10-Q 1 carver_10-q.txt CARVER BANCORP INC UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________________________________ FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-21487 CARVER BANCORP, INC. -------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-3904174 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 75 WEST 125TH STREET, NEW YORK, NEW YORK 10027 ---------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrants telephone number, including area code: (212) 876-4747 -------------- 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 thirty days. Yes X No --- COMMON STOCK, PAR VALUE $.01 2,316,358 ---------------------------- --------- Class Outstanding at July 31, 2002 CONTENTS
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition as of June 30, 2002 (unaudited) and March 31, 2002...........................................1 Consolidated Statements of Income for the Three Months Ended June 30, 2002 and 2001 (unaudited)...............................................2 Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income for the Three Months Ended June 30, 2002 (unaudited)..............3 Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2002 and 2001 (unaudited)...............................................4 Notes to Consolidated Financial Statements (unaudited).................................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................6 Item 3. Quantitative and Qualitative Disclosure About Market Risk......................................13 PART II. OTHER INFORMATION Item 1. Legal Proceedings..............................................................................14 Item 2. Changes in Securities and Proceeds.............................................................14 Item 3. Defaults upon Senior Securities................................................................14 Item 4. Submission of Matters to a Vote of Security Holders............................................14 Item 5. Other Information..............................................................................14 Item 6. Exhibits and Reports on Form 8-K...............................................................14 SIGNATURES.......................................................................................................15 EXHIBITS.........................................................................................................16
PART I. .FINANCIAL INFORMATION ITEM 1. .FINANCIAL STATEMENTS CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except share data)
June 30, March 31, 2002 2002 --------------- ------------- ASSETS (Unaudited) Cash and cash equivalents: Cash and due from banks $ 14,599 $ 13,751 Federal Funds sold 31,000 21,100 --------------- ------------- Total cash and cash equivalents 45,599 34,851 --------------- ------------- Securities: Available-for-sale, at fair value (including pledged as collateral of $80,038 at June 30, 2002 and $76,720 at March 31, 2002) 81,573 89,821 Held-to-maturity, at amortized cost (including pledged as collateral of $14,295 June 30, 2002 and $15,549 at March 31, 2002) (fair value of $14,508 at June 30, 2002 and $15,716 at March 31, 2002) 14,411 15,643 --------------- ------------- Total securities 95,984 105,464 --------------- ------------- Loans receivable: Real estate mortgage loans 280,050 290,914 Consumer and commercial business loans 2,292 2,328 Allowance for loan losses (4,132) (4,128) --------------- ------------- Total loans receivable, net 278,210 289,114 --------------- ------------- Office properties and equipment, net 10,208 10,251 Federal Home Loan Bank of New York stock, at cost 3,213 3,763 Accrued interest receivable 2,455 2,804 Excess of cost over net assets acquired, net 337 391 Other assets 2,947 3,072 --------------- ------------- Total assets $ 438,953 $ 449,710 =============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 330,089 $ 324,954 Advances from the Federal Home Loan Bank of New York and other borrowed money 60,600 75,651 Other liabilities 10,472 12,363 --------------- ------------- Total liabilities 401,161 412,968 --------------- ------------- Stockholders' equity: Preferred stock (par value $0.01 per share; 1,000,000 shares authorized; 100,000 issued and outstanding) 1 1 Common stock (par value $0.01 per share: 5,000,000 shares authorized; 2,316,358 shares issued; 2,300,869 shares outstanding at June 30, 2002 and March 31, 2002) 23 23 Additional paid-in capital 23,765 23,756 Retained earnings 13,970 13,194 Unallocated common stock held by employee stock ownership plan ("ESOP") (106) (152) Unamortized awards of common stock under management recognition plan ("MRP") (49) (58) Treasury stock, at cost (15,489 shares at June 30, 2002 and 15,489 shares at March 31, 2002) (138) (138) Accumulated other comprehensive income 326 116 --------------- ------------- Total stockholders' equity 37,792 36,742 --------------- ------------- Total liabilities and stockholders' equity $ 438,953 $ 449,710 =============== =============
See accompanying notes to consolidated financial statements. 1 CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except share data)
