-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AVON27cHWn7evB644JWLGnHsxqyqP7n4aysvzQ4/XOa4uZlHchIMMQdR7w4tQYNv 9h2MsDCua5R8Q3jgs/LaLg== 0000882377-02-000828.txt : 20021114 0000882377-02-000828.hdr.sgml : 20021114 20021114144724 ACCESSION NUMBER: 0000882377-02-000828 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARVER BANCORP INC CENTRAL INDEX KEY: 0001016178 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 133904174 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13007 FILM NUMBER: 02824485 BUSINESS ADDRESS: STREET 1: 75 W 125TH ST CITY: NEW YORK STATE: NY ZIP: 10027-4512 BUSINESS PHONE: 2128764747 MAIL ADDRESS: STREET 1: 75 W 125TH ST CITY: NEW YORK STATE: NY ZIP: 10027-4512 10-Q 1 dcarver10q111302.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 September 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 90 days. Yes /X/ No / / Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). Yes / / No /X/ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK, PAR VALUE $.01 2,294,756 - -------------------------------- ---------------------------------- Class Outstanding at October 31, 2002
CONTENTS Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition as of September 30, 2002 (unaudited) and March 31, 2002......................................1 Consolidated Statements of Income for the Three Months and Six Months Ended September 30, 2002 and 2001 (unaudited)..........................................2 Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income for the Six Months Ended September 30, 2002 (unaudited)...........3 Consolidated Statements of Cash Flows for the Six Months Ended September 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.......................................................................7 Item 3. Quantitative and Qualitative Disclosure About Market Risk......................................19 Item 4. Controls and Procedures........................................................................19 PART II. OTHER INFORMATION Item 1. Legal Proceedings..............................................................................19 Item 2. Changes in Securities and Use of Proceeds......................................................20 Item 3. Defaults Upon Senior Securities................................................................20 Item 4. Submission of Matters to a Vote of Security Holders............................................20 Item 5. Other Information..............................................................................20 Item 6. Exhibits and Reports on Form 8-K...............................................................20 SIGNATURES.......................................................................................................21 CERTIFICATIONS...................................................................................................22 EXHIBITS.........................................................................................................24
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except share data)
September 30, March 31, 2002 2002 ------------- ----------- ASSETS (Unaudited) Cash and cash equivalents: Cash and due from banks $ 16,928 $ 13,751 Federal Funds sold 18,100 21,100 ----------- --------- Total cash and cash equivalents 35,028 34,851 ----------- --------- Securities: Available-for-sale, at fair value (including pledged as collateral of $114,703 at September 30, 2002 and $76,720 at March 31, 2002) 116,486 89,821 Held-to-maturity, at amortized cost (including pledged as collateral of $17,397 at September 30, 2002 and $15,549 at March 31, 2002; fair value of $17,662 at September 30, 2002 and $15,716 at March 31, 2002) 17,481 15,643 ----------- --------- Total securities 133,967 105,464 ----------- --------- Loans receivable: Real estate mortgage loans 280,695 290,914 Consumer and commercial business loans 2,248 2,328 Allowance for loan losses (4,172) (4,128) ----------- --------- Total loans receivable, net 278,771 289,114 ----------- --------- Office properties and equipment, net 10,299 10,251 Federal Home Loan Bank of New York ("FHLB-NY") stock, at cost 4,453 3,763 Accrued interest receivable 2,958 2,804 Identifiable intangible asset, net 284 391 Other assets 3,079 3,072 ----------- --------- Total assets $ 468,839 $ 449,710 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 330,342 $ 324,954 Advances from the FHLB-NY and other borrowed money 89,348 75,651 Other liabilities 10,253 12,363 ----------- --------- Total liabilities 429,943 412,968 ----------- --------- 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; 2,294,756 and 2,300,869 shares outstanding at September 30, 2002 and March 31, 2002 respectively) 23 23 Additional paid-in capital 23,770 23,756 Retained earnings 14,905 13,194 Unallocated common stock held by employee stock ownership plan ("ESOP") (60) (152) Unamortized awards of common stock under management recognition plan ("MRP") (15) (58) Treasury stock, at cost (21,602 shares at September 30, 2002 and 15,489 shares at March 31, 2002) (211) (138) Accumulated other comprehensive income 483 116 ----------- --------- Total stockholders' equity 38,896 36,742 ----------- --------- Total liabilities and stockholders' equity $ 468,839 $ 449,710 =========== =========
