
------------------ -------------------------------------------------------------
1998 1998 1997
------------------ ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
YIELD AVERAGE YIELD AVERAGE YIELD
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS:
Loans(1)............................. $274,954 7.54% $242,948 $18,311 7.54% $ 94,346 7,844 8.31%
Investment Securities(2)............. 5,795 7.04 12,117 671 5.54 85,040 4,742 5.25
Mortgage-Backed Securities(3)........ 119,523 6.35 130,927 8,523 6.51 156,454 9,979 6.38
Federal Funds Sold................... 3,000 5.50 5,735 323 5.63 5,202 282 5.42
-------- ---- -------- ------- ----- -------- ------- ------
Total Interest-earning assets........ 403,272 7.16% 391,727 27,828 7.10 341,042 22,847 6.70
-------
Non Interest Earning Assets.......... 34,186 23,746 25,453
-------- -------- --------
Total Assets......................... $437,458 $415,473 $366,495
======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits
DDA................................ $ 9,687 0.00% $ 8,625 $ 0 0.00% $ 4,774 $ -- $ --
Now.................................. 19,230 2.23 18,725 354 1.89 19,909 311 1.56
Savings and Clubs.................... 145,448 2.50 144,466 3,601 2.49 142,410 3,542 2.49
Money Market Accounts................ 21,496 3.22 21,514 692 3.22 20,398 658 3.23
Certificate of deposits.............. 79,033 5.24 76,990 3,949 5.13 74,583 3,844 5.15
-------- ---- -------- ------- ----- -------- ------- ------
Total deposits....................... 274,894 3.24 270,320 8,596 3.18 262,074 8,355 3.19
Borrowed money....................... 124,946 5.87% 108,970 6,423 5.89 66,403 4,128 6.22
-------- ---- -------- ------- ----- -------- ------- ------
Total interest-bearing Liabilities... 399,840 4.06% 379,290 15,019 3.96 328,477 12,483 3.80
------- -------
Non-interest-bearing Liabilities..... 2,083 1,310 3,239
-------- -------- --------
Total liabilities.................... 401,923 380,600 331,716
Stockholders' equity................. 35,535 34,873 34,779
-------- -------- --------
Total liabilities and Stockholders'
equity............................. $437,458 $415,473 366,495
======== ======== ========
Net interest income.................. $12,809 $10,364
======= =======
Interest rate spread................. 3.10% 3.14% 2.90%
==== ===== ======
Net interest margin.................. 3.27% 3.04%
===== ======
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................ 1.03x 1.04x
===== ======
YEAR ENDED MARCH 31,
-----------------------------
1996
-----------------------------
AVERAGE
AVERAGE YIELD
BALANCE INTEREST COST
-------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS:
Loans(1)............................. $ 58,136 $ 4,800 8.26%
Investment Securities(2)............. 91,639 5,807 6.34
Mortgage-Backed Securities(3)........ 188,136 12,217 6.49
Federal Funds Sold................... 11,949 705 5.90
-------- ------- -----
Total Interest-earning assets........ 349,860 23,529 6.73
-------
Non Interest Earning Assets.......... 13,977
--------
Total Assets......................... $363,837
========
INTEREST-BEARING LIABILITIES:
Deposits
DDA................................ $ 4,761 $ -- $ --
Now.................................. 15,539 314 2.02
Savings and Clubs.................... 140,204 3,507 2.50
Money Market Accounts................ 18,770 599 3.19
Certificate of deposits.............. 74,060 3,970 5.36
-------- ------- -----
Total deposits....................... 253,334 8,390 3.31
Borrowed money....................... 73,253 5,204 7.10
-------- ------- -----
Total interest-bearing Liabilities... 326,587 13,594 4.16
-------
Non-interest-bearing Liabilities..... 2,230
--------
Total liabilities.................... 328,817
Stockholders' equity................. 35,020
--------
Total liabilities and Stockholders'
equity............................. $363,837
========
Net interest income.................. $ 9,935
=======
Interest rate spread................. 2.57%
=====
Net interest margin.................. 2.85%
=====
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................ 1.07x
=====
- ---------------
(1) Includes non-accrual loans
(2) Includes FHLB stock and fair value of investments available for sale of $5.8
million at March 31, 1998.
(3) Includes fair value of mortgage-backed securities available for sale of 28.4
million at March 31, 1998.
45
47
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,
--------------------------------------------------------
1998 VS. 1997 1997 VS. 1996
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
--------------------------- -------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ----- ------- ------ ----- ------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans............................... $11,201 $(734) $10,468 $3,013 $ 31 $3,044
Investment securities(1).............. (4,040) (34) (4,074) (335) (730) (1,065)
Mortgage-backed securities(1)....... (1,674) 219 (1,455)
Securities.......................... -- -- -- (2,024) (214) (2,238)
Federal funds sold.................... 30 11 41 (441) 18 (423)
------- ----- ------- ------ ----- ------
Total interest-earning
assets.................... 5,517 (538) 4,979 213 (895) (682)
------- ----- ------- ------ ----- ------
Interest-bearing liabilities:
NOWs................................ (22) 68 45 4 (7) (3)
Savings and Clubs................... 52 0 52 49 (14) 35
Money Market Accounts............... 36 (2) 34 66 (7) 59
Certificate of Deposits............. 123 (15) 109 (92) 36 (56)
------- ----- ------- ------ ----- ------
Total Deposits.............. 189 51 239 27 8 35
Borrowed money...................... 2,507 (212) 2,295 638 438 1,076
------- ----- ------- ------ ----- ------
Total interest-bearing
liabilities............... 2,696 (162) 2,534 665 446 1,111
------- ----- ------- ------ ----- ------
Net change in net interest income..... $ 2,821 $(376) $ 2,445 $ 878 $(449) $ 429
======= ===== ======= ====== ===== ======
- ---------------
(1) Includes securities available for sale.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND 1997
At March 31, 1998 total assets increased by $13.8 million, or 3.27% to
$437.5 million compared to $423.6 million at March 31, 1997. The increase in
total assets was primarily attributable to increases in cash and equivalents,
loans receivable net, and other assets which include accounts receivable, loan
clearing accounts, offset in part by decreases in securities available for sale
and mortgage-backed securities ("MBS") held to maturity. Securities held as
available for sale decreased by $55.5 million, or 66.14%, to $28.4 million at
March 31, 1998 compared to $83.9 million at March 31, 1997. The decrease was
primarily due to the sale of $49.0 million of mutual funds, the maturity of
investment securities, and the principal repayments on MBS securities held as
available for sale. The balance of this portfolio at the end of fiscal 1998
consisted solely of mortgage-backed securities held as available for sale.
Mortgage-backed securities held to maturity decreased by $19.7 million, or
17.8%, to $91.1 million at March 31, 1998, from $110.9 million at March 31,
1997, primarily due to principal repayments. Investment securities held to
maturity decreased by $1.7 million due to the maturation of such securities; at
March 31, 1998 the Bank held no securities in this category. Carver's loans
receivable at March 31, 1998 increased by $77.0 million or 38.92% to $275.0
million compared to $197.9 million at March 31, 1997. In fiscal 1998, Carver
Federal purchased $80.2 million of one- to four-
46
48
family mortgage loans. These shifts in the Company's balance sheet reflect the
ongoing Restructuring. See "Restructuring of Balance Sheet."
Carver's total liabilities increased by $12.3 million, or 3.16%, to $401.9
million at March 31, 1998 compared to $389.6 million at March 31, 1997. The
increase was due to a $8.4 million or 3.16% increase in total deposits coupled
with a $3.8 million or 3.17% increase in total borrowings. At March 31, 1998,
the Bank's Federal Home Loan Bank of New York ("FHLB") advances decreased by
$8.7 million, or 19.07%, to $36.7 million, compared to $45.4 million at March
31, 1997. At March 31, 1998 securities sold under agreements to repurchase
("reverse repurchases") increased $12.7 million or 17.06%, to $87.0 million
compared to $74.3 million at March 31, 1997. The Company reduced its FHLB
advances and increased reverse repurchases to reduce the cost of borrowings.
Carver used the additional borrowings to fund loan originations and loan
purchases. During fiscal 1998, deposits increased from $266.5 million to $274.9
million primarily due to interest credited to depositors.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
Net Income (Loss)
The Company reported net income for the fiscal year ended March 31, 1998 of
$1.0 million or $.48 per share, compared to a net loss of $1.7 million or $.80
per share for the fiscal year ended March 31, 1997.
Earnings for fiscal 1997 were adversely affected by three unusual events.
During the second quarter of fiscal 1997, Carver experienced a one time pre-tax
assessment of $1.6 million for the recapitalization of the Savings Association
Insurance Fund ("SAIF") pursuant to legislation which was enacted in September
of 1996. During the fourth quarter of fiscal 1997, Carver experienced a one time
pre-tax charge of $1.0 million as a result of the disposition of approximately
$72 million of money market rate investment securities, or mutual funds.
Carver's operating results for the year were also impacted by increases in net
interest income, provision for loan losses, and non-interest expense.
Interest Income
Interest income increased by $5.0 million or 21.80% to $27.8 million for
the twelve months ended March 31, 1998 compared to $22.8 million for the twelve
months ended March 31, 1997. The increase in interest income was primarily
attributable to a $50.7 million or 14.86% increase in average balance of
interest earning assets to $391.7 million for the twelve months ended March 31,
1998 compared to $341.0 million for twelve months ended March 31, 1997, coupled
with a 40 basis point increase in the yield on average interest earning assets
to 7.10% the twelve months ended March 31, 1998 compared to 6.70% for the same
period last year.
The growth in total interest earning assets was concentrated interest
income received from loans. Interest income on loans increased by $10.5 million,
or 133.45%, to $18.3 million for the twelve months ended March 31, 1998 compared
to $7.8 million for the same period last year. The increase in interest income
from loans reflects a $148.8 million or 157.51% increase in the average balance
of loans to $243.0 million at March 31, 1998 compared to $94.3 million at March
31, 1997 was partially offset by a 77 basis point decrease from 8.31% to 7.54%
in the average yield on loans due to lower market rates of interest. Interest
income on mortgage-backed securities held to maturity and MBS available for sale
decreased by $1.5 million or 14.59% to $8.5 million for the twelve months ended
March 31, 1998 compared to $10.0 million for the same period last year
reflecting a decrease of $25.5 million in the average balance of total MBS and a
three basis point decrease in the average yield on MBS. Interest income on
investment securities decreased by approximately $4.1 million or 85.84% to
$671,000 for the twelve months ended March 31, 1998 compared to $4.4 million for
the same period last year. The decrease in interest income on investment
securities is primarily due to $72.9 million or 85.75% decrease in the average
balance of investment securities to $12.1 million for the twelve months ended
March 31, 1998 compared to $85.0 million for the same period last year. The
declines in the average balances of investment securities and MBS reflect the
Company's strategy to shift assets into higher yielding loans.
47
49
Interest Expense.
Total interest expense increased by $2.5 million or 20.32% to $15.0 million
for the twelve months ended March 31, 1998 compared to $12.5 million for the
same period last year. The increase in interest expense reflects a $50.8 million
or 15.47% increase in the average balance of interest bearing liabilities
coupled with a 16 basis point increase in the average cost of such liabilities.
This increase reflects the use of borrowings primarily to fund the origination
and purchase of loans.
Interest expense on deposits increased by $241,000 or 2.89% to $8.6 million
for the twelve months ended March 31, 1998 compared to $8.4 million for the same
period last year primarily due to an $8.2 million or 3.15% increase in the
average balance of deposits to $270.3 million, offset in part by a 1 basis point
decrease in the cost of deposits.