Three Months Ended June 30, -------------------------------- 2002 2001 --------------- --------------- Interest Income: Loans $ 5,339 $ 5,485 Mortgage-backed securities 879 666 Investment securities 401 682 Federal funds sold 110 216 --------------- --------------- Total interest income 6,729 7,049 --------------- --------------- Interest expense: Deposits 1,602 2,165 Advances and other borrowed money 736 1,222 --------------- --------------- Total interest expense 2,338 3,387 --------------- --------------- Net interest income 4,391 3,662 Provision for loan losses - 225 --------------- --------------- Net interest income after provision for loan losses 4,391 3,437 --------------- --------------- Non-interest income: Loan fees and service charges 66 92 Income from sale of branches - 987 Loss from sale of loans - (101) Other 887 442 --------------- --------------- Total non-interest income 953 1,420 --------------- --------------- Non-interest expense: Compensation and benefits 1,624 1,381 Net occupancy expense 336 293 Equipment 359 325 Other 1,437 1,420 --------------- --------------- Total non-interest expense 3,756 3,419 --------------- --------------- Income before income taxes 1,588 1,438 Income taxes 714 273 --------------- --------------- Net income $ 874 $ 1,165 =============== =============== Dividends applicable to preferred stock $ 49 $ 49 Net income available to common stockholders $ 825 $ 1,116 =============== =============== Earnings per common share: Basic $ 0.36 $ 0.49 =============== =============== Diluted $ 0.35 $ 0.47 =============== ===============
See accompanying notes to consolidated financial statements. 2 CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Unaudited) (In thousands)
ACCUMULATED COMMON COMMON TOTAL ADDITIONAL OTHER STOCK STOCK STOCK PREFERRED COMMON PAID IN RETAINED TREASURY COMPREHENSIVE ACQUIRED ACQUIRED BY HOLDERS' STOCK STOCK CAPITAL EARNINGS STOCK INCOME BY ESOP MRP EQUITY ----- ----- ------- -------- ----- ------ ------- --- ------ Balance-March 31, 2002 $ 1 $ 23 $23,756 $ 13,194 ($138) $ 116 ($152) ($58) $36,742 Comprehensive income: Net Income - - - $874 - - - - $874 Change in net unrealized gain on Available-for-sale securities, net of taxes - - - - - 210 - - 210 ----- ----- ------- ------- ----- ---- ----- ---- ------ Dividends paid - - - (98) - - - - (98) Allocation of ESOP stock - - 9 - - - 46 - 55 Purchase of shares for MRP - - - - - - - 9 9 ----- ----- ------- ------- ----- ---- ----- ---- ------ Balance-June 30, 2002 $ 1 $ 23 $23,765 $13,970 ($138) $326 ($106) ($49) $37,792
See accompanying notes to consolidated financial statements. 3 CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
THREE MONTHS ENDED JUNE 30, --------------------------- 2002 2001 ---- ---- Cash flows from operating activities: Net income $ $ 874 $ 1,165 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses - 225 ESOP and MRP expense 75 41 Depreciation and amortization expense 286 284 Amortization of intangibles 53 53 Other amortization (accretion) 186 (253) Gain on sale of branches - (987) Impairment of foreclosed real estate - 20 Changes in assets and liabilities: decrease in accrued interest receivable 349 277 Decrease (increase) in other assets 126 (172) (Decrease)Increase in other liabilities (2,476) 208 (Decrease) in accrued interest payable (11) - --------------- -------------- Net cash (used in) provided by operating activities (538) 861 --------------- -------------- Cash flows from investing activities: Purchases of securities: Available-for-sale - (54,847) Held-to-maturity (22) - Proceeds from principal payments, maturities and calls of securities: Available-for-sale 8,470 58,000 Held-to-maturity 1,223 2,392 Proceeds from sales of available-for-sale securities - - Disbursements for loan originations (19,373) (11,692) Loans purchased from third parties - (20,251) Principal collections on loans 29,712 26,435 Redemption of FHLB-NY stock 550 - Proceeds from loans sold 984 - Proceeds from sale of fixed assets - 570 Proceeds from sale of other real estate owned - 429 Additions to premises and equipment (244) (115) --------------- -------------- Net cash provided by investing activities 21,300 921 --------------- -------------- Cash flows from financing activities: Net increase in deposits 5,135 9,312 Repayment of securities repurchase agreements - 10,000 Repayment of FHLB-NY advances and other borrowed money (15,051) (251) Cash paid to fund sale of deposits - (15,802) Dividends paid (98) (98) --------------- -------------- Net cash (used in) provided by financing activities (10,014) 3,161 --------------- -------------- Net increase in cash and cash equivalents 10,748 4,943 Cash and cash equivalents at beginning of the period 34,851 31,758 --------------- -------------- Cash and cash equivalents at end of the period $ 45,599 $ 36,701 =============== ============== Supplemental information: Noncash Transfers- Change in unrealized gain on valuation of investments available-for-sale, net $326 $ - Cash paid for- Interest paid 2,338 3,601 Income taxes paid 778 - =============== ==============