See accompanying notes to consolidated financial statements. 1
CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended September 30, September 30, ------------- ------------- 2002 2001 2002 2001 ---- ---- ---- ---- Interest Income: Loans $ 5,297 $ 5,660 $ 10,636 $ 11,145 Mortgage-backed securities 984 631 1,863 1,297 Investment securities 388 608 789 1,290 Federal funds sold 77 125 188 341 -------- -------- -------- -------- Total interest income 6,746 7,024 13,476 14,073 -------- -------- -------- -------- Interest expense: Deposits 1,469 2,145 3,071 4,310 Advances and other borrowed money 741 1,088 1,478 2,310 -------- -------- -------- -------- Total interest expense 2,210 3,233 4,549 6,620 -------- -------- -------- -------- Net interest income 4,536 3,791 8,927 7,453 Provision for loan losses -- 225 -- 450 -------- -------- -------- -------- Net interest income after provision for loan losses 4,536 3,566 8,927 7,003 -------- -------- -------- -------- Non-interest income: (1) Depository fees and charges 457 361 861 731 Loan fees and service charges 257 102 804 267 Income from sale of branches -- -- -- 987 Loss from sale of loans -- -- -- (101) Other 2 13 4 12 -------- -------- -------- -------- Total non-interest income 716 476 1,669 1,896 -------- -------- -------- -------- Non-interest expense: (1) Compensation and benefits 1,589 1,463 3,263 3,021 Net occupancy expense 320 359 656 651 Equipment 354 378 772 755 Other 1,257 1,238 2,585 2,430 -------- -------- -------- -------- Total non-interest expense 3,520 3,438 7,276 6,857 -------- -------- -------- -------- Income before income taxes 1,732 604 3,320 2,042 Income taxes 797 115 1,511 388 -------- -------- -------- -------- Net income $ 935 $ 489 $ 1,809 $ 1,654 ======== ======== ======== ======== Dividends applicable to preferred stock $ 49 $ 49 $ 98 $ 98 Net income available to common stockholders $ 886 $ 440 $ 1,711 $ 1,556 ======== ======== ======== ======== Earnings per common share: Basic $ 0.39 $ 0.19 $ 0.75 $ 0.68 ======== ======== ======== ======== Diluted $ 0.37 $ 0.19 $ 0.72 $ 0.66 ======== ======== ======== ========
(1) Reclassifications have been made to prior year periods to conform with current periods. 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)
ADDITIONAL PREFERRED COMMON PAID-IN RETAINED TREASURY STOCK STOCK CAPITAL EARNINGS STOCK --------- --------- ------------ ---------- --------- Balance-March 31, 2002 $ 1 $ 23 $ 23,756 $ 13,194 ($ 138) Comprehensive income: Net Income -- -- -- 874 -- Change in net unrealized gain on Available-for-sale securities, net of taxes -- -- -- -- -- -------- -------- -------- -------- ------- Comprehensive income net of taxes -- -- -- -- -- Dividends paid -- -- -- (98) -- Allocation of ESOP stock -- -- 9 -- -- Allocation of shares for MRP -- -- -- -- -- -------- -------- -------- -------- ------- Balance-June 30, 2002 $ 1 $ 23 $ 23,765 $ 13,970 ($ 138) Comprehensive income: Net Income -- -- -- 935 -- Change in net unrealized gain on Available-for-sale securities, net of taxes -- -- -- -- -- -------- -------- -------- -------- ------- Comprehensive income net of taxes -- -- -- -- -- Dividends paid Allocation of ESOP stock -- -- 5 -- -- Allocation of shares for MRP -- -- -- -- -- Purchase of Treasury Stock -- -- -- -- (73) -------- -------- -------- -------- ------- Balance-September 30, 2002 $ 1 $ 23 $ 23,770 14,905 ($ 211)
ACCUMULATED COMMON COMMON TOTAL OTHER STOCK STOCK STOCK- COMPREHENSIVE ACQUIRED ACQUIRED HOLDERS' INCOME BY ESOP BY MRP EQUITY ------------- ---------- ---------- --------- Balance-March 31, 2002 $ 116 ($ 152) ($ 58) $ 36,742 Comprehensive income: Net Income -- -- -- 874 Change in net unrealized gain on Available-for-sale securities, net of taxes 210 -- -- 210 -------- ------- ------- -------- Comprehensive income net of taxes -- -- -- $ 37,826 Dividends paid -- -- -- (98) Allocation of ESOP stock -- 46 -- 55 Allocation of shares for MRP -- -- 9 9 -------- ------- ------- -------- Balance-June 30, 2002 $ 326 ($ 106) ($ 49) $ 37,792 Comprehensive income: Net Income -- -- -- 935 Change in net unrealized gain on Available-for-sale securities, net of taxes 157 -- -- 157 -------- ------- ------- -------- Comprehensive income net of taxes -- -- -- 38,884 Dividends paid Allocation of ESOP stock -- 46 -- 51 Allocation of shares for MRP -- -- 34 34 Purchase of Treasury Stock -- -- -- (73) -------- ------- ------- -------- Balance-September 30, 2002 $ 483 ($ 60) ($ 15) $ 38,896
See accompanying notes to consolidated financial statements. 3
CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended September 30, ---------------------------------- 2002 2001 ---- ---- Cash flows from operating activities: Net income $ 1,809 $ 1,654 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses -- 450 ESOP and MRP expense 149 80 Depreciation and amortization expense 652 569 Amortization of intangibles 106 106 Other amortization (accretion) 632 (246) Gain on sale of branches -- (987) Impairment of foreclosed real estate -- 20 Changes in assets and liabilities: Increase in accrued interest receivable (155) (608) Increase in other assets (2) (1,070) (Decrease)Increase in other liabilities (2,783) 954 Increase in accrued interest payable 77 -- --------- --------- Net cash provided by (used in) operating activities 485 922 --------- --------- Cash flows from investing activities: Purchases of securities: Available-for-sale (36,848) (62,673) Held-to-maturity (4,167) (10,271) Proceeds from principal payments, maturities and calls of securities: Available-for-sale 10,182 75,000 Held-to-maturity 2,307 5,394 Disbursements for loan originations (30,079) (29,900) Loans purchased from third parties (13,861) (45,200) Principal collections on loans 52,897 44,815 (Purchase) sale of FHLB-NY stock (690) 4 Proceeds from loans sold 1,493 -- Proceeds from sale of fixed assets -- 570 Proceeds from sale of other real estate owned -- 429 Additions to premises and equipment (455) (767) --------- --------- Net cash used in investing activities (19,221) (22,599) --------- --------- Cash flows from financing activities: Net increase in deposits 5,388 58,571 Repayment of securities repurchase agreements -- 109 Advances from FHLB-NY 29,300 257,800 Repayment of FHLB-NY advances and other borrowed money (15,603) (287,241) Purchase of treasury stock (74) (99) Cash paid to fund sale of deposits -- (15,802) Dividends paid (98) (98) --------- --------- Net cash provided by financing activities 18,913 13,240 --------- --------- Net increase (decrease) in cash and cash equivalents 177 (8,437) Cash and cash equivalents at beginning of the period 34,851 31,758 --------- --------- Cash and cash equivalents at end of the period $ 35,028 $ 23,321 ========= ========= Supplemental information: Noncash Transfers- Change in unrealized gain on valuation of investments available-for-sale, net $ 483 $ -- Cash paid for- 4,549 7,198 Interest paid 2,228 0 Income taxes paid ========= =========
4 CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) 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 ("SEC"). 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/A, for the year ended March 31, 2002 ("2002 10-K/A"). The consolidated results of operations and other data for the six-month period ended September 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 which is inactive, and the Bank's wholly owned subsidiaries, CFSB Realty Corp. and CFSB Credit Corp. The Holding Company and its consolidated subsidiaries 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 SEC. 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 six-month periods ended September 30, 2002 and 2001, preferred dividends of $98,000 were deducted from net income to arrive at the amount of net income available to common stockholders. Additionally, for both the six-month periods ended September 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 ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS In October 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards ("SFAS") No. 147, "ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS." SFAS No. 147 amends SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", and FASB Interpretation No. 9, "Applying APB Opinions Nos. 16 and 17 When a Savings and Loan Association or a Similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method." SFAS No. 147 removes acquisitions of financial institutions, other than transactions between two or more mutual enterprises, from the scope of SFAS No. 72 and FASB Interpretation No. 9. SFAS No. 147 also amends SFAS No. 144 to include long-term customer-relationship intangible assets such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. The provisions of SFAS No. 147 are effective October 1, 2002. Management does not anticipate that the adoption of this statement will have a significant effect on the Company's earnings or financial position. 5 ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES." The Statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by this standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. Previous accounting guidance was provided by Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 replaces EITF Issue No. 94-3. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS In April 2002, the FASB issued SFAS No. 145, "RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS." The Statement updates, clarifies and simplifies existing accounting pronouncements. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," will now be used to classify those gains and losses. SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," amended SFAS No. 4 and is no longer necessary because SFAS No. 4 has been rescinded. SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This amendment is consistent with the FASB's goal of requiring similar accounting treatment for transactions that have similar economic effects. SFAS No. 145 also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances they may change accounting practice. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002. Early application of SFAS No. 145 is encouraged. 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. 