Interest expense on borrowings increased by $2.3 million or 55.60% to $6.4
million for the twelve months ended March 31, 1998 compared to $4.1 million for
the same period last year. The increase in interest expense on borrowings
reflects a $42.6 million or 64.10% increase in the average balance of borrowings
to $109.0 for the twelve months ended March 31, 1998 compared to $66.4 million
for the same period last year partially offset by a 33 basis point decrease in
the average cost of borrowings from 6.22% to 5.89%.
Net Interest Income.
Net interest income before provision for loan losses for the year ended
March 31, 1998, increased $2.4 million, or 23.59%, to $12.8 million compared to
$10.4 million for the same period last year. The increase was primarily
attributable to a 24 basis point increase in the Company's interest rate spread
for the twelve months ended March 31, 1998 to 3.14 % from 2.90%, coupled with a
$50.7 million increase in the balance of average interest earning assets offset
in part by a $50.8 million increase in the average balance of interest bearing
liabilities. The Company's net interest margin increased by 23 basis points to
3.27 % from 3.04%, however, average interest-earning assets to interest-bearing
liabilities decreased to 1.03x for the twelve months 1998, from 1.04x for the
same period last year.
Provision for Loan Losses.
The provision for loan losses decreased by $430,000 to $1.3 million, for
the year ended March 31, 1998, from $1.7 million for the year ended March 31,
1997. 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. Non performing loans increased from $6.4 million at March 31, 1997
to $6.8 million at March 31, 1998 and net charge-offs decreased from $649,000 to
$368,000 over the same period. The net effect of the increased provision and the
charge-offs for fiscal 1998 was an increase in the allowance for loan losses
from $2.2 million at March 31, 1997, to $3.1 million at March 31, 1998. The
allowance for loan losses equaled 1.11% of the gross loan portfolio at March 31,
1998 compared 1.09% at March 31, 1997.
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 by $2.2 million to $2.4 million for the twelve
month period ended March 31, 1998 compared to $113,000 the twelve month period
ended March 31, 1997. Non interest income for the period ended March 31, 1997
was reduced by approximately $927,000 as the result of a loss on the sale of
securities related to the Restructuring. Non interest income increased by $1.3
million or 126.06% for the twelve month period ended March 31, 1998 compared to
the same period last year before posting the loss on the sale of securities. The
increase in non interest income reflects a gain of $184,000 on the sale of
securities held as available for sale during the fourth quarter combined with an
increase of $2.1 million in other income which consist of fees for banking
services and products.
48
50
Non-Interest Expense.
Non interest expense for the twelve month period ended March 31, 1998 was
$11.7 million. Non-interest expense for fiscal 1997, contained a one-time
pre-tax assessment of $1.6 million for the recapitalization of SAIF, pursuant to
the Funds Act. Excluding the SAIF assessment, total non-interest expense would
have been $10.2 million for fiscal 1997. Non interest expense increased by $1.5
million or 14.71% for the twelve month period ended March 31, 1998 compared to
the same period last year before posting the SAIF assessment. During the twelve
month period ended March 31, 1998 the Company continued to invest substantially
in improving its infrastructure. These investments encompassed upgrading
technology, increasing staff and expanding marketing efforts. These investments
increased operating expenses for the fiscal year 1998. Salaries and employee
benefits for fiscal year 1998 increased by $694,000, or 17.17%, to $4.7 million
from $4.0 million for fiscal 1997. This increase was primarily due to a general
increase in staff, incentive compensation and ESOP expense. Equipment expense
for fiscal 1998 increased by $167,000, or 15.35%, to $1.3 million from $1.1
million in fiscal 1997, reflecting the increased depreciation and maintenance
cost for new furniture, fixtures and computers for Carver's headquarters and
certain branches. Legal expenses increased by $214,000 or 136.54% to $371,000
for fiscal 1998 compared to $157,000 for fiscal 1997. Bank charges increased by
$74,000 or 21.67% to $415,000 for fiscal 1998 compared to $341,000 for fiscal
1997. These increases in non-interest expenses were offset in part by a $356,000
or 73.94% decrease in deposit insurance premiums to $135,000 for fiscal 1998
compared to $482,000 for fiscal 1997.
Income Tax Expense.
Income tax expense totaled $1.2 million for fiscal year 1998, compared to a
benefit of $1.3 million for fiscal year 1997. The Company's effective tax rates
were 45.7% and 42.3% for the years then ended March 31, 1998 and 1997,
respectively.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND 1996
Carver's total assets increased by $56.0 million, or 15.23%, from $367.6
million at March 31, 1996 to $423.6 million at March 31, 1997. The increase in
assets was primarily due to the restructuring of the investment and loan
portfolios and leveraging the Company's balance sheet. Carver's portfolio of
securities available for sale decreased by $30.5 million, or 26.68%, to $83.8
million at March 31, 1997, from $114.3 million at March 31, 1996. The reason for
this significant change in the portfolio was the sale of the Company's portfolio
of mutual funds (which was included in securities available for sale), in
accordance with the Company's restructuring program. Accordingly the balance of
this portfolio at year end consisted of mortgage-backed securities available for
sale. Mortgage-backed securities held to maturity decreased by $20.3 million, or
15.48%, to $110.8 million at March 31, 1997, from $131.1 million at March 31,
1996, primarily due to principal repayments. Investment securities held to
maturity decreased by $7.3 million, or 82.02%, to $1.6 million at March 31,
1997, from $8.9 million at March 31, 1996. This decrease in investment
securities was due primarily to the call back of certain bonds totaling $7.0
million. Carver's loans receivable increased to $197.9 million at March 31,
1997, as compared to $82.6 million at March 31, 1996. In fiscal year 1997,
Carver Federal purchased $83.0 million of one- to four-family mortgage loans.
See "Restructuring of Balance Sheet."
Carver's total liabilities increased by $56.8 million, or 17.07%, from
$332.8 million at March 31, 1996, to $389.6 million at March 31, 1997, as a
result of an increase in borrowings as well as increased deposits. At March 31,
1997, the Bank's FHLB advances were $45.4 million, an increase of $20.0 million,
or 78.74%, as compared to advances of $25.4 million at March 31, 1996.
Securities sold under agreements to repurchase increased $27.3 million, or
58.09%, to $74.3 million at March 31, 1997, from $47.0 million at March 31,
1996. Carver used the proceeds from the principal payments of securities to
decrease its borrowings and thereby reduce the cost of funds.
49
51
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
Net Income (Loss).
For fiscal 1997, the Company experienced a net loss of $1.7 million, as
compared to net income of $753,000 for the year ended March 31, 1996. Earnings
for fiscal 1997 were adversely affected by three unusual events. During the
second quarter of fiscal 1997, Carver experienced a one time pre-tax assessment
of $1.6 million for the recapitalization of the Savings Association Insurance
Fund ("SAIF") pursuant to legislation which was enacted in September of 1996.
During the fourth quarter of fiscal 1997, Carver experienced a one time pre-tax
charge of $1.0 million as a result of the disposition of approximately $72
million of money market rate investment securities, or mutual funds. During the
fourth quarter of fiscal 1997, the Company added approximately $1.6 million to
its provision for loan losses. Carver's operating results for the year were also
impacted by an increase in net interest income and an increase in non-interest
expense.
Net Interest Income.
Net interest income before provision for loan losses for the year ended
March 31, 1997, increased $429,000, or 4.32%, to $10.3 million as compared to
$9.9 million for the year ended March 31, 1996 ("fiscal 1996"). Carver's
interest rate spread widened from 2.57% in fiscal 1996 to 2.90% in fiscal 1997,
and its interest margin increased from 2.85% in fiscal 1996, to 3.04% in fiscal
1997. These increases in interest rate spread and net interest margin resulted
in part from the decreased cost of deposits and borrowed money. These increases
also reflect the replacement of certain investment and mortgage-backed
securities with higher yielding loans. The ratio of the Company's average
interest-earning assets to interest-bearing liabilities decreased to 1.04x in
fiscal 1997, from 1.07x in fiscal 1996. The changes in this ratio primarily
reflects the increase in average interest earning assets.
Interest Income.
Carver's interest income for the fiscal year ended March 31, 1997,
decreased by $682,000, or 2.90%, to $22.8 million as compared to $23.5 million
for the fiscal year ended March 31, 1996. The decrease in interest income
resulted primarily from a 3 basis point decrease in the average yield on
interest-bearing assets, from 6.73% during fiscal year 1996, to 6.70% during
fiscal year 1997 and a decline of $8.8 million in the average balance of
interest-earning assets. The decline in average yield resulted from a lower
interest rate environment.
The decrease in interest income resulted in part from a $2.2 million, or
18.31%, decrease in income from mortgage-backed securities, reflecting a
decrease of 11 basis points in the average yield to 6.38% in fiscal 1997 from
6.49% in fiscal 1996. The decrease in interest income also resulted in part from
a $1.1 million or an 18.33% decrease in interest income from investment
securities, primarily due to a decrease of 76 basis points in the average yield
to 5.58% during fiscal 1997 from 6.34% during fiscal 1996. A decline in the
general level of interest rates lead these assets, which are primarily
adjustable rate, to reprice to lower yields during fiscal 1997. The decline in
average yields resulted in a decline in interest income. The impact of these
declines in the average yields was offset in part by a shift in Carver's
interest earning assets. The shift was reflected in the declines in the average
balances of investment securities and mortgage-backed securities which were
offset by a significant increase in the average balance of higher yielding
mortgage loans. In addition, the average yield on mortgage loans increased
slightly from 8.26% for fiscal 1996 to 8.31% during fiscal 1997.
Interest Expense.
Total interest expense decreased by $1.1 million, or 8.18%, to $12.4
million for fiscal 1997, as compared to $13.5 million for fiscal 1996. The
decrease was primarily attributable to a decrease of 88 basis points in the
average cost of borrowings during the fiscal 1997 as well as a decrease in
average balance on borrowings, of $6.8 million, or 9.29%, to $66.4 million for
fiscal 1997, as compared to $73.2 million for fiscal 1996. The interest expense
on deposits for the year ended March 31, 1997, decreased nominally by $35,000,
or 0.42%, from $8.39 million for the year ended March 31, 1996 to $8.36 million
for the year ended March 31, 1997 despite an increase in average deposits of
$8.7 million, or 3.43% to $262.0 million for fiscal year 1997, as compared to
$253.3 million for fiscal 1996. The decrease in average balance was offset by a
12 basis point
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decrease in the average cost of deposits, from 3.31% for the year ended March
31, 1996 to 3.19% for fiscal year 1997. The increase in deposits costs is due
principally to a decline in the average cost of certificate of deposit accounts
in the lower interest rate environment.
Provision for Loan Losses.
The provision for loan losses increased by $1.6 million from $131,000, for
the year ended March 31, 1996, to $1.7 million for the year ended March 31,
1997. In addition, the decision to increase the provision reflects the increase
in non-performing loans from $3.3 million at March 31, 1996 to $6.4 million at
March 31, 1997, net charge-offs of $649,000 during fiscal 1997, compared to a
net recovery of $19,000 in fiscal 1996, and the increase in the loan portfolio
to $197.8 million at March 31, 1997 from $82.6 million at March 31, 1996. The
net effect of the increased provision and the charge-offs for fiscal 1997 was an
increase in the allowance for loan losses from $1.2 million at March 31, 1996,
to $2.2 million at March 31, 1997, and equaled 1.09% of the gross loan portfolio
compared to 1.42% at March 31, 1996. The decline in the ratio of allowances to
total loans is the result of the significant increase in gross loans at March
31, 1997. In determining its provision for loan losses, management establishes
specific loss allowances on identified problem loans and general loss allowance
on the remainder of the loan portfolio.