See accompanying notes to consolidated financial statements. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Carver Bancorp, Inc. (the "Holding Company" or "Bancorp"), have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for fair presentation have been included. The unaudited consolidated financial statements presented herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Holding Company's Annual Report on Form 10-K, as amended, for the year ended March 31, 2002 ("2002 10-K"). The consolidated results of operations and other data for the three-month period ended June 30, 2002 are not necessarily indicative of results that may be expected for the entire fiscal year ending March 31, 2003 ("fiscal 2003"). The unaudited consolidated financial statements include the accounts of the Holding Company and its wholly owned subsidiaries, Carver Federal Savings Bank (the "Bank" or "Carver Federal") and Alhambra Holding Corp., a Delaware corporation ("Alhambra Holding") which is inactive, and the Bank's wholly owned subsidiaries, CFSB Realty Corp. and CFSB Credit Corp. Carver Federal and the Holding Company are referred to herein collectively as "Carver" or the "Company." All significant inter-company accounts and transactions have been eliminated in consolidation. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. (2) NET INCOME PER COMMON SHARE Basic earnings per common share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per common share includes any additional common shares as if all potentially dilutive common shares were issued (e.g., convertible preferred stock). For the purpose of these calculations, unreleased ESOP shares are not considered to be outstanding. For each of the three-month periods ended June 30, 2002 and 2001, preferred dividends of $49,000 were deducted from net income to arrive at the amount of net income available to common stockholders. Additionally, for both the three-month periods ended June 30, 2002 and 2001, 208,333 shares of common stock potentially issuable from the conversion of preferred stock are considered in determining the diluted net income per common share. (3) RECENT ACCOUNTING PRONOUNCEMENTS GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142 "GOODWILL AND OTHER INTANGIBLE ASSETS" ("SFAS 142"). SFAS 142 addresses the initial recognition and measurement of intangible assets acquired individually or with a group of other assets not constituting a business combination. In accordance with the provisions of SFAS 142, all goodwill and identifiable intangible assets identified as having an indefinite useful life, including those acquired before its effective date, will no longer be amortized but will be assessed for impairment at least annually by applying a fair-value based test as defined in the Statement. SFAS 142 requires that on acquired intangible assets having an estimated useful life, be separately recognized and amortized over their estimated useful lives. Intangible assets that remain subject to amortization shall continue to be reviewed for impairment in accordance with previous pronouncements. 5 Additionally, SFAS 142 requires that an initial impairment assessment on all goodwill recognized in the consolidated financial statements be completed within six months of the statements adoption to determine if a transition impairment charge needs to be recognized. Management has performed the initial impairment assessment as of March 31, 2002 and determined that no impairment charge is warranted. The consolidated balance sheets and consolidated statements of income presented herein disclose the identifiable intangible assets that were originally recognized separate from goodwill. Effective April 1, 2002, goodwill will no longer be amortized; however, identifiable intangible assets will continue to be amortized over the estimated useful lives. Amortization of identifiable intangible assets is estimated to be $213,000 in fiscal 2003. ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS In June 2001, the FASB issued SFAS No. 143 "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Management does not anticipate that the adoption of this statement will have a significant effect on the Company's earnings or financial position. ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS In August 2001, the FASB issued SFAS No. 144 "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and resolves accounting and implementation issues related to previous pronouncements. More specifically, it: (a) eliminates the allocation of goodwill to long-lived assets to be tested for impairment; and (b) details both a probability-weighted and primary asset approach to estimate cash flows in testing for impairment of a long-lived asset. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. Management does not anticipate that the adoption of this statement will have a significant effect on the Company's earnings or financial position. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXPLANATORY NOTE This Quarterly Report on Form 10-Q contains forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company and the Bank that are subject to various factors which could cause the actual results to differ materially from these estimates. These factors include, without limitation, the Company's success in implementing its initiatives, including its new branch opening, its ability to achieve cost-savings associated with the Bank's branch closings, changes in general, economic and market, legislative and regulatory conditions and the development of an adverse interest rate environment that adversely affects the interest rate spread or other income anticipated from the Company's operations and investments. The Company assumes no obligation to update these forward looking statements to reflect the actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. CRITICAL ACCOUNTING POLICIES Note 1 to our Audited Consolidated Financial Statements for the fiscal year ended March 31, 2002 ("fiscal 2002") included in our 2002 10-K, as supplemented by this report, contains a summary of our significant accounting policies. We believe our policies with respect to the methodology for our determination of the allowance for loan losses, the valuation of mortgage servicing rights and asset impairment judgments, including the recoverability of goodwill and other than temporary declines in the value of our securities, involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and our Board of Directors. GENERAL 6 Carver Bancorp, Inc. (the "Holding Company" or "Bancorp"), a Delaware corporation, is the holding company for Carver Federal Savings Bank (the "Bank" or "Carver Federal"), a federally chartered savings bank. 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, which operates five full-service banking locations in the New York City boroughs of Brooklyn, Queens and Manhattan. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2002 AND MARCH 31, 2002 ASSETS Total assets decreased by $10.8 million to $439.0 million at June 30, 2002 compared to $449.7 million at March 31, 2002. The change was primarily attributable to a decrease of $10.9 million in loans receivable, net, a decrease of $9.5 million in total securities and an increase of $10.7 million in total cash and cash equivalents. Due to the lower interest rate environment, loan payoffs in excess of new loans resulted a decrease of $10.9 million in loans receivable, net, during the first three months of the fiscal year ending March 31, 2003 ("fiscal 2003"). Loan repayments were $29.8 million, offset in part by loan originations of $19.4 million during the period. Loan originations were concentrated in multifamily and commercial real estate mortgage loans, which accounted for $13.4 million of the $19.4 million originated in the quarter. The remaining originations of $6.0 million were for construction loans and one- to four-family loans. Management anticipates moderate loan demand for the remainder of the year that should redeploy assets from lower earning cash equivalents to higher yielding loans. The increase in cash and cash equivalents primarily reflects the investment of a portion of the loan and securities repayments in federal funds sold. This temporary increase in cash and cash equivalents was due to net payoff activity in the loan and mortgage-backed securities portfolios, which is expected to be reinvested in additional new loans and mortgage backed securities in the second quarter. As of April 1, 2001, the Bank adopted Statement of Financial Standards No. 133 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 133") and transferred $45.7 million of mortgage-backed and investment securities from held-to-maturity to available-for-sale. An unrecognized gain of $592,000 as of June 30, 2002 is included in the carrying value of the mortgage-backed and investment securities available-for-sale. The decreases in mortgage and investment securities, adjusted for the available-for-sale adjustment in mortgage-backed and investment securities, primarily represent maturities of $7 million and principal repayments that occurred during the first three months of fiscal 2003 which exceeded purchases of investment securities. The net funds received from these activities were used primarily to fund loan originations. Office properties and equipment, net, declined $43,000 to $10.2 million at June 30, 2002 compared to $10.3 million at March 31, 2002 due primarily to normal depreciation on the Bank's property and equipment. LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES At June 30, 2002, total liabilities decreased by $11.8 million, or 2.9%, to $401.2 million compared to $413.0 million at March 31, 2002. The reduction in liabilities primarily reflects a decrease of $15.1 million in advances from the Federal Home Loan Bank of New York ("FHLB-NY") and other borrowings, offset in part by an increase of $5.1 million in deposits. The decrease in total borrowings is primarily due to $15 million of maturing borrowings being repaid to the FHLB-NY. The $5.1 million increase in deposit balances is primarily attributable to increases of $1.2 million in regular savings and club accounts, $1.1 million in certificates of deposit, $3.4 million in NOW accounts, offset in part by a decrease of $628,000 in money market accounts. STOCKHOLDERS' EQUITY Total stockholders' equity increased $1.1 million, or 2.9%, to $37.8 million at June 30, 2002 compared to $36.7 million at March 31, 2002. The increase in stockholders' equity was primarily attributable to $776,000 of 7 retained earnings for the three months ended June 30, 2002 and an increase of $210,000 in accumulated other comprehensive income resulting from the recognition of unrealized gains, net of taxes, relating to the transfer of certain investment and mortgage-backed securities from the accounting classification of held-to-maturity to available-for-sale. Investment and mortgage-backed securities accounted for as held-to-maturity are carried at cost while such securities designated as available-for-sale are carried at market with an adjustment to stockholders' equity, net of taxes. LIQUIDITY AND CAPITAL RESOURCES Liquidity is a