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. GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the FASB issued SFAS No. 142 "GOODWILL AND OTHER INTANGIBLE ASSETS" ("SFAS 142"). SFAS 142 addresses the initial recognition and measurement of intangible assets acquired individually or with a 6 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 acquired intangible assets having an estimated useful life be separately recognized and amortized over their estimated useful lives. Intangible assets that remain subject to amortization shall continue to be reviewed for impairment in accordance with previous pronouncements. Additionally, SFAS 142 requires that an initial impairment assessment on all goodwill recognized in the consolidated financial statements be completed within six months of the statement's 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. 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 as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by the use of such words as "believe," "expect," "anticipate," "intend," "should," "could," "planned," "estimated," "potential" and similar terms and phrases. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors. Factors which could result in material variations include, but are not limited to, the Company's success in implementing its initiatives, including expanding its product line, successfully opening its new ATM center, successfully rebranding its image and achieving greater operating efficiencies; changes in interest rates which could affect net interest margins and net interest income; competitive factors which could affect net interest income and non-interest income; general economic conditions which could affect the volume of loan origination, deposit flows, real estate values, the levels of non-interest income and the amount of loan losses as well as other factors discussed in documents filed by the Company with the SEC from time to time. The Company undertakes no obligation to update any such forward-looking statements at any time. As used in this Form 10-Q, "we," "us" and "our" refer to Carver Bancorp, Inc. and/or its consolidated subsidiaries, depending on the context. 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/A, 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 our Finance and Audit Committee and our Board of Directors. GENERAL The Holding Company, a Delaware corporation, is the holding company for 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. 7 COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2002 AND MARCH 31, 2002 ASSETS Total assets increased by $19.1 million, or 4.3%, to $468.8 million at September 30, 2002 compared to $449.7 million at March 31, 2002. The change was primarily attributable to an increase of $28.5 million in securities offset by a decrease of $10.3 million in total loans receivable, net. The balance in cash and cash equivalents for the six-month period was substantially unchanged from that of March 31, 2002. This was due to the effective utilization of excess liquid assets created by higher than expected mortgage loan and mortgage-backed security repayments. The Bank invested its excess liquid assets in the origination and purchase of mortgage loans and the purchase of mortgage-backed securities. Due to the lower interest rate environment, mortgage loan payoffs in excess of new loans resulted in a decrease of $10.3 million in total loans receivable, net, during the first six months of the fiscal 2003. Loan repayments were $52.9 million, offset in part by loan originations of $30.1 million and loan purchases of $13.9 million during the six-month period. Loan originations and purchases were concentrated in multifamily and commercial real estate mortgage loans, which accounted for $36.2 million of the $43.9 million originated and purchased during the period. The remaining originations of $7.7 million were for construction loans and one- to four-family loans. The $34.0 million increase in investment securities primarily represents purchases of $41.0 million partially offset by maturities of $7.0 million and principal repayments of $3.1 million that occurred during the first six months of fiscal 2003. Management will continue to evaluate the balance of earning assets allocated to loan originations and purchases as well as additional purchases of mortgage-backed securities while continuing to assess yields and economic risk. As of April 1, 2001, the Bank adopted SFAS No. 133 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" and transferred $45.7 million of mortgage-backed and investment securities from held-to-maturity to available-for-sale. An unrecognized gain of $878,000 as of September 30, 2002 is included in the carrying value of the mortgage-backed and investment securities available-for-sale. Office properties and equipment, net, slightly increased $48,000 to $10.3 million at September 30, 2002, due primarily to costs associated with the new ATM center at the Bank's Bedford-Stuyvesant branch and new equipment needed for the deployment of online banking. LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES At September 30, 2002, total liabilities increased by $17.0 million, or 4.1%, to $429.9 million compared to $413.0 million at March 31, 2002. The increase in liabilities primarily reflects an increase of $13.7 million in advances from the FHLB-NY and other borrowings, and an increase of $5.4 million in deposits offset in part by a decrease of $1.1 million and $1.0 million in accounts payable and other liabilities, respectively. The $5.4 million increase in deposit balances is primarily attributable to increases of $6.1 million in certificates of deposit, $5.0 million of which was an individual federal deposit, and $1.1 million in money market accounts offset in part by a decrease of $1.0 million in regular savings and club accounts and $726,000 in NOW accounts. STOCKHOLDERS' EQUITY Total stockholders' equity increased $2.2 million, or 5.9%, to $38.9 million at September 30, 2002 compared to $36.7 million at March 31, 2002. The increase in stockholders' equity was primarily attributable to $1.7 million increase in retained earnings for the six months ended September 30, 2002 and an increase of $367,000 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 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. 8 During the quarter ended September 30, 2002, the Holding Company purchased 9,100 shares of its common stock in open market transactions at an average price of $11.01 per share as part of its repurchase program announced on August 6, 2002. The Holding Company intends to use the repurchased shares to fund its stock-based benefit and compensation plans and for any other purpose the Board of Directors of the Holding Company deems advisable in compliance with applicable law. 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 and investment 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 reduced the federal funds rate on eight separate occasions by a total of 325 basis points, resulting in a lower interest rate environment in fiscal 2002 compared to the fiscal year ended March 31, 2001. During the first six months of fiscal 2003 the federal funds rate has remained unchanged from that of March 31, 2002. As a result, interest rates for the first six months of fiscal 2003 are 125 basis points lower than those during the first six months of fiscal 2002. The increase in loan and securities repayments was primarily the result of the increase in mortgage loan refinancing 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 six months ended September 30, 2002, total cash and cash equivalents increased by $177,000. Net cash provided by operating activities during this period was $485,000, representing primarily a decrease in other liabilities, offset by depreciation and amortization expense, other amortization or accretion and an increase in accrued interest receivable. Net cash provided by investing activities was $19.2 million, primarily representing 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 and purchase of loans and the purchases of securities. Net cash provided by financing activities was $18.9 million, primarily representing a net increase of $13.7 million in advances from the FHLB-NY and an increase in deposits of $5.4 million. 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. 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 Bank's several liquidity measurements are evaluated on a frequent basis. The Bank was in compliance with this policy as of September 30, 2002. 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 ("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 September 30, 2002, the Bank exceeded all regulatory minimum capital requirements and qualified as a well-capitalized institution. The table below presents certain information relating to the Bank's capital compliance at September 30, 2002. 9 REGULATORY CAPITAL As of September 30, 2002 Amount % of Assets ------ ----------- Total capital (to risk-weighted assets): Capital level $40,003 18.66% Less requirement 17,153 8.00 ------- ----- Excess $22,850 10.66% ======= ===== Tier 1 capital (to risk-weighted assets): Capital level $37,304 17.40% Less requirement 8,576 4.00 ------- ----- Excess $28,728 13.40% ======= ===== Tier 1 Leverage capital (to adjusted total assets): Capital level $37,304 7.98% Less requirement 18,694 4.00 ------- ----- Excess $18,610 3.98% ======= ===== 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 tables set 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. 10
Three months ended September 30, -------------------------------------------------------------------- 2002 2001 --------------------------------- -------------------------------- Average Annualized Average Annualized Avg. Avg. Balance Interest Yield/Cost Balance Interest Yield/Cost --------- -------- ---------- --------- -------- ---------- (Dollars in thousands) Loans receivable (1) $282,684 $5,297 7.50% $299,943 $5,660 7.55% Investment securities (2) 35,952 388 4.32% 32,262 608 7.54% Mortgage-backed securities 74,085 984 5.31% 43,651 631 5.78% Federal funds 17,871 77 1.72% 15,854 125 3.15% -------- ------ ---- -------- ------ ---- Total interest earning assets 410,592 6,746 6.57% 391,710 7,024 7.17% Non-interest earning assets 31,429 23,027 -------- -------- Total assets $442,021 $414,737 ======== ======== Liabilities and Equity - ---------------------- Deposits NOW $ 17,948 $ 34 0.76% $ 21,252 $ 74 1.39% Savings and clubs 127,002 373 1.17% 124,645 639 2.05% Money market accounts 15,660 46 1.17% 16,250 88 2.17% Certificates of deposit 152,330 