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 for fiscal year 1997, decreased by $495,000, or 81.44%, to
$113,000, from $608,000 for fiscal year 1996. The decrease was due to loss of
$1.0 million on the sale of Carver's mutual fund investments, as part of the
asset restructuring during fiscal 1997 substantially offset by increased loan
and fee services, charges, and other fees loan fee and service charge income
increased by $116,000 or 149.33% due a substantial increase in loan obligations.
Fee income for banking services increased by $315,000 or 59.53%, primarily due
to an increase in the fees charged for selected services and income from
automatic teller machines.
Non-Interest Expense.
Non-interest expense increased by $2.7 million, or 30.37%, to $11.8 million
for fiscal 1997, as compared to $9.1 million for fiscal year 1996. This increase
was primarily attributable to a one-time pre-tax assessment of $1.6 million for
the recapitalization of SAIF, pursuant to the Funds Act. Excluding the SAIF
assessment, total non-interest expense would have been $10.2 million for fiscal
1997. During the fiscal year 1997 Carver invested substantially in improving its
infrastructure. These investments encompassed upgrading technology, increasing
staff and expanding marketing efforts. These investments increased operating
expenses for the fiscal year 1997. Salaries and employee benefits for fiscal
year 1997 increased by $562,000, or 16.13%, to $4.0 million from $3.4 million
for fiscal year 1996. This increase was primarily due to a general increase in
staff, incentive compensation and ESOP expense. Equipment expense for fiscal
1997 increased by $403,000, or 58.72%, to $1.1 million from $686,000 in fiscal
year 1996, reflecting the increased depreciation and maintenance cost for new
furniture, fixtures and computers for Carver's new headquarters and certain
branches. Net occupancy expense for fiscal year 1997 increased by $136,000, or
13.92%, to $1.1 million from $976,000 in fiscal year 1996. Increase in rent,
cleaning expenses and depreciation of leasehold expenses account for the
increase in occupancy expense. These increases in non-interest expenses were
offset in part by decreased deposit insurance premiums from $618,000 during
fiscal 1996 to $482,000 for fiscal 1997. This $137,000 or 22.9%, decrease was
due to decreased assessment rates which became effective as of the fourth
quarter of fiscal 1997. See "Impact of Recent Legislation -- Recapitalization of
the Savings Association Insurance Fund SAIF." Legal expenses during fiscal year
1997, decreased by $194,000, or 55.26%, to $157,000 from $351,000 during fiscal
year 1996. The decrease in legal cost was due mainly to capitalization of the
costs incurred in connection with the Reorganization of approximately $225,000.
This amount is being depreciated on a straight line basis over sixty months.
Other non-interest expense increased $314,000, or 16.33%, due to increases on a
variety of miscellaneous expense categories, including, among other items,
travel and expense, employee training and charitable contribution expenses.
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53
Income Tax Expense.
Income tax expense (benefit) for fiscal year 1997, was a benefit of $1.2
million, compared to $606,000 for fiscal year 1996, due to the net loss for
fiscal 1977. The Company's effective tax rates were 42.3% and 44.59% for the
years then ended March 31, 1997 and 1996, respectively
LIQUIDITY AND CAPITAL RESOURCES
Carver Federal's primary sources of funds are deposits, FHLB advances, and
proceeds from principal and interest payments on loans, 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 12.26% and 21.86% at March 31, 1998 and 1997, 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 31,1998, and 1997,
assets qualifying for short-term liquidity, including cash and short-term
investments, totaled $21.5 million and $83.2 million, respectively.
The primary investment activity of the Bank is the origination and purchase
of loans and, to a lesser extent, purchase of investment and mortgage-backed
securities. During fiscal year 1998, Carver purchased $80.2 million in whole
loan mortgages, $6.4 million in investment securities and mortgage-backed
securities, and sold $5.0 million in investment securities and mortgage-backed
securities. During fiscal year 1997 the Bank purchased $84.7 million of whole
loan mortgages and originated $51.3 million mortgage and other loans. During
fiscal year 1997 no securities were purchased. During fiscal years 1998 and
1997, the Bank received $38.3 million and $27.5 million, respectively, in
principal payments. During fiscal year 1998 there was a cash flow of $2.0
million due to call back of government agency preferred stock.
At March 31, 1998, the Bank had outstanding loan commitments of $9.6
million. Certificates of deposit which are scheduled to mature in one year or
less from March 31, 1998 totaled $23.8 million. Management believes that a
significant percentage of such deposits will remain with the Bank.
THE YEAR 2000 PROBLEM
The Year 2000 Problem centers on the inability of 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. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial providers, the Company and its operations may be significantly
affected by the Year 2000 Problem due to the nature of financial information.
Software, hardware, and equipment both within and outside the Company's direct
control and with whom the Company electronically or operationally interfaces
(e.g. third party vendors providing data processing, information system
management, maintenance of computer systems and credit bureau information) are
likely to be affected. Furthermore, if computer systems are not adequately
changed to identify the year 2000, many computer applications could fail or
create erroneous results. As a result, many calculations which rely on the date
field information, such as interest, payment or due dates and other operating
functions, will generate results which could be significantly misstated, and the
Company could experience a temporary inability to process transactions, send
invoices or engage in similar normal business activities. In addition, under
certain circumstances, failure to adequately address the Year 2000 Problem could
adversely affect the viability of the Company's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the Year
2000 Problem could result in a significant adverse impact on the Company's
products, services and competitive condition.
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54
The OTS and the other federal banking regulators have issued guidelines to
be followed by insured depository institutions, such as the Bank, to assure
resolution of any Year 2000 problems. Any institution's failure to address
appropriately the Year 2000 Problem could result in supervisory action.
The Company recently received a "Satisfactory" rating in a review of its
Year 2000 Problem compliance by the OTS, which represents the highest possible
rating eligible to be received. The Company is currently scheduled to begin
testing on its loan and deposit systems beginning in July, 1998, and is
currently in the process of obtaining software modifications deemed necessary
for compliance in all other systems. The Company has initiated formal
communications with all of its significant suppliers to determine the extent to
which the Company is vulnerable to those third parties' failure to resolve their
own Year 2000 Problem. The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 Problem will be
mitigated without causing a material adverse effect on the operations of the
Company. However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Problem could have an impact on the Company's
operations. At this time, management believes that any such impact and any
resulting costs will not be material.
Monitoring and managing the Year 2000 Problem will result in additional
direct and indirect costs to the Company. Direct costs include potential charges
by third party software vendors for product enhancements, costs involved in
testing software products for Year 2000 compliance and any resulting costs for
developing and implementing contingency plans for critical software products
which are not enhanced. Indirect costs will principally consist of the time
devoted by existing employees in monitoring software vendor progress, testing
enhanced software products and implementing any necessary contingency plans.
Such costs have not been material to date. The Company believes that any such
costs to be incurred in the future will not have a material effect on its
results of operations. Both direct and indirect costs of addressing the Year
2000 Problem will be charged to earnings as incurred.
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 Savings Associations -- Capital Requirements."
The Bank presently exceeds all capital requirements as currently
promulgated. At March 31, 1998, the Bank had tangible, core, and Tier 1 to
risk-weighted assets, and risk-based capital ratios of 6.90%, 6.91%, 6.93% and
16.00% respectively.
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The following table reconciles the Bank's stockholders equity at March 31,
1998, 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,
1998(1)................................. $31,434 $31,434 $31,434 $31,434
Add:
Unrealized loss on securities available
for sale, net........................ 13 13 13
General valuation allowances............ -- -- 1,522
Qualifying intangible assets............ -- 48 48
Deduct:................................. -- -- --
Goodwill................................ (1,246) (1,246) (1,246)
Excess of net deferred tax assets.... -- -- (40)
------- ------- -------
Asset required to be deducted........... -- -- --
Regulatory capital...................... 30,201 30,249 31,731
Minimum capital requirement............. 6,562 13,124 $15,856
------- ------- -------
Regulatory capital excess............... $23,639 $17,125 $15,875
======= ======= =======
- ---------------
(1) Reflects Bank only.
The Bank presently exceeds all capital requirements as currently
promulgated. At March 31, 1998, the Bank had tangible, core, and Tier 1 to
risk-weighted assets, and risk-based capital ratios of 6.90%, 6.91%, 6.93% and
16.00%, respectively.
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.
IMPACT OF RECENT LEGISLATION
SAIF Recapitalization. For the period from January 1, through September
30, 1996, there existed a disparity of 23 cents per $100 of deposits in the
minimum deposit insurance assessment rates applicable to deposits insured by the
Bank Insurance Fund ("BIF") and the higher assessment rates applicable to
deposits insured by the Savings Association Insurance Fund ("SAIF"). In response
to this disparity, on September 30, 1996 the Deposit Insurance Funds Act of 1996
(the "Funds Act") was enacted into law. The Funds Act authorized the Federal
Deposit Insurance Corporation ("FDIC") to impose a special assessment on all
financial institutions with SAIF-assessable deposits in the amount necessary to
recapitalize the SAIF. Pursuant to such authority, the FDIC imposed a special
assessment of 65.7 basis points per $100 of an institution's SAIF-assessable
deposits held on March 31, 1995. The Company's special SAIF assessment of $1.6
million was charged to expense in September 1996 and paid in November 1996. In
view of the recapitalization of the SAIF, the FDIC reduced the assessment rates
for SAIF-assessable deposits. For the calendar year 1997, the SAIF assessment
rates range from 0 to 27 basis points, which is the same range of rates
applicable to the BIF. Prior to the SAIF recapitalization, all SAIF-insured
institutions were subject to a
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minimum assessment of 23 basis points. The Funds Act also expanded the
assessment base to include BIF-insured, as well as SAIF-insured, institutions to
fund payments on the bonds issued by the Financing Corporation ("FICO bonds") to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation. In
order to fund such interest payments, a separate assessment of 1.3 basis points
for BIF-assessable deposits and 6.48 basis points for SAIF-assessable deposits
became effective on January 1, 1997. The Funds Act requires that, until December
31, 1999 or such earlier date on which the last savings association ceases to
exist, the rates of assessment for FICO bond payments imposed on BIF-assessable
deposits will be one-fifth of the rate imposed on SAIF-assessable deposits. As a
result of the lower overall assessment rates, the Company's non-interest expense
for the year justify months ended March 31, 1998 was reduced by $137,000
compared to the same period in 1996.
The Funds Act also provides for the merger of the BIF and SAIF on January
1, 1999, with such merger being conditioned upon the prior elimination of the
thrift charter. The Funds Act required the Secretary of Treasury to conduct a
study of relevant factors with respect to the development of a common charter
for all insured depository institutions and the abolition of separate charters
for banks and thrifts and to report the Secretary's conclusions and the findings
to Congress. The Secretary of the Treasury has recommended that the separate
charter for thrifts be eliminated only if other legislation is adopted that
permits bank holding companies to engage in certain non-financial activities.
Absent legislation permitting such non-financial activity, the Secretary of the
Treasury recommended retention of the thrift charter. Other proposed legislation
has been introduced in Congress that would require thrift institutions to
convert to bank charters. The Secretary of the Treasury also recommended that
the BIF and the SAIF be merged irrespective of the elimination of the thrift
charter.