measure of the Bank's ability to generate adequate cash to meet financial obligations. The principal cash requirements of a financial institution are to cover downward fluctuations in deposit accounts and increases in its loan portfolio. The Company's primary sources of funds are deposits, borrowed funds and principal and interest payments on loans, and mortgage-backed securities and investment securities. While maturities and scheduled amortization of loans, mortgage-backed securities and investment securities are predictable sources of funds, deposit flows and loan and mortgage-backed securities prepayments are strongly influenced by changes in general interest rates, economic conditions and competition. During fiscal 2002, the Federal Open Market Committee, or FOMC, reduced the federal funds rate on eight separate occasions by a total of 325 basis points, resulting in a lower interest rate environment compared to the fiscal year ended March 31, 2001. The increase in loan and securities repayments was primarily the result of the increase in mortgage loan refinance activity caused by this lower interest rate environment. The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During the three months ended June 30, 2002, cash and cash equivalents increased by $10.7 million. Net cash used in operating activities during this period was $538,000, representing primarily a decrease in other liabilities, offset by depreciation and amortization expense, other amortization and accretion, an increase in accrued interest receivable, and an increase in other assets. Net cash provided by investing activities was $21.3 million, representing primarily the net proceeds from principal payments, maturities and calls of securities available-for-sale and held-to-maturity and principal collections on loans, offset in part by disbursements made for the origination of loans. Net cash used in financing activities was $10.0 million, primarily representing a reduction relating to the repayment of FHLB-NY advances and other borrowed money, offset in part by a net increase in deposits. The Bank is required to maintain sufficient liquidity to ensure its safe and sound operation. Management believes the Bank's short-term assets have sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash requirements. At June 30, 2002, the Bank's liquidity ratio, which represents the average daily balance of liquid assets as a percentage of net withdrawable deposit accounts plus short-term borrowings was 7.86%. The Bank monitors its liquidity utilizing guidelines that are contained in a policy developed by management of the Bank and approved by the Bank's board of directors. The levels of the Bank's short-term liquid assets are dependent on the Bank's operating, financing and investing activities during any given period. The most significant liquidity challenge the Bank faces is the variability in cash flows as a result of mortgage refinance activity. As mortgage interest rates decline, customers' refinance activities tend to accelerate, causing the cash flow from both the mortgage loan portfolio and the mortgage-backed securities portfolio to accelerate. When mortgage interest rates increase, the opposite effect tends to occur. In addition, as mortgage interest rates decrease, customers generally tend to prefer fixed rate mortgage loan products over variable rate products. Since the Bank generally sells its fifteen-year and thirty-year fixed rate loan production into the secondary mortgage market, the origination of such products for sale does not significantly reduce the Bank's liquidity. The Office of Thrift Supervision (the "OTS"), the Bank's primary federal regulator, requires that the Bank meet minimum capital requirements. Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. At June 30, 2002, the Bank exceeded all regulatory minimum capital requirements. The table below presents certain information relating to the Bank's capital compliance at June 30, 2002. 8 REGULATORY CAPITAL 6/30/2002
Amount % of Assets ------ ----------- Total capital (to risk-weighted assets): Capital level $40,878 19.72% Less requirement 16,581 8.00 ------- ----- Excess $24,297 11.72% ======= ===== Tier 1 Capital (to risk-weighted assets): Capital level $38,268 18.46% Less requirement 8,291 4.00 ------- ----- Excess $29,977 14.46% ======= ===== Tier 1 leverage capital (to risk-weighted assets): Capital level $38,268 8.73% Less requirement 17,542 4.00 ------- ----- Excess $20,726 4.73% ------- -----
ANALYSIS OF EARNINGS The Company's profitability is primarily dependent upon net interest income, which represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income is dependent on the difference between the average balances and rates earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities. Provisions for loan losses, non-interest income, non-interest expense and income taxes further affect net income. The earnings of the Company are significantly affected by general economic and competitive conditions, particularly changes in market interest rates, and to a lesser extent by government policies and actions of regulatory authorities. The following table sets forth, for the periods indicated, certain information relating to Carver's average interest-earning assets, average interest-bearing liabilities, net interest income, interest rate spread and interest rate margin. It reflects the average yield on assets and the average cost of liabilities. Such yields and costs are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods shown. Average balances are derived from daily or month-end balances as available. Management does not believe that the use of average monthly balances instead of average daily balances has caused any material difference in information presented. The average balance of loans includes loans on which the Company has discontinued accruing interest. The yield and cost include fees, which are considered adjustments to yields. 9