1,016 2.67% 121,265 1,344 4.43% -------- ------ ----- -------- ------ ----- Total deposits 312,940 1,469 1.88% 283,412 2,145 3.03% Borrowed money 67,904 741 4.36% 83,247 1,088 5.23% -------- ------ ----- -------- ------ ----- Total interest-bearing 380,844 2,210 2.32% 366,659 3,233 3.53% liabilities Non-interest-bearing 23,361 14,243 liabilities -------- -------- Total liabilities 404,205 380,902 Stockholders' equity 37,816 33,835 -------- -------- Total liabilities and stockholders' equity $442,021 $414,737 ======== ======== ------ ------ Net interest income $4,536 $3,791 ====== ====== Interest rate spread 4.25% 3.65% ===== ===== Net interest margin 4.42% 3.87% ===== ===== Ratio of average interest- earning assets to deposits and interest-bearing liabilities 1.08x 1.07x ====== ======
(1) Includes non-accrual loans. (2) Includes FHLB-NY stock. 11
Six months ended September 30, -------------------------------------------------------------------- 2002 2001 --------------------------------- -------------------------------- Average Annualized Average Annualized Avg. Avg. Assets Balance Interest Yield/Cost Balance Interest Yield/Cost - ------ --------- -------- ---------- --------- -------- ---------- (Dollars in thousands) Loans receivable (1) $284,037 $10,636 7.49% $288,855 $11,145 7.72% Investment securities (2) 36,043 789 4.38% 38,975 1,290 6.62% Mortgage-backed securities 69,276 1,863 5.38% 42,599 1,297 6.09% Federal funds 22,201 188 1.69% 17,958 341 3.80% -------- ------- ----- -------- ------- ----- Total interest-earning assets 411,557 13,476 6.55% 388,387 14,073 7.25% Non-interest-earning assets 30,476 23,673 -------- -------- Total assets $442,033 $412,060 ======== ======== Liabilities and Equity - ---------------------- Deposits NOW $ 18,813 $81 0.86% $20,718 $133 1.28% Savings and clubs 127,724 815 1.28% 128,332 1,336 2.08% Money market accounts 15,225 98 1.29% 16,333 173 2.12% Certificates of deposit 152,187 2,077 2.73% 114,237 2,668 4.67% -------- ------- ----- -------- ------- ----- Total deposits 313,949 3,071 1.96% 279,620 4,310 3.08% Borrowed money 66,107 1,478 4.47% 84,275 2,310 5.48% -------- ------- ------- -------- ------- ----- Total interest-bearing liabilities 380,056 4,549 2.39% 363,895 6,620 3.64% Non-interest-bearing liabilities 24,587 15,076 -------- -------- Total liabilities 404,643 378,971 Stockholders' equity 37,390 33,089 -------- -------- Total liabilities and stockholders' equity $442,033 $412,060 ======== -------- ======== ------- Net interest income $8,927 $7,453 ======== ======= Interest rate spread 4.16% 3.61% ======= ===== Net interest margin 4.34% 3.84% ======= ===== Ratio of average interest-earning assets to deposits and interest-bearing liabilities. 1.08x 1.07x ======== =======
(1) Includes non-accrual loans. (2) Includes FHLB-NY stock. 12 COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 GENERAL The Company reported net income for the three-month period ended September 30, 2002 of $935,000 compared to net income of $489,000 for the corresponding prior year period. Net income available to common stockholders (after adjustment for dividends payable on the Company's preferred stock) was $886,000, or $0.37 per diluted common share, compared to $440,000, or $0.19 per diluted common share, for the corresponding prior year period. For most of fiscal 2002, the Company utilized a tax loss carryforward and therefore no federal taxes were applied to earnings for the comparable prior year period. Had the Company been taxed during fiscal 2002 at its current tax rate, quarterly net income would have increased 186% over the corresponding prior year period. INTEREST INCOME Interest income decreased by $278,000, or 4.0%, to $6.7 million for the three months ended September 30, 2002 compared to $7.0 million in the corresponding prior year period. Interest income decreased as a result of the lower interest rate environment during the second quarter compared to the corresponding prior year period. The change in total interest income was attributable to a decrease of 60 basis points in the annualized average yield on interest-earning assets to 6.57% for the three months ended September 30, 2002 compared to 7.17% for the corresponding prior year period. This was partially offset by an increase in the average balance of interest-earning assets of $18.9 million, or 4.8%, to $410.6 million for the three months ended September 30, 2002 compared with $391.7 million for the corresponding prior year period. Interest income on loans decreased by $363,000, or 6.4%, to $5.3 million for the three months ended September 30, 2002 compared to $5.7 million for the corresponding prior year period. The change was primarily due to a decrease in average mortgage loan balances of $17.3 million, or 5.8%, to $282.7 million from $300.0 million, partially offset by an escalation in the recognition of deferred loan fee income of $212,000 resulting from higher than expected mortgage loan prepayments. We do not expect this level of deferred loan fee income to continue. Interest income on mortgage-backed securities increased by $353,000, or 55.9%, to $984,000 for the three months ended September 30, 2002 compared to $631,000 for the corresponding prior