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 for
tax years after 1995 and to require thrifts to recapture into taxable income
(over a six-year period) all bad debt reserves accumulated after 1987. Since the
Bank's federal bad debt reserves approximated the 1987 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 provide for future additions to each of the base-year
reserve 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 and New York City state base-year reserve would still become payable under
various circumstances, including conversion to a bank charter or failure to meet
various thrift definition tests.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits," which provides improved
disclosures about pensions and other post-retirement benefits. The disclosures
will provide information that is more comparable, understandable and concise,
and that would better serve users' needs. This statement is effective for fiscal
years beginning after December 15, 1997. The adoption of this statement is not
anticipated to have a material impact on Carver's financial position or results
of operations.
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 is effective
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for all fiscal quarters of fiscal years beginning after June 15, 1999. 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."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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LETTERHEAD OF MITCHELL & TITUS LLP
To The Board of Directors and Stockholders
Carver Bancorp Inc.,
We have audited the accompanying consolidated statements of financial
condition of Carver Bancorp Inc., (the "Company") and subsidiaries as of March
31, 1998 and 1997 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three years
ended March 31, 1998. 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 audits.
We conducted our audits 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 audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Carver
Bancorp and subsidiaries as of March 31, 1998 and 1997, and the results of their
operations and cash flows for each of the years in the three years ended March
31, 1998 in conformity with generally accepted accounting principles.
/s/ MITCHELL & TITUS LLP
--------------------------------------
July 10, 1998
New York, New York
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CARVER BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31,
----------------------------
1998 1997
------------ ------------
ASSETS
Cash and amounts due from depository institutions........... $ 12,120,071 $ 4,230,757
Federal funds sold.......................................... 3,000,000 --
------------ ------------
Total cash and cash equivalents (Notes 1 and 19)....... 15,120,071 4,230,757
Securities available for sale (Notes 1, 3, 13 and 19)....... 28,407,505 83,892,617
Investment securities held to maturity, net (estimated fair
value of $1,673,000 in 1997 (Notes 1, 4, 13, 18 and 19)... -- 1,675,181
Mortgage-backed securities held to maturity, net (estimated
fair value of $107,719,000 in 1997) (Notes 1, 5, 12, 13,
18 and 19)................................................ 91,115,861 110,852,668
Loans receivable, net (Notes 1, 6, 13 and 19)............... 274,954,337 197,917,673
Real estate owned, net (Note 1)............................. 82,198 82,198
Property and equipment, net (Notes 1 and 8)................. 11,545,627 11,342,678
Federal Home Loan Bank of New York stock, at cost (Note
13)....................................................... 5,754,600 5,535,000
Accrued interest receivable, net (Notes 1, 9 and 19)........ 2,762,843 2,978,365
Excess of cost over net assets acquired, net (Notes 1 and
10)....................................................... 1,246,116 1,456,000
Other assets (Notes 14 and 16).............................. 6,469,053 3,650,366
------------ ------------
Total assets........................................... $437,458,211 $423,613,503
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Notes 11 and 19).................................. $274,894,232 $266,471,487
Securities sold under agreements to repurchase (Notes 12 and
19)....................................................... 87,020,000 74,335,000
Advances from Federal Home Loan Bank of New York (Notes 13
and 19)................................................... 36,741,686 45,400,000
Other borrowed money (Notes 17 and 19)...................... 1,183,858 1,365,990
Advance payments by borrowers for taxes and insurance....... 659,995 670,502
Other liabilities (Notes 14 and 16)......................... 1,424,096 1,386,802
------------ ------------
Total liabilities...................................... 401,923,867 389,629,781
------------ ------------
Commitments and contingencies (Notes 18 and 19)............. -- --
STOCKHOLDERS' EQUITY: (Note 15) Preferred stock, $0.01 par
value per share; 1,000,000 authorized; none issued........ -- --
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)......................... 21,418,897 21,410,167
Retained earnings -- substantially restricted (Notes 2 and
14)....................................................... 15,289,632 14,359,060
Common stock acquired by Employee Stock Ownership Plan
("ESOP") (Notes 2 and 17)................................. (1,183,858) (1,365,990)
Unrealized (loss) on securities available for sale, net of
taxes..................................................... (13,470) (442,659)
------------ ------------
Total stockholders' equity............................. 35,534,345 33,983,722
------------ ------------
Total liabilities and stockholders' equity............. $437,458,211 $423,613,503
============ ============
See Notes to Consolidated Financial Statements
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CARVER BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED MARCH 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
INTEREST INCOME:
Loans (Note 1)...................................... $18,311,042 $ 7,843,822 $ 4,800,482
Mortgage-backed securities.......................... 8,522,922 9,978,660 12,217,281
Debt and equity securities.......................... 323,243 4,416,362 5,415,806
Other interest-earning assets....................... 670,509 607,903 1,095,336
----------- ----------- -----------
Total interest income.......................... 27,827,716 22,846,747 23,528,905
----------- ----------- -----------
INTEREST EXPENSE:
Deposits (Note 11).................................. 8,596,358 8,355,168 8,390,201
Advances and other borrowed money................... 6,422,666 4,127,743 5,204,068
----------- ----------- -----------
Total interest expense......................... 15,019,024 12,482,911 13,594,269
----------- ----------- -----------
Net interest income................................. 12,808,692 10,363,836 9,934,636
Provision for loan losses (Notes 1 and 6)........... 1,259,531 1,689,508 130,892
----------- ----------- -----------
Net interest income after provision for loan
losses............................................ 11,549,161 8,674,328 9,803,744
----------- ----------- -----------
NON-INTEREST INCOME:
Loan fees and service charges....................... 559,960 194,689 78,084
Gain (loss) on sale of securities held for sale
(Notes 4 and 5)................................... 188,483 (927,093) --
Other............................................... 1,603,096 845,287 529,873
----------- ----------- -----------
Total non-interest income...................... 2,351,539 112,883 607,957
----------- ----------- -----------
NON-INTEREST EXPENSES:
Salaries and employee benefits (Notes 16 and 17).... 4,739,069 4,044,718 3,482,928
Net occupancy expense (Notes 1 and 18).............. 1,118,467 1,111,602 975,795
Equipment (Note 1).................................. 1,255,301 1,088,258 685,657
Loss on foreclosed real estate (Note 1)............. -- 37,995 76,582
Advertising......................................... 289,061 172,795 168,084
Federal deposit insurance premium................... 125,506 481,646 618,169
Amortization of intangibles (Note 1)................ 209,892 213,073 229,898
Legal expenses...................................... 371,430 157,023 350,921
Bank charges........................................ 415,223 341,272 308,391
Security service.................................... 290,431 286,036 234,856
SAIF assessment..................................... -- 1,632,290 --
Other............................................... 2,836,568 2,235,249 1,921,462
----------- ----------- -----------
Total non-interest expenses.................... 11,650,948 11,801,957 9,052,743
----------- ----------- -----------
Income (loss) before income taxes................... 2,249,752 (3,014,746) 1,358,958
Income taxes (Notes 1 and 14)....................... 1,203,466 (1,275,078) 605,874
----------- ----------- -----------
Net income (loss)................................... $ 1,046,286 $(1,739,668) $ 753,084
=========== =========== ===========
Net income (loss) per common share.................. $ 0.48 $ (0.80) $ 0.35
=========== =========== ===========
Weighted average number of shares outstanding (Note
1)................................................ 2,187,619 2,169,276 2,156,346
See Notes to Consolidated Financial Statements
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61
CARVER BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
RETAINED COMMON (LOSS) ON
ADDITIONAL EARNINGS STOCK SECURITIES
COMMON PAID-IN SUBSTANTIALLY ACQUIRED AVAILABLE
STOCK CAPITAL RESTRICTED BY ESOP FOR SALE NET TOTAL
------- ----------- ------------- ----------- ------------ -----------
Balance -- March 31, 1995... $23,144 $21,465,072 $15,345,644 $(1,730,254) $ (302,455) $34,801,161
Net income for the year
ended March 31, 1996...... -- -- 753,084 -- -- 753,084
Allocation of ESOP stock.... -- (28,837) -- 182,132 -- 153,295
Increase in unrealized
(loss) in securities
available for sale, net... -- -- -- -- (942,759) (942,759)
------- ----------- ----------- ----------- ----------- -----------
Balance -- March 31, 1996... 23,144 21,436,235 16,098,728 (1,548,122) (1,245,204) 34,764,781
Net loss for the year ended
March 31, 1997............ -- -- (1,739,668) -- -- (1,739,668)
------- ----------- ----------- ----------- ----------- -----------
Allocation of ESOP stock.... -- (26,068) -- 182,132 -- 156,064
Decrease in unrealized, loss
in securities available
for sale, net............. -- -- -- -- 802,545 802,545
------- ----------- ----------- ----------- ----------- -----------
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
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
======= =========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements
60
62
CARVER BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $ 1,046,286 $ (1,739,668) $ 753,084
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization............................... 695,192 664,750 301,918
Amortization of intangibles................................. 209,892 213,082 229,888
Other amortization and accretion, net....................... 402,662 1,143,308 651,014
Provision for loan losses................................... 1,259,531 1,689,508 130,892
Gain from sale of real estate owned......................... -- (26,229) --
Proceeds from sale of loans................................. 1,459,491 -- 1,948,143
Net loss on sale of securities available for sale........... (188,483) 927,093 --
Deferred income taxes....................................... 58,555 (387,456) (380,541)
Allocation of ESOP stock.................................... 240,698 156,064 153,295
(Increase) decrease in accrued interest receivable.......... 215,522 (290,166) 19,310
Decrease (increase) in refundable income taxes.............. 0 (286,000) 238,157
(Increase) decrease in other assets......................... 2,818,687 (1,493,435) (72,455)
Increase (decrease) in other liabilities.................... 37,294 (510,154) 731,784
------------ ------------ ------------
Net cash provided by operating activities................... 8,255,327 60,697 4,704,489
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments on investments held to maturity........ 194,476 311,894 96,335
Principal repayments on securities available for sale....... 5,061,181 5,357,790 2,965,441
Purchases of securities available for sale.................. (17,000,000) (57,508,308) --
Proceeds from sales and call of securities held for sale.... 55,485,112 84,052,091 9,000,000
Purchase of investment securities held to maturity.......... (1,946,326) (50,000) --
Proceeds from maturities and calls of investment securities
held to maturity.......................................... 8,480,705 7,000,000
Principal repayment of mortgage-backed securities held to
maturity.................................................. 19,313,831 19,302,028 23,663,432
Purchase of loans........................................... (68,153,900) (84,708,587) (26,911,379)
Net change in loans receivable.............................. (8,882,764) (32,265,562) (9,357,887)
Proceeds from sale of real estate owned..................... 0 258,292 --
Additions to premises and equipment......................... (897,030) (2,050,447) (5,930,518)
(Purchase) Federal Home Loan Bank stock..................... (219,600) (2,415,000) --
------------ ------------ ------------
Net cash (used in) provided by investing activities......... (8,564,315) (62,715,809) (6,474,576)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits......................... 8,422,745 9,519,604 8,505,919
Net increase (decrease) in short-term borrowings............ (942,404) 58,335,000 (19,188,000)
Proceeds of long-term borrowings............................ 12,685,000 -- 11,000,000
Repayment of long-term borrowings........................... (45,400,000) (11,000,000) --
Advances from Federal Home Loan of New York................. 36,741,314 -- --
Repayment of other borrowed money........................... (182,132) (182,132) --
Dividends Paid.............................................. (115,714) -- --
Increase (Decrease) in advance payments by borrowers for
taxes and insurance....................................... (10,507) 187,447 (339,687)
------------ ------------ ------------
Net cash provided by (used in) financing activities......... (11,198,302) 56,859,919 (21,768)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents........ 10,889,314 (5,795,193) (1,791,855)
Cash and cash equivalents -- beginning...................... 4,230,757 10,025,950 11,817,805
------------ ------------ ------------
Cash and cash equivalents -- ending......................... $ 15,120,071 $ 4,230,757 $ 10,025,950
============ ============ ============
Supplemental disclosure of non-cash activities:
Transfers of mortgage-backed securities..................... $ -- $ -- $ 25,891,771
============ ============ ============
Unrealized Gain (loss) on securities available for sale:
Unrealized Gain (loss)...................................... (25,417) 835,206 (1,778,783)
Deferred income taxes....................................... 11,947 (397,547) 836,033
------------ ------------ ------------
$ 13,470 $ 442,659 $ (942,760)
============ ============ ============
Loans receivable transferred to real estate owned........... $ -- $ 32,729 $ 449,197
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest.................................................... $ 15,019,024 $ 12,361,162 $ 13,344,140
============ ============ ============
Federal, state and city income taxes........................ $ 515,457 $ 286,000 $ --
============ ============ ============
See Notes to Consolidated Financial Statements
61
63
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background
Carver Bancorp, Inc. ("Carver" or the "Holding Company") is a bank holding
company that was incorporated in May 1996 and whose principal wholly owned
subsidiary is Carver Federal Savings Bank (the "Bank"). CFSB Realty Corp. and
CFSB Credit Corp. are wholly owned subsidiaries of the Bank. The Bank was
chartered in 1948 and began operations in 1949 as Carver Federal Savings and
Loan Association, a federally chartered mutual savings and loan association. The
Bank converted to a federal savings bank in 1986 and changed its name at that
time. On October 24, 1994, Carver Federal Savings Bank converted from mutual
stock form and issued 2,314,375 shares of its common stock, par value $0.01 per
share. In connection with an agreement and plan of reorganization whereby the
Bank would become a wholly owned subsidiary of Carver, the Bank incorporated
Carver on May 9, 1996 under the General Corporation Law of the State of
Delaware. Pursuant to the Reorganization, each outstanding share of the
outstanding common stock of the Bank was converted on a one-to-one basis for
Carver's common stock, except for 100 shares with regard to which a stockholder
of the Bank exercised dissenters' rights of appraisal. Accordingly, 2,314,275
shares of Carver's common stock are presently issued and outstanding.