THREE MONTHS ENDED JUNE 30, 2002 2001 ---- ---- Annualized Annualized Average Avg. Average Avg. Balance Interest Yield/Cost Balance Interest Yield ------- -------- ---------- ------- -------- ----- ASSETS ------ Loans recievable(1) 285,500 5,340 7.48% 277,767 5,485 7.90% Mortgaged-backed securities 64,466 879 5.45% 41,547 666 6.41% Investment securites (2) 36,135 402 4.45% 45,688 682 5.97% Fed funds 26,512 109 1.64% 20,062 216 4.31% ------- ----- ---- ------- ----- ---- Total interest-earning assets 412,613 6,730 6.52% 385,064 7,049 7.32% Non-interest-earning assets 29,524 24,319 ------- ------- Total assets 442,137 409,383 ======= ======= LIABILITIES AND EQUITY ---------------------- Deposits NOW 19,669 47 0.96% 20,183 59 1.17% Savings and clubs 128,440 443 1.38% 132,019 697 2.11% Money market accounts 14,790 52 1.41% 16,417 85 2.07% Certificates of deposit 152,044 1,061 2.79% 107,208 1,324 4.94% ------- ----- ---- ------- ----- ---- Total deposits 314,943 1,603 2.04% 275,827 2,165 3.14% Borrowed money 64,251 737 4.59% 85,302 1,222 5.73% ------- ----- ---- ------- ----- ---- Total deposits and interest-bearing liabilities 379,194 2,340 2.47% 361,129 3,386 3.75% Non-interest-bearing liabilities 25,819 15,910 ------- ------- Total liabilities 405,013 377,039 Stockholders' equity 37,124 32,344 ------- ------- Total liabilities and stockholders' equity 442,137 409,383 ======= ----- ======== ----- 4,390 3,662 ===== ===== Interest rate spread 4.05% 3.57% ==== ==== Net interest margin 4.26% 3.80% ==== ==== Ratio of average interest earning-assets to deposit and interest-bearing liabilities 1.09x 1.07x ==== ====
(1) Includes non-accrual loans. (2) Includes FHLB-NY stock 10 COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001 GENERAL The Company reported net income for the three-month period ended June 30, 2002 of $874,000 compared to net income of $1.2 million for the same period last year. Net income available to common stockholders (after adjustment for income reduced by dividends relating to the Company's preferred stock) was $825,000, or $0.35 per diluted common share, compared to $1.1 million, or $0.47 per diluted common share, for the corresponding period last year. For most of fiscal year 2002, the Company was able to utilize its tax loss carryforward, which eliminated the Company's federal tax liability. Had the Company been taxed during fiscal 2002 at its current tax rate, net income available to common stockholders at June 30, 2001 would have been $ 742,000, or $0.32 per diluted common share. Income for the quarter ended June 30, 2001 includes non-recurring other non-interest income of approximately $886,000 which represents the gain realized on the sale of deposits of the Bank's East New York branch offset in part by a loss of $101,000 from the sale of the Bank's $490,000 automobile loan portfolio. INTEREST INCOME Interest income decreased by $320,000, or 4.5%, to $6.7 million for the three months ended June 30, 2002 compared to $7.0 million in the corresponding prior year period. The decrease in interest income is due to a lower interest rate environment this quarter as compared to the same period last year. The change in total interest income was attributable to a decrease of 80 basis points in the annualized average yield on interest-earning assets to 6.52% for the three months ended June 30, 2002, compared to 7.32% for the corresponding prior year period. This was partially offset by an increase in the average balance of interest-earning assets of $27.5 million, or 7.2%, to $412.6 million for the three months ended June 30, 2002, compared with $385.1 million for the corresponding prior year period. Interest income on loans decreased by $146,000, or 2.7%, to $5.3 million for the three months ended June 30, 2002 compared to $5.5 million for the corresponding prior year period. The change was primarily due to a decrease in the annualized average yield on mortgages to 7.48% compared to 7.90% for the three months ended June 30, 2001. The decrease in average yield was partially offset by the increase in average mortgage loan balances of $7.7 million, or 2.8%, to $285.5 million for the three months period ending June 30, 2002 compared to $277.8 million for the corresponding prior year period. Interest income on mortgage-backed securities increased by $213,000, or 32.0%, to $879,000 for the three months ended June 30, 2002 compared to $666,000 for the corresponding prior year period. The change was primarily due to an increase in the average balance of mortgage-backed securities of $22.9 million, or 55.2%, to $64.5 million compared to $41.5 million, partially offset by a decrease in the annualized average yield on mortgage-backed securities of 96 basis points to 5.45% from 