year period. The change was primarily due to an increase in the average balance of mortgage-backed securities of $30.4 million, or 69.7%, to $74.1 million compared to $43.7 million in the corresponding prior year period, partially offset by a 47 basis points decrease in the annualized average yield on mortgage-backed securities to 5.31% from 5.78% in the corresponding prior year period. Interest income on investment securities decreased by $220,000, or 36.2%, to $388,000 for the three months ended September 30, 2002 compared to $608,000 for the corresponding prior year period. Due to the decline in the interest rate environment there was a 322 basis point decrease in the annualized average yield to 4.32% for the three months ended September 30, 2002 compared to 7.54% for the corresponding prior year period. The decrease in interest income on investment securities was partially offset by the average balance of investment securities increasing by $3.7 million, or 11.4%, to $36.0 million for the three months ended September 30, 2002 compared to $32.3 million for the corresponding prior year period. Interest income on federal funds sold decreased by $48,000, or 38.4%, to $77,000 for the three months ended September 30, 2002 compared to $125,000 for the corresponding prior year period. The annualized yield on federal funds sold declined 143 basis points to 1.72% for the three months ended September 30, 2002 compared to 3.15% for the corresponding 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 $2.0 million, or 12.7%, to $17.9 million from $15.9 million for the corresponding prior year period. INTEREST EXPENSE Total interest expense decreased by $1.0 million, or 31.6%, to $2.2 million for the three months ended September 30, 2002 compared to $3.2 million for the corresponding prior year period. The change in interest 13 expense is primarily due to the lower interest rate environment cited above. The annualized average cost of liabilities decreased 121 basis points to 2.32% from 3.53% 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 $14.2 million, or 3.9%, to $380.8 million from $366.7 million compared to the corresponding prior year period. Interest expense on deposits decreased $676,000, or 31.5%, to $1.5 million for the three months ended September 30, 2002 compared to $2.1 million for the corresponding prior year period. The decrease in interest expense on deposits was due primarily to a 115 basis point decline in the rate paid on deposits to 1.88% for the three months ended September 30, 2002 compared to 3.03% for the corresponding prior year period. This was partially offset by a $29.5 million increase in the average balance of interest-bearing deposits to $312.9 million for the three months ended September 30, 2002 from $283.4 million for the corresponding prior year period. The decrease in the cost of deposits was primarily the result of the reduction in interest rates due to the lower interest rate environment during the second quarter compared to the corresponding prior year period and a restructuring of deposit rates by management. In addition there was an overall decrease in the average balance of some 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 $3.3 million to $17.9 million from $21.3 million for the corresponding prior year period. The average balance of money market accounts declined $590,000 to $15.7 million from $16.3 million for the corresponding prior year period. However, the average balance of savings and club accounts increased $2.4 million to $127.0 million from $124.6 million for the corresponding prior year period. The average balance of certificates of deposit increased $31.1 million to $152.3 million from $121.3 million for the corresponding prior year period. Interest expense on FHLB-NY advances and other borrowed money decreased $347,000, or 31.9%, to $741,000 for the three months ended September 30, 2002 compared to $1.1 million for the corresponding prior year period. This decrease in interest expense was primarily due to a $15.3 million, or 18.4%, decline in the average balance of borrowed money to $67.9 million from $83.2 million coupled with a decrease of 87 basis points in the cost of borrowings to 4.36% from 5.23% 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 $745,000, or 19.7%, to $4.5 million for the three months ended September 30, 2002 compared to $3.8 million for the corresponding prior year period. Total interest income decreased by $278,000 and total interest expense decreased by $1.0 million for the three months ended September 30, 2002. The Company's annualized average interest rate spread increased by 60 basis points to 4.25% for the three months ended September 30, 2002 compared to 3.65% for the corresponding prior year period. PROVISION FOR LOAN LOSSES AND ASSET QUALITY The Company did not provide for additional loan loss reserves for the three months ended September 30, 2002 compared to $225,000 for the corresponding prior year period. The provision for loan losses was not increased during the three-month period as the Company considers the overall reserve for loan losses to be adequate at September 30, 2002 as explained below. During the second quarter of fiscal 2003, Carver