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 federal savings
banks. Carver's banking subsidiary has seven branches located throughout the
City of New York that primarily serves the communities in which they operate.
Basis of consolidated financial statement presentation
The consolidated financial statements include the accounts of Carver, the
Bank and its wholly owned subsidiaries, CFSB Realty Corp. and CFSB Credit Corp.
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. Actual results could differ significantly from those
estimates. Material 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.
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.
62
64
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Cash and cash equivalents
Cash and cash equivalents include cash and amounts due from depository
institutions and federal funds sold. Generally, federal funds sold are sold for
one-day periods.
Investment and mortgage-backed securities
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
reporting entity has a positive intent and ability to hold those securities to
maturity. If not classified as held to maturity, such securities must be
classified as securities available for sale. 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 retained earnings.
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 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 by use of the interest method. Premiums and discounts
on loans purchased are amortized and accreted, respectively, as an adjustment of
yield over the contractual lives of the related loans by use of the interest
method.
Loans are placed on non-accrual status when they are past due three months
or more as to contractual obligations. When a loan is placed on non-accrual
status, any interest accrued but not received is reversed against interest
income. A non-accrual loan is restored to accrual status when principal and
interest payments become less than three months past due.
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.
63
65
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Allowance for loan losses
An allowance for loan losses is maintained at a level considered adequate
to absorb future 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. See "Purchases of Loans."
Premises and equipment
Premises and equipment are comprised of land and construction in progress,
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 50 years
Furnishings and equipment............ 3 to 10 years
Leasehold improvements............... The lesser of useful life or 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 amounts ultimately recoverable from real estate owned could differ
from the net carrying value of these properties because of economic conditions
and the current softness in the local real estate market.
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.
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.
64
66
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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
Federal, state and city income taxes have been provided on the basis of
reported income. The amounts reflected on the tax returns differ from these
provisions due principally to temporary differences in the treatment of certain
items of income and expense for financial statement and income tax reporting
purposes.
Deferred income taxes in the consolidated statement of condition are
adjusted each year to reflect the cumulative taxable and deductible temporary
differences and net operating loss and tax credit carryforwards at the then
existing income tax rates.
Net income per common share
Net income per common share for each of the years in the three years ended
March 31, 1998 is based on net income for the entire year dividend by weighted
average shares outstanding during the year. For the purpose of these
calculations, unreleased ESOP shares are not considered to be outstanding.
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 and in
order to grant priority to eligible depositors, 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 $4,884,000, and $5,763,000 at March 31, 1998 and 1997,
respectively. On October 17, 1996, the Bank completed a reorganization into a
holding company structure (the "Reorganization") and became the wholly-owned
subsidiary of Carver Bancorp, Inc., a savings and loan 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 common stock were purchased 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.
65
67
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. SECURITIES AVAILABLE FOR SALE
MARCH 31, 1998
--------------------------------------------------
GROSS UNREALIZED
CARRYING ----------------- ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
-------------- ----- -------- -----------
Mortgage -- backed securities................ $28,407,505 $-- $ 25,417 $28,382,089
Interest rate agreement for a notional amount
of $5,000,000.............................. 0 -- -- 0
----------- -- -------- -----------
$28,407,505 -- -- $28,382,089
=========== == ======== ===========
MARCH 31, 1997
--------------------------------------------------
GROSS UNREALIZED
CARRYING ----------------- ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
-------------- ----- -------- -----------
Mortgage -- backed securities................ $33,469,963 $-- $845,206 $32,624,757
Equity securities:
Mutual funds............................... 49,108,306 -- -- 49,108,306
Common and preferred stock................. 2,049,898 -- -- 2,048,898
Interest rate agreement for a notional
amount of $5,000,000.................... 29,750 --
Interest rate agreement for a notional
amount of $20,000,000................... 79,906 -- 79,906
----------- -- -------- -----------
$84,737,823 $ $845,206 $83,892,617
=========== == ======== ===========
Proceeds from sales of investment securities held for sale during the year
ended March 31, 1998 were $5,188,483, resulting in gross gains of $188,000.
There were no sales of investment securities held for sale during the years
ended March 31, 1997 and 1996.
NOTE 4. INVESTMENT SECURITIES HELD TO MATURITY, NET
MARCH 31, 1998
--------------------------------------------------
GROSS UNREALIZED
CARRYING ----------------- ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
-------------- ----- -------- -----------
U.S. Government (including agencies):
After one year through five years.......... $ 0 $0 $ 0 $ 0
=========== == ======== ===========
MARCH 31, 1997
--------------------------------------------------
GROSS UNREALIZED
CARRYING ----------------- ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
-------------- ----- -------- -----------
U.S. Government (including agencies):
After one year through five years.......... $ 1,675,181 $-- $ 2,094 $ 1,673,087
=========== == ======== ===========
There were no sales of securities held to maturity during the years ended
March 31, 1998, 1997 and 1996. Proceeds from calls of investment securities held
to maturity during the years ended March 31, 1998, 1997 and 1996 were
$2,000,000, $7,000,000 and $9,000,000, respectively. No gains or losses were
realized on these calls.
66
68
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. MORTGAGE-BACKED SECURITIES HELD TO MATURITY, NET
MARCH 31, 1998
------------------------------------------------------
PRINCIPAL UNAMORTIZED UNEARNED CARRYING
BALANCE PREMIUMS DISCOUNTS VALUE
----------- ----------- --------- -----------
Government National Mortgage
Association............................ $ 8,918,901 $ 0 $ 64,260 $ 8,854,642
Federal Home Loan Mortgage Corporation... 35,141,886 872,418 112,803 35,901,501
Federal National Mortgage Association.... 36,264,031 529,740 109,146 36,684,625
Small Business Administration............ 1,782,199 -- 11,847 1,770,352
Collateralized mortgage obligations:
Resolution Trust Corporation........... 6,478,542 85,901 -- 6,564,443
Federal Home Loan Mortgage
Corporation......................... 1,340,298 -- -- 1,340,298
Others................................. 629,118 -- -- --
----------- ---------- -------- -----------
$89,925,857 $1,488,059 $298,056 $91,115,861
=========== ========== ======== ===========
MARCH 31, 1997
----------------------------------------------------------
PRINCIPAL UNAMORTIZED UNEARNED CARRYING
BALANCE PREMIUMS DISCOUNTS VALUE
-------------- ----------- --------- ------------
Government National Mortgage
Association........................... $ 11,797,496 $ 40 $108,430 $ 11,689,106
Federal Home Loan Mortgage
Corporation........................... 43,789,880 1,132,946 154,798 44,768,028
Federal National Mortgage Association... 41,007,256 603,316 144,713 41,465,859
Small Business Administration........... 2,263,969 -- 15,251 2,248,718
Collateralized mortgage obligations:
Resolution Trust Corporation.......... 8,240,457 113,289 -- 8,353,746
Federal Home Loan Mortgage
Corporation........................ 1,690,298 -- -- 1,690,298
Others................................ 629,118 7,795 -- 636,913
------------ ---------- -------- ------------
$109,418,474 $1,857,386 $423,192 $110,852,668
============ ========== ======== ============
A summary of gross unrealized gains and losses and estimated fair value
follows:
MARCH 31, 1998
----------------------------------------------
GROSS UNREALIZED
CARRYING ------------------ ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
----------- ------- -------- -----------
Government National Mortgage Association....... $ 8,854,642 $ -- $ 39,022 $88,156,620
Federal Home Loan Mortgage Corporation......... 35,901,501 -- 585,759 35,315,741
Federal National Mortgage Association.......... 36,684,625 -- 206,223 36,478,402
Small Business Administration.................. 1,770,352 40,744 -- 1,811,096
Collateralized mortgage obligations:
Resolution Trust Corporation................. 1,340,298 116,838 1,329,408
Federal Home Loan Mortgage Corporation....... 6,564,443 -- 10,890 6,447,605
Others....................................... -- -- -- --
----------- ------- -------- -----------
$91,115,861 $40,744 $958,732 $90,197,873
=========== ======= ======== ===========
67
69
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997
---------------------------------------------------
GROSS UNREALIZED
CARRYING --------------------- ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
------------ -------- ---------- ------------
Government National Mortgage
Association............................. $ 11,689,106 $149,141 $ 475,567 $ 11,362,680
Federal Home Loan Mortgage Corporation.... 44,768,028 -- 937,810 43,830,218
Federal National Mortgage Association..... 41,465,859 -- 1,480,513 39,985,346
Small Business Administration............. 2,248,718 38,806 -- 2,287,524
Collateralized mortgage obligations:
Resolution Trust Corporation............ 8,353,746 268,352 8,085,394
Federal Home Loan Mortgage
Corporation.......................... 1,690,298 -- 29,581 1,660,717
Others.................................. 636,913 -- 7,795 629,118
------------ -------- ---------- ------------
$110,852,668 $187,947 $3,199,618 $107,840,997
============ ======== ========== ============
The following is a schedule of final maturities as of March 31,1998:
CARRYING ESTIMATED
VALUE FAIR VALUE
-------- ----------
(IN THOUSANDS)
After one through five years............................ $19,501 $19,428
After five through ten years............................ 71,615 70,770
After ten years......................................... -- --
------- -------
$91,116 $90,198
======= =======
There were no sales of mortgage-backed securities held to maturity during
the years ended March 31,1998, 1997 and 1996.