6.41% from the corresponding prior year period. Interest income on investment securities decreased by $281,000, or 41.2%, to $401,000 for the three months ended June 30, 2002 compared to $682,000 for the corresponding prior year period. The decline was partially due to average investment securities decreasing by $9.6 million, or 20.9%, to $36.1 million for the three months ended June 30, 2002 compared to $45.7 million for the corresponding prior year period. Also contributing to the decrease in interest on investments was a decrease in the annualized average yield of 152 basis points to 4.45% for the three months ended June 30, 2002 compared to 5.97% for the three months ended June 30, 2001. Interest income on federal funds sold decreased by $106,000, or 49.1%, to $110,000 for the three months ended June 30, 2002 compared to $216,000 for the corresponding prior year period. The annualized yield on federal funds sold for the three months ended June 30, 2002 declined 267 basis points to 1.64% for the three months ended June 30, 2002 compared to 4.31% for the prior year period due to a lower short-term interest rate environment. The decrease was partially offset by an increase in the average balance of federal funds of $6.5 million, or 32.2%, to $26.5 million from $20.1 million for the corresponding prior year period. 11 INTEREST EXPENSE Total interest expense decreased by $1.0 million, or 31.0%, to $2.3 million compared to $3.4 million for the corresponding prior year period. The change in interest expense is primarily due to the lower interest rate environment cited above. The annualized average cost of liabilities decreased 128 basis points to 2.47% from 3.75% for the corresponding prior year period. The decrease in interest expense was partially offset by an increase in the average balance of interest-bearing liabilities of $18.1 million, or 5.0%, to $379.2 million from $361.1 million compared to the corresponding prior year period. Interest expense on deposits decreased $563,000, or 26.0%, to $1.6 million for the three months ended June 30, 2002 compared to $2.2 million for the prior year period. The decrease in interest expense on deposits was due primarily to a 110 basis point decline in the rate paid on deposits to 2.04% for the three months ended June 30, 2002 compared to 3.14% for the same period last year. This was partially offset by a $39.1 million increase in the average balance of interest-bearing deposits to $314.9 million from $275.8 million for the corresponding prior year period. The decrease in the cost of deposits was primarily the result of a reduction in interest rates. However, there was a decrease in the average balance of comparatively lower cost deposits (NOW accounts, savings and club accounts and money market accounts), offset in part by an increase in the average balance of comparatively higher cost certificates of deposit. The average balance of NOW account deposits declined $514,000 to $19.7 million from $20.2 million for the corresponding prior year period. The average balance of savings and club accounts declined $3.6 million to $128.4 million from $132.0 million for the corresponding prior year period. The average balance of money market accounts declined $1.6 million to $14.8 million from $16.4 million for the prior year period. The average balance of certificates of deposit increased $44.8 million to $152.0 million from $107.2 million for the corresponding prior year period. Interest expense on FHLB-NY advances and other borrowed money decreased $486,000, or 39.8%, to $736,000 for the three months ended June 30, 2002 compared $1.2 million for the corresponding prior year period. This decrease in interest expense was primarily due to a $21.1 million, or 24.7%, decline in the average balance of borrowed money to $64.3 million from $85.3 coupled with a decrease of 114 basis points in the cost of borrowings to 4.59% from 5.73% for the corresponding prior year period. NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES Net interest income before the provision for loan losses increased by $729,000, or 19.9%, to $4.4 million for the three months ended June 30, 2002 compared to $3.7 million for the corresponding prior year period. Total interest income decreased by $320,000 and total interest expense decreased by $1.0 million for the three months ended June 30, 2002. The Company's annualized interest rate spread increased by 48 basis points to 4.05%, for the three months ended June 30, 2002 compared to 3.57% for the corresponding prior year period. PROVISION FOR LOAN LOSSES AND ASSET QUALITY The Company did not provide for any additional loan losses for the three months ended June 30, 2002, compared to $225,000 for the corresponding prior year period. The provision for loan losses was not increased during the current quarter due to improved credit quality and an overall reserve that the Company believes to be adequate. During the first quarter of fiscal 2003, Carver recorded net loan recoveries of $4,000 compared to net loan charge-offs of $163,000 for the corresponding prior year period. At June 30, 2002, non-performing loans totaled $1.5 million, or 0.5% of total loans, compared to non-performing loans of $2.8 million at March 31, 2002 a decrease of $1.3 million, or 47.1%. The reduction in non-performing loans improved the ratio of the allowance for loan losses to non-performing loans to 276.6% at June 30, 2002 compared to 142.3% at March 31, 2002. At June 30, 2002, the Bank's allowance for loan losses at $4.1 million remained substantially unchanged from March 31, 2002. The ratio of the allowance for loan losses to total loans was 1.47% compared to 1.41% at March 31, 2001. 