68
70
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. LOANS RECEIVABLE, NET
YEAR ENDED MARCH 31,
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
Real estate mortgage:
One- to four- family............................ $188,761,350 $139,961,350 $59,466,442
Multi-family.................................... 49,289,001 19,935,991 2,490,355
Non-residential................................. 12,789,230 22,415,427 11,138,426
Equity and second mortgages..................... 443,907 586,300 364,085
------------ ------------ -----------
251,283,488 182,899,068 73,459,308
------------ ------------ -----------
Agency for International Development.............. -- -- 9,441
------------ ------------ -----------
Real estate construction.......................... 15,993,381 14,386,137 6,965,301
------------ ------------ -----------
Commercial loans.................................. 1,442,158 3,192,251 1,090,941
------------ ------------ -----------
Consumer:
Passbook or certificate......................... 997,804 954,635 1,011,371
Student education............................... 174,313 974,892 1,094,351
Other........................................... 12,478,147 3,600,859 931,319
------------ ------------ -----------
13,650,264 5,530,386 3,037,041
------------ ------------ -----------
Total loans....................................... 282,369,290 206,007,842 84,562,032
------------ ------------ -----------
Add: Premium...................................... 1,555,397 1,804,938 882,138
Less: Loans in process............................ 4,752,246 6,854,591 1,406,150
Allowance for loan losses......................... 3,138,000 2,245,746 1,205,496
Deferred loan fees and discounts.................. 1,080,104 794,770 224,459
------------ ------------ -----------
(7,414,953) (9,895,107) (2,836,105)
------------ ------------ -----------
$274,954,337 $197,917,673 $82,608,065
============ ============ ===========
The following is an analysis of the allowance for loan losses:
YEAR ENDED MARCH 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
Balance -- beginning........................... $2,245,746 $1,204,496 $1,074,604
Provision charged to operations................ 1,259,532 1,698,508 130,892
Recoveries of amounts previously charged off... -- 49,940 --
Loans charged off.............................. (367,278) (699,198) --
---------- ---------- ----------
Balance -- ending.............................. $3,138,000 $2,245,746 $1,205,496
========== ========== ==========
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. Such loans are
performing in
69
71
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
accordance with their restructured terms. The balances of non-accrual and
restructured loans and their impact in interest income are as follows:
YEAR ENDED MARCH 31,
--------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
Non-accrual loans........................................ $5,568 $2,872 $2,034
Restructured loans....................................... 807 413 --
------ ------ ------
$6,375 $3,285 $2,034
====== ====== ======
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Interest income which would have been recorded had loans
performed in accordance with original contracts........... $762 $393 $138
Interest income received.................................... 285 147 26
---- ---- ----
Interest income lost........................................ 477 246 $112
==== ==== ====
At March 31, 1998, loans to officers totaled approximately $850,000. In
addition, the Bank carried two loans to former officers totaling approximately
$244,000 one of which for $122,000 was originated during fiscal 1998.
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,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
Balance -- beginning........................................ $649,607 $428,429
Loans originated............................................ 464,488 235,200
Other....................................................... (243,789)
Repayments.................................................. (20,111) (14,022)
-------- --------
Balance -- ending........................................... $850,195 $649,607
======== ========
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 $3,696,000; $3,881,000, and $4,317,000 at March 31,
1998, 1997 and 1996, respectively.
Custodial escrow balances, maintained in connection with the foregoing loan
servicing, were approximately $61,000, $80,000 and $89,000 at March 31, 1998,
1997 and 1996, respectively.
70
72
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. PREMISES AND EQUIPMENT, NET
MARCH 31,
--------------------------
1998 1997
----------- -----------
Land...................................................... $ 450,952 $ 450,952
Buildings and improvements................................ 8,431,160 8,362,760
Leasehold improvements.................................... 395,770 379,331
Furnishings and equipment................................. 4,231,094 3,589,757
Construction in process................................... 299,809 127,848
----------- -----------
13,808,785 12,910,648
Less accumulated depreciation and amortization............ 2,263,158 1,567,970
----------- -----------
$11,545,627 $11,342,678
=========== ===========
Depreciation and amortization charged to operations for the years ended
March 31, 1998, 1997 and 1996 were $695,000, $664,000 and $302,000,
respectively.
NOTE 9. ACCRUED INTEREST RECEIVABLE, NET
MARCH 31,
------------------------
1998 1997
---------- ----------
Loans....................................................... $2,164,713 $1,783,330
Mortgage-backed securities.................................. 745,533 1,074,768
Investments and other interest-bearing assets............... 98,918 306,260
---------- ----------
3,009,164 3,169,358
Less allowance for uncollected interest..................... (243,321) (190,993)
---------- ----------
$2,762,843 $2,978,365
========== ==========
NOTE 10. EXCESS OF COST OVER ASSETS ACQUIRED, NET
MARCH 31,
------------------------
1998 1997
---------- ----------
Core deposit premium........................................ $1,198,405 $1,403,835
Acquisition costs........................................... 47,712 52,165
---------- ----------
$1,246,117 $1,456,000
========== ==========
71
73
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. DEPOSITS
MARCH 31,
------------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT PERCENT RATE AMOUNT PERCENT
-------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
DEMAND:
Interest bearing............. 2.23% $ 19,230 6.99% 1.89% $ 18,579 6.97%
Non-interest-bearing......... 0.00 9,687 3.52 0.00 7,677 2.88
---- -------- ------ ---- -------- ------
1.48 28,917 10.52 1.34 26,256 9.85
---- -------- ------ ---- -------- ------
Savings and club............... 2.50 145,448 52.93 2.50 142,953 53.65
Money Management............... 3.22 21,496 7.82 3.15 21,078 7.91
Certificate of Interest........ 5.24 79,033 28.74 5.18 76,184 28.59
---- -------- ------ ---- -------- ------
3.46 246,072 89.48 3.41 240,215 90.15
---- -------- ------ ---- -------- ------
3.24% $274,894 100.00% 3.28% $266,471 100.00%
==== ======== ====== ==== ======== ======
The scheduled maturities of certificates of deposits are as follows:
MARCH 31,
-------------------------
1998 1997
-------------- -------
(IN THOUSANDS)
One year or less............................................ $23,765 $36,028
After one year to three years............................... 38,605 25,639
After three years to five years............................. 29 14,447
After five years............................................ 16,634 71
------- -------
$79,033 $76,185
======= =======
The aggregate amount of certificates of deposit with minimum denominations
of $100,000 or more was approximately $11,625,000 and $9,430,000 at March
31,1998 and 1997, respectively.
Interest expense on deposits consists of the following:
FOR YEAR ENDED MARCH 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
Demand......................................... $ 364,774 $ 332,393 $ 330,562
Savings and clubs.............................. 3,601,095 3,542,024 3,507,068
Money Management............................... 691,939 657,529 599,280
Certificates of deposit........................ 3,948,687 3,844,009 3,965,252
---------- ---------- ----------
8,606,495 8,375,955 8,402,162
Penalty for early withdrawals of certificate of
deposit...................................... (10,137) (20,787) (11,961)
---------- ---------- ----------
$8,596,358 $8,355,168 $8,390,201
========== ========== ==========
72
74
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
MARCH 31,
INTEREST --------------------------
LENDER MATURITY RATE 1998 1997
- ------ ------------------ -------- ----------- -----------
Federal Home Loan Bank.............. April 30, 1997 5.69% 8,000,000
Federal Home Loan Bank.............. May 30, 1997 5.73% 7,000,000
Federal Home Loan Bank.............. June 30, 1997 5.76% 8,000,000
Federal Home Loan Bank.............. July 11, 1997 5.56% 6,000,000
Federal Home Loan Bank.............. July 29, 1997 5.81% 4,000,000
Federal Home Loan Bank.............. August 15, 1997 5.82% 4,000,000
Federal Home Loan Bank.............. September 10, 1997 5.51% 6,000,000
Federal Home Loan Bank.............. September 16, 1997 5.56% 5,000,000
Federal Home Loan Bank.............. October 14, 1997 5.79% 5,000,000
Federal Home Loan Bank.............. November 3, 1997 5.59% 4,000,000
Federal Home Loan Bank.............. November 26, 1997 5.58% 5,835,000
Federal Home Loan Bank.............. December 3, 1997 5.56% 6,500,000
Federal Home Loan Bank.............. December 22, 1997 5.77% 5,000,000
Federal Home Loan Bank.............. April 13, 1998 5.77% 5,700,000
Federal Home Loan Bank.............. May 26, 1998 5.98% 6,000,000
Federal Home Loan Bank.............. June 23, 1998 5.89% 5,000,000
Federal Home Loan Bank.............. June 23, 1998 5.98% 6,000,000
Federal Home Loan Bank.............. July 29, 1998 5.91% 8,000,000
Federal Home Loan Bank.............. July 28, 1998 5.89% 6,000,000
Morgan Stanley Repo................. August 14, 1998 5.91% 4,000,000
Federal Home Loan Bank.............. September 3, 1998 5.91% 6,500,000
Federal Home Loan Bank.............. October 27, 1998 5.92% 6,000,000
Morgan Stanley Repo................. November 26, 1998 5.58% 4,820,000
Federal Home Loan Bank.............. February 26, 1999 5.81% 8,000,000
Federal Home Loan Bank.............. December 20, 1999 5.79% 5,000,000
Federal Home Loan Bank.............. March 2, 2000 5.82% 7,000,000
Federal Home Loan Bank.............. January 26, 2000 5.75% 9,000,000
-----------
5.85% $87,020,000 $74,335,000
=========== ===========
Information concerning borrowings collateralized by securities sold under
agreements to repurchase are summarized as follows:
FOR THE YEAR ENDED
MARCH 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
Average balance during the year............................. $75,280 $26,650
Average interest rate during the year....................... 5.80% 5.73%
Maximum month-end balance during the year................... 83,335 74,335
Mortgage-backed securities underlying the agreements at year
end:
Carrying value............................................ $59,065 $ 4,898
Estimated fair value...................................... $59,090 $ 4,757
73
75
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK
MARCH 31,
----------------------------------------------------------
1998 1997
MATURING --------------------------- ---------------------------
YEAR ENDED WEIGHTED WEIGHTED
MARCH 31, AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT
- ---------------------------------------- ------------ ----------- ------------ -----------
1998.................................... 5.89% $21,000,000 9.69% $45,000,000
1999.................................... 5.84% 5,000,000
2000.................................... 5.85% 10,000,000
2003.................................... 3.58% 372,596 3.58% 400,000
2012.................................... 3.50% 369,090
----------- -----------
36,741,686 45,400,000
=========== ===========
At March 31, 1998 and 1997, the advances were secured by pledges of the
Bank's investment in the capital stock of the Federal Home Loan Bank totaling
$5,535,000 respectively and a blanket assignment of the Bank's unpledged
qualifying mortgage, mortgage-backed securities and investment portfolios.
NOTE 14. INCOME TAXES
The Bank qualifies as a thrift institution under the provisions of the Code
and is therefore permitted to deduct from taxable income an allowance for bad
debts based on the greater of: (1) actual loan losses (the "experience method");
or (2) eight percent of taxable income before such bad debt deduction less
certain adjustments (the "percentage of taxable income method"). For the tax
years ended December 31,1996 and 1995, the deduction for bad debts was computed
using the experience method. For the year ended March 31, 1998, the deductions
for bad debt was computed using the percentage method.
Retained earnings at March 31, 1998, includes approximately $4,183,000 of
such bad debts, for which federal income taxes have not been provided. If such
amount is used for purpose other than bad debts losses, including distributions
in liquidation, it will be subject to federal income tax at the current rate.
The components of income taxes are summarized as follows:
YEAR ENDED MARCH 31,
-------------------------------------
1998 1997 1996
---------- ----------- --------
Current........................................ $ 966,000 $(1,348,259) $785,816
Deferred....................................... 237,466 73,181 (75,869)
---------- ----------- --------
$1,203,466 $(1,275,078) $674,297
========== =========== ========
74
76
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents a reconciliation between the reported income
taxes and the federal income taxes which would be computed by applying the
normal federal income tax rate of 34% to income before income taxes:
YEAR ENDED MARCH 31,
------------------------------------------------------------------
1998 1997 1996
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ----------- ------- -------- -------
Income taxes........................ $ 765,000 34.00 $(1,025,014) (34.00) $462,046 34.00
Increases (reductions) in income
taxes resulting from:
Statutory bad debts deduction..... 303,000 13.47 -- -- (36,000) (2.65)
Amortization of intangibles....... (34,000) (1.51) (43,324) (1.44) (37,600) (2.77)
Dividend exclusion................ (85,200) (3.79) (373,400) (12.39) (190,845) 14.04
State and city income taxes, net
of federal income tax effect... (304,660) 12.47 (166,660) (5.53) 190,845 14.04
Other items, net.................. (49,334) (2.15) 26,583 1.96
----------- ------ ----------- ------ -------- -----
Effective income taxes.............. $(1,203,466) 53.49 $(1,275,078) 72.30 $605,874 44.58
=========== ====== =========== ====== ======== =====
At March 31, 1997, income taxes payable of $379,076 are included in other
liabilities. 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,
----------------------
1998 1997
-------- ----------
(IN THOUSANDS)
DEFERRED TAX ASSETS
Reserve for uncollected interest............................ $114,360 $ 89,767
Loan and real estate owned losses in excess of bad debts
deduction................................................. 188,000 (46,808)
Deferred loan fees.......................................... 151,400 354,388
Accrued pension............................................. (63,165) 229,535
Write down of common stock.................................. 19,829 19,829
Reserve for losses on other assets.......................... 98,741 149,985
Unrealized loss on securities available for sale............ 40,410 392,547
Other....................................................... 65,165 64,579
-------- ----------
612,740 1,253,822
-------- ----------
DEFERRED TAX LIABILITIES
Savings premium............................................. 209,883 282,685
Depreciation................................................ 330,800 521,721
-------- ----------
Sub total................................................... 540,683 1,099,380
-------- ----------
Net deferred tax assets (liabilities) included in other
assets or (liabilities)................................... $ 72,057 $ 154,442
======== ==========
75
77
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. 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 FERREA, the OTS promulgated capital requirements for financial institutions
consisting of minimum tangible and core capital ratios of 1.50% and 3.00%,
respectively, of the institution's adjusted total assets and a minimum
risk-based capital ratio of 8.00% of the institution's risk weighted assets.
Although the minimum core capital ratio is 3.00%, the FDICIA stipulates that an
institution with less than 4.00% core capital is deemed undercapitalized. At
March 31,1998 and 1997, the Bank exceeded all the current capital requirements.
The following table sets out the Bank's various regulatory capital
categorized at March 31, 1998.
1998
---------------------
DOLLARS PERCENTAGE
------- ----------
(IN THOUSANDS)
Tangible capital............................................ $30,201 6.90%
Tangible equity............................................. 31,434 7.17
Core/leverage capital....................................... 30,249 6.91
Tier 1 risk-based capital................................... 31,731 7.25
------- -----
Total risk-based capital.......................... $31,731 16.01%
======= =====
The following table reconciles the Bank's stockholders' equity at March 31,
1998, under generally accepted accounting principles to regulatory capital
requirements:
REGULATORY CAPITAL REQUIREMENTS
----------------------------------------------
GAAP TANGIBLE TIER/CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
------- -------- --------- ----------
Stockholders' Equity at March 31, 1998............ $31,434 $31,434 $31,434 $31,434
======= ======= ======= =======
Add:
Unrealized loss on securities available for
sale, net.................................... 13 13 13
General valuation allowances.................... -- -- 1,522
Qualifying intangible assets.................... 48 48 48
Deduct:
Goodwill........................................ (1,246) (1,246) (1,246)
Excess of net deferred tax assets............... -- -- --
Asset required to be deducted................... -- -- (40)
------- ------- -------
Regulatory capital.............................. 30,201 30,249 31,731
Minimum capital requirement..................... 6,562 13,124 15,856
------- ------- -------
Regulatory capital excess....................... $23,639 $17,125 $15,875
======= ======= =======
NOTE 16. 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
76
78
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
equal the maximum amount deductible for federal income tax purposes. The
following table sets forth the plan's funded status:
MARCH 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Actuarial present value of benefit obligation including
vested benefits of $2,054,535 and $1,690,000.............. $2,382,850 $2,097,345
Projected benefit obligation................................ 2,796,385 2,425,891
---------- ----------
Plan assets at fair value................................... 3,275,671 2,900,146
Plan assets in excess of projected benefit obligation....... 474,255 474,255
Unrecognized net obligation being amortized over 19.75
years..................................................... 330,567 366,279
Unrecognized prior service cost............................. 18,678 20,812
Unrecognized net (gain)..................................... (947,721) (1,008,762)
---------- ----------
(Accrued) pension cost included other liabilities........... (119,181) 147,416
========== ==========
Net periodic pension cost included the following components:
YEAR ENDED MARCH 31,
---------------------------------
1998 1997 1996
-------- -------- ---------
Service cost...................................... $158,235 $115,541 $ 95,323
Interest cost..................................... 182,273 158,379 137,100
Return on plan assets............................. (387,657) (318,555) (174,058)
Net deferral and amortization..................... 133,928 157,672 (94,665)
-------- -------- ---------
Net periodic pension cost......................... $ 86,779 $ 55,057 $ 36,300)
======== ======== =========
Significant actuarial assumptions used in determining plan benefits are:
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
---- ---- ----
Annual salary increase...................................... 5.50% 5.00% 6.00%
Long-term return on assets.................................. 8.00% 8.00% 8.0%
Discount rate used in measurement of benefit obligations.... 7.50% 7.00% 8.25%
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 save up to
15% of their compensation and may receive a percentage matching contribution
from the Bank with respect to 50% of the eligible employee's contributions up to
the maximum allowed by law. Total incentive plan expenses for the years ended
March 31, 1998, 1997 and 1996 were $73,000, $63,500 and $52,700, respectively.
77
79
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
Actuarial present value of benefit obligation including
vested benefits of $2,054,535 and $1,690,000.............. $327,815 $360,564
======== ========
Projected benefit obligation................................ $479,672 $401,463
Plan assets at fair value................................... -- --
-------- --------
Projected benefit obligation in excess of plan assets....... 479,672 401,463
Unrecognized past service cost.............................. 165,700 (220,936)
Additional minimum liability................................ 13,843 180,037
-------- --------
Accrued liability included in other liabilities............. $327,815 $360,564
======== ========
Net periodic pension cost for the years ended March 31,1998, 1997 and 1996
included the following:
1998 1997 1996
-------- ------- --------
Service cost................................ $ 42,403 $24,330 $ 18,267
Interest cost............................... 31,562 31,395 28,417
Net deferral and amortization............... 58,758 55,324 55,236
-------- ------- --------
Net pension cost............................ $132,723 $111,049 $101,920
======== ======= ========
The actuarial assumptions used in determining plan benefits include annual
fee at 2.80% for each of the three years ended March 31, 1998, and a discount
rate of 8.00%, 7.50% and 8.00%, for the years ended March 31, 1998, 1997 and
1996, respectively. The additional minimum liability included as an intangible
asset in other assets are $165,700 and $221,093 for the years ended March 31,
1998 and 1997, respectively.
Management Recognition Plan
Pursuant to the management recognition plan approved at the stockholders
meeting held on September 12, 1995, the Bank recognized $93,000 and $75,000 as
expense for the years ended March 31, 1998 and 1997.
NOTE 17. 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.
78
80
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 share become
outstanding for net income per common share computations. ESOP compensation
expense was $241,000 and $156,000 for the years ended March 31,1998 and 1997
respectively.
The ESOP shares at March 31,1998 and 1997 are as follows:
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
Allocated shares............................................ 50,236 28,389
---------- ----------
Shares committed to be released............................. 25,519 21,847
Unreleased shares........................................... 106,377 131,896
---------- ----------
Total ESOP shares................................. 182,132 182,132
========== ==========
Fair value of unreleased shares............................. $2,709,214 $1,345,251
NOTE 18. 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 need 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 in excess of the amount recognized in the statement of
financial condition. The contract amounts of those instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Bank
uses the same credit policies making commitments as it does for on-balance-sheet
instruments.
The Bank has outstanding various loan commitments as follows:
MARCH 31,
-------------------------
1998 1997
---------- -----------
Commitments To Originate Loans Mortgage.................... $9,585,776 $13,443,419
========== ===========
Commitments To Purchase Loans Mortgage..................... $ -- $32,544,057
========== ===========
Commitments to Sell Loans Mortgage......................... -- $ --
Consumer Loans............................................. $ -- --
---------- -----------
Total............................................ $ -- $ --
========== ===========
At March 31,1998, of the $9,585,776 in outstanding commitments to originate
mortgage loans, $1,334,776 are at fixed rates within a range of 6.50% to 8.00%,
$7,626,000 are for balloon loans with 5 years maturity, whose rates range
between 8.50% to 9.50% and $625,000 commercial are adjustable rate with initial
rates ranging from 8.00% to 8.25%.
79
81
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At March 31,1998, undisbursed from approved commercial lines of credit
totaled $2,107,000. All such lines are secured, including $1,100,000 in
warehouse lines of credit secured by the underlying warehoused mortgages,
expired within one year, and carry interest rates that float at from 1.50% to
2.00% above the prime rate.
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 $263,000, $285,000 and $302,000
for the years ended March 31, 1998, 1997, and 1996, respectively. As of March
31, 1998, minimum rental commitments under all noncancellable leases with
initial or remaining terms of more than one year and expiring through 2011 are
as follows:
MINIMUM RENTAL
YEAR ENDED MARCH 31 (IN THOUSANDS)
- ------------------- --------------
1998.......................................... $ 263
1999.......................................... 266
2000.......................................... 293
2001.......................................... 296
2002.......................................... 296
2003.......................................... 296
Thereafter.................................... 1,330
------
$2,744
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.
On January 2, 1996, the United States District Court for the Southern
District of New York dismissed the class action encaptioned Dougherty v. Carver
Federal Savings Bank for lack of subject matter jurisdiction. The class action
alleged that the offering circular, used by Carver to sell its stock in its
public offering, contained material misstatements and omissions. Further, the
complaint alleged that the Bank's shares were not appraised by an independent
appraiser. By separate order on the same date, the court made its ruling
applicable to Gomberg v. Carver Federal Savings Bank and Uminer v. Carver
Federal Savings Bank, two other class actions filed in the Southern District of
New York which asserted claims essentially identical to those asserted in the
Dougherty suit.