12 Management's judgment in determining the adequacy of the allowance is based on an evaluation of individual loans, the risk characteristics and size of the loan portfolio, an assessment of current economic and real estate market conditions, estimates of the current value of underlying collateral, past loan loss experience, review of regulatory authority examination reports and other relevant factors. Management believes that the allowance for loan losses is adequate under the prevailing economic conditions to absorb losses on existing loans, which may become uncollectible. While management estimates loan losses using the best available information, no assurance can be made that future adjustments to the allowance will not be necessary based on changes in economic and real estate market conditions, further information obtained regarding known problem loans, identification of additional problem loans and other factors, both within and outside of management's control. NON-INTEREST INCOME Total non-interest income decreased $467,000, or 32.9%, to $953,000 for the three-month period ended June 30, 2002 compared to $1.4 million for the corresponding period last year. The change was primarily attributable to a net decrease in non-recurring income of $886,000 for the three-month period ended June 30, 2002, partially offset by an increase in other non-interest income of $445,000. The other non-interest income included non-recurring income of $886,000 for the three months ended June 30, 2001, representing a gain of $987,000 on the sale of the Bank's East New York branch offset in part by a loss of $101,000 on the sale of the Bank's automobile loan portfolio. NON-INTEREST EXPENSE Total non-interest expense increased $337,000, or 9.9%, to $3.8 million for the quarter ended June 30, 2002 compared to $3.4 million for the corresponding period last year. The increase was primarily attributable to increases in compensation and benefits and other expenses, consisting primarily of marketing and advertising expenses. Salaries and employee benefits increased $243,000 to $1.6 million for the quarter ended June 30, 2002 compared to $1.4 million for the corresponding period last year. The increase in compensation and benefits is primarily attributable to the addition of a chief financial officer and a chief operating officer as well as the use of temporary personnel to fill vacant positions while recruiting efforts continue. Marketing and advertising expenses increased by $70,000 to $176,000 for the quarter ended June 30, 2002 compared to $106,000 for the corresponding prior year period. The increase in marketing and advertising expenses is primarily attributable to the re-launch of the Company's brand, as well as the continuing development of its online banking and debit card products. INCOME TAX EXPENSE In comparison to the prior year period, the Company has fully utilized its tax loss carryforward resulting from prior period losses and is now accruing for federal taxes. For the three-month period ended June 30, 2002, estimated income tax expense relating to federal, New York state and New York city was $714,000. For the three-month period ended June 30, 2001, the Company applied a federal tax loss carryforward resulting from prior period losses and therefore no federal income taxes were payable for the period. The accrual for taxes of $273,000 for the three-months ended June 30, 2001, represents an estimate of New York State and New York City income taxes only. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Quantitative and qualitative disclosure about market risk is presented at March 31, 2002 in the Company's 2002 10-K, as filed with the Securities and Exchange Commission ("SEC"). The Company believes that there have been no material changes in the Company's market risk at June 30, 2002 compared to March 31, 2002. 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, the Company is a party to various legal proceedings incident to its business. At June 30, 2002, except as set forth below, there were no legal proceedings to which the Company 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. Disclosure regarding legal proceedings that the Company is a party to is presented on Carver's 2002 10-K, as filed with the SEC. There have been no material changes with regard to such legal proceedings since the filing of the 2002 10-K. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibit 11. Net income per share. Exhibit 99.1 Written Statement of Deborah C. Wright furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 Exhibit 99.2 Written Statement of William C. Gray furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (b) Reports on Form 8-K. None 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CARVER BANCORP, INC. Date: August 14, 2002 /s/ Deborah C. Wright ------------------------------------- Deborah C. Wright President and Chief Executive Officer Date: August 14, 2002 /s/ William C. Gray ------------------------------------- William C. Gray Chief Financial Officer 15