The plaintiffs filed a consolidated notice of appeal on January 29, 1996
with the United States Court of Appeals for the Second Circuit. In April 1997
the Circuit Court concluded that the District had subject matter jurisdiction
over the plaintiffs' complaint, the Circuit Court reversed and remanded the case
back to the District Court. On July 10, 1997, upon request of all counsel, the
trial judge directed that discovery be completed by March 31, 1998 and that the
case be ready for trial in May of 1998. As of the date hereof, no trial date has
been set by the court. Carver believes that the allegations made in this action
are without merit and intends to aggressively defend its interest with respect
to this matter.
80
82
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In the conduct of the Company's business, it is also involved in normal
litigation matters. In the opinion of management, the ultimate disposition of
such litigation should not have a material adverse effect on the financial
position or results of operations of the Company.
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is defined as the amount at which
the instrument could be exchange in a current transaction between willing
parties, other than a forced or liquidation sale. Significant estimations were
used by the Bank for the purpose of this disclosure. Estimated fair values have
been determined by the Bank using the best available data and estimation
methodology suitable for each category of financial instrument. For those loans
and deposits with floating interest rates, it is presumed that estimated fair
values generally approximate their recorded book balances. The estimation
methodologies used and the estimated fair values and carrying values of the
Bank's financial instruments are set forth below:
Cash And Cash Equivalents And Accrued Interest Receivable
The carrying amounts for cash and cash equivalents and accrued 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 value of commitments to originate loans is equal to amount of
commitment.
81
83
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts and estimated fair values of the Bank's financial
instruments at March 31, 1998 and 1997 are as follows:
AT MARCH 31,
------------------------------------------------
1998 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
Financial Assets:
Cash and cash equivalents...................... $12,120 $12,120 $ 4,231 $ 4,231
Securities available........................... 28,408 28,382 84,708 83,863
Investment securities.......................... -- -- 1,675 1,673
Mortgage-backed securities..................... 91,116 90,198 110,853 107,841
Loans receivable............................... 274,905 276,170 197,918 199,073
Accrued interest receivable.................... 2,763 2,763 2,978 2,978
Financial Liabilities:
Deposits....................................... 274,894 273,401 266,471 265,566
Securities sold under agreements to purchase... 87,020 87,020 74,335 74,333
Advances from Federal Home Loan Bank of New
York........................................ 36,742 36,730 45,400 45,325
Other borrowed money........................... 1,184 1,184 1,366 1,366
Commitments
To originate loans............................. 9,586 9,586 13,443 4,905
To sell loans.................................. -- -- -- --
To fund line of credit......................... 5,276 5,276 5,970 5,970
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.
82
84
CARVER BANCORP INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 20. QUARTERLY FINANCIAL DATA (UNAUDITED)
YEAR ENDED MARCH 31, 1998
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Interest income..................................... $ 6,797 $ 7,146 $ 6,931 $ 6,954
Interest expense.................................... (3,820) (3,828) (3,694) (3,677)
Net interest income................................. 2,977 3,318 3,237 3,277
Provision for loan losses........................... (168) (171) (280) (691)
Non-interest income loss............................ 316 353 550 1,133
Non-interest expense................................ (2,561) (2,902) (2,938) (3,200)
Income taxes (benefit).............................. (254) (269) (268) (413)
------- ------- ------- -------
Net income (loss)................................... $ 310 $ 329 $ 301 $ 106
======= ======= ======= =======
Net income (loss) per common share.................. $ 0.14 $ 0.15 $ 0.14 $ 0.05
======= ======= ======= =======
YEAR ENDED MARCH 31, 1997
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Interest income..................................... $ 5,811 $ 5,609 $ 5,770 $ 5,657
Interest expense.................................... (3,132) (3,133) (3,135) (3,083)
Net interest income................................. 2,679 2,476 2,635 2,574
Provision for loan losses........................... (52) (33) (51) (1,554)
Non-interest income loss............................ 328 282 238 (735)
Non-interest expense................................ (2,464) (4,158) (2,559) (2,622)
Income taxes (benefit).............................. 228 (649) 111 (966)
------- ------- ------- -------
Net income (loss)................................... $ 263 $ (784) $ 152 $(1,371)
======= ======= ======= =======
Net income (loss) per common share.................. $ 0.12 $ (0.36) $ 0.07 $ (0.63)
======= ======= ======= =======
83
85
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding Directors and Executive Officers of the Registrant is
included under the headings, "Information with respect to Nominees and
Continuing Directors," "Nominees for Election as Directors," "Continuing
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Company's Proxy Statement for its Annual Meeting of Stockholders to
be held on August 14, 1998, which will be filed with the SEC within 120 days
from March 31, 1998, and is incorporated herein by reference. Information
regarding Executive Officers, who are not Directors, appears under the caption
"Executive Officers of the Holding Company" included in Item 1 of this Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation is included under the
headings "Executive Compensation" (excluding the Stock Performance Graph and the
Compensation Committee Report) and "Directors' Compensation" in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on August 14,
1998, which will be filed with the SEC within 120 days from March 31, 1998, and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to security ownership of certain beneficial owners and
management is included under the headings "Security Ownership of Certain
Beneficial Owners" and "Stock Ownership of Management" in the Company's Proxy
Statement for its Annual Meeting of Stockholders to be held on August 14, 1998,
which will be filed with the SEC within 120 days from March 31, 1998, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is
included under the heading "Certain Relationships and Related Transactions" in
the Company's Proxy Statement for its Annual Meeting of Stockholders to be held
on August 14, 1998, which will be filed with the SEC within 120 days from March
31, 1998 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) List of Documents Filed as Part of this Report
(1) Consolidated Financial Statements. The following are incorporated
by reference from Item 8 hereof.
Independent Auditors' Report
Consolidated Statements of Financial Condition as of March 31, 1998
and 1997
Consolidated Statements of Income for Each of the Years in the
Three-Year Period Ended March 31, 1998
Consolidated Statements of Changes in Stockholders' Equity for Each
of the Years in the Three-Year Period Ended March 31, 1998
Consolidated Statements of Cash Flows for Each of the Years in the
Three-Year Period Ended March 31, 1998
Notes to Consolidated Financial Statements
(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.
84
86
(3) Exhibits. The following is a list of exhibits filed as part of this
Annual Report and is also the Exhibit Index.
(b) Reports on Form 8-K filed during the last quarter of the period covered
by this report: None.
(c) Exhibit required by Item 601 of Regulation S-K:
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
10.1 Carver Bancorp, Inc. 1995 Stock Option Plan, effective as of
September 12, 1995(1)(2)
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)(3)
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)(4)
10.8 Carver Bancorp, Inc. Incentive Compensative Plan, effective
as of September 12, 1995(1)(5)
10.9 Employment Agreement by and between Carver Federal Savings
Bank and Thomas L. Clark, entered into as of April 1,
1997(6)
10.10 Employment Agreement by and between Carver Bancorp, Inc. and
Thomas L. Clark, entered into as of April 1, 1997(6)
10.11 Separation Agreement and General Release by and among Carver
Bancorp, Inc., Carver Federal Savings Bank and Biswarup
Mukherjee entered into as of October 24, 1997
10.12 Supplemental Executive Retirement Agreement by and between
Carver Federal Savings Bank and Richard T. Greene, entered
into as of January 30, 1995(1)
10.13 Consulting Agreement by and between Carver Bancorp, Inc. and
M. Moran Weston, entered into as of October 1, 1997
10.14 Agreement and Plan of Reorganization by and among Carver
Federal Savings Bank, Carver Bancorp, Inc. and Carver
Interim Federal Savings Bank(1)
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule (only submitted with filing in
electronic format)
99.1 Proxy Statement for the 1998 Annual Meeting of Stockholders
of Carver Bancorp, Inc. to be filed with the Securities and
Exchange Commission within 120 days from March 31, 1998 is
incorporated herein by reference.
- ---------------
(1) Incorporated herein by reference to Registration Statement No. 333-0559 on
Form S-4 (the "Form S-4") of Carver Bancorp. Inc., filed with the Securities
and Exchange Commission during July 1997, as amended.
(2) Filed as Exhibit 10.1 to the Form S-4.
(3) Filed as Exhibit 10.4 to the Form S-4.
(4) Filed as Exhibit 10.7 to the Form S-4.
(5) Filed as Exhibit 10.8 to the Form S-4.
(6) Incorporated herein by reference to the Exhibits to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997.
85
87
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, 1998 By /s/ THOMAS L. CLARK, JR.
--------------------------------------------------------
Thomas L. Clark, Jr.
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.
By: /s/ THOMAS L. CLARK, JR. President, Chief Executive Officer July 14, 1998
and Director (Principal Executive
- -------------------------------------------------- Officer)
Thomas L. Clark, Jr.
By: /s/ WALTER T. BOND Acting Chief Financial Officer and July 14, 1998
Chief Investment Officer
- -------------------------------------------------- (Principal Financial and
Walter T. Bond Accounting Officer)
By: /s/ DAVID N. DINKINS Director July 14, 1998
- --------------------------------------------------
David N. Dinkins
By: /s/ LINDA H. DUNHAM Director July 14, 1998
- --------------------------------------------------
Linda H. Dunham
By: /s/ HERMAN JOHNSON Director July 14, 1998
- --------------------------------------------------
Herman Johnson
By: /s/ DAVID R. JONES Chairman of the Board and Director July 14, 1998
- --------------------------------------------------
David R. Jones
By: /s/ PAZEL G. JACKSON Director July 14, 1998
- --------------------------------------------------
Pazel G. Jackson
By: /s/ ROBERT J. FRANZ Director July 14, 1998
- --------------------------------------------------
Robert J. Franz
86
88
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
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
10.1 Carver Bancorp, Inc. 1995 Stock Option Plan, effective as of
September 12, 1995(1)(2)
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)(3)
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)(4)
10.8 Carver Bancorp, Inc. Incentive Compensative Plan, effective
as of September 12, 1995(1)(5)
10.9 Employment Agreement by and between Carver Federal Savings
Bank and Thomas L. Clark, entered into as of April 1,
1997(6)
10.10 Employment Agreement by and between Carver Bancorp, Inc. and
Thomas L. Clark, entered into as of April 1, 1997(6)
10.11 Separation Agreement and General Release by and among Carver
Bancorp, Inc., Carver Federal Savings Bank and Biswarup
Mukherjee entered into as of October 24, 1997
10.12 Supplemental Executive Retirement Agreement by and between
Carver Federal Savings Bank and Richard T. Greene, entered
into as of January 30, 1995(1)
10.13 Consulting Agreement by and between Carver Bancorp, Inc. and
M. Moran Weston, entered into as of October 1, 1997
10.14 Agreement and Plan of Reorganization by and among Carver
Federal Savings Bank, Carver Bancorp, Inc. and Carver
Interim Federal Savings Bank(1)
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule (only submitted with filing in
electronic format)
99.1 Proxy Statement for the 1998 Annual Meeting of Stockholders
of Carver Bancorp, Inc. to be filed with the Securities and
Exchange Commission within 120 days from March 31, 1998 is
incorporated herein by reference.
- ---------------
(1) Incorporated herein by reference to Registration Statement No. 333-0559 on
Form S-4 (the "Form S-4") of Carver Bancorp. Inc., filed with the Securities
and Exchange Commission during July 1997, as amended.
(2) Filed as Exhibit 10.1 to the Form S-4.
(3) Filed as Exhibit 10.4 to the Form S-4.
(4) Filed as Exhibit 10.7 to the Form S-4.
(5) Filed as Exhibit 10.8 to the Form S-4.
(6) Incorporated herein by reference to the Exhibits to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997.