recorded net loan recoveries of $40,000 compared to $5,000 for the corresponding prior year period. At September 30, 2002, the Bank's allowance for loan losses at $4.1 million remained substantially unchanged from March 31, 2002. At September 30, 2002, non-performing loans totaled $2.1 million, or 0.74% of total loans, compared to non-performing loans of $2.8 million, or 0.96% of total loans, at March 31, 2002 a decrease of $717,000 or 25.4%. The reduction in non-performing loans improved the ratio of the allowance for loan losses to non-performing loans to 198.1% at September 30, 2002 compared to 146.0% at 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. Management's judgment in determining the adequacy of the allowance for loan losses 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. Based on the process 14 employed, management believes that the allowance for loan losses is adequate under prevailing economic conditions to absorb losses on existing loans that 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 increased $240,000, or 50.4%, to $716,000 for the three-month period ended September 30, 2002 compared to $476,000 for the corresponding prior year period. The change was primarily attributable to a net increase in depository fee income of $96,000 and an increase in loan fees and service charges of $155,000. The increase in depository fees can be attributed to increased ATM fees and a restructuring of banking fees during the quarter. Loan fees and service charges increased as a result of the recognition of higher mortgage prepayment penalties and a general restructuring of the Bank's loan fees. Non-interest income represented 13.6% of operating income (net interest income plus non-interest income, excluding any non-recurring gain and loss) for the second quarter of fiscal 2003 compared with 11.2% for the corresponding prior year period. NON-INTEREST EXPENSE Total non-interest expense increased $82,000, or 2.4%, to $3.5 million for the quarter ended September 30, 2002 compared to $3.4 million for the corresponding prior year period. 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 $126,000 to $1.6 million for the quarter ended September 30, 2002 compared to $1.5 million for the corresponding prior year period. The increase in compensation and benefits is primarily attributable to the Company's successful recruitment efforts during the last quarter of fiscal 2002 and the first half of fiscal 2003 to fill the Chief Financial Officer and Chief Operating Officer positions. Marketing and advertising expenses increased by $118,000 to $178,000 for the quarter ended September 30, 2002 compared to $60,000 for the corresponding prior year period. The increase in marketing and advertising expense is primarily attributable to the re-launch of the Company's new brand image, as well as the introduction of its online banking and debit card products. Advertising costs are expected to continue to exceed prior fiscal year expenses as the Company continues its rebranding efforts over the course of fiscal 2003. INCOME TAX EXPENSE In comparison to the corresponding 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 September 30, 2002, estimated federal, New York State and New York City income tax expense was $797,000. For the three-month period ended September 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 $115,000 for the three-months ended September 30, 2001 represents an estimate of New York State and New York City income taxes only. COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 GENERAL The Company reported net income for the six-month period ended September 30, 2002 of $1.8 million compared to net income of $1.7 million for the corresponding prior year period. Net income available to common stockholders (after adjustment for dividends payable on the Company's preferred stock) was $1.7 million, or $0.72 per diluted common share, compared to $1.6 million, or $0.66 per diluted common share, for the corresponding prior year period. For most of fiscal 2002, the Company was able to utilize its tax loss carryforward, which eliminated the Company's federal tax liability. Income for the six-months ended September 30, 2001 includes non-recurring non-interest income of approximately $886,000 which includes a gain of $987,000 realized on the sale of 15 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 automobile loan portfolio. INTEREST INCOME Interest income decreased by $597,000, or 4.2%, to $13.5 million for the six months ended September 30, 2002 compared to $14.1 million in the corresponding prior year period. The decrease in interest income is due to a lower interest rate environment during the six-month period ended September 30, 2002 compared to the corresponding prior year period. The change in total interest income was attributable to a decrease of 70 basis points in the annualized average yield on interest-earning assets to 6.55% for the six months ended September 30, 2002 compared to 7.25% for the corresponding prior year period. This was partially offset by an increase in the average balance of interest-earning assets of $23.2 million, or 6.0%, to $411.6 million for the six months ended September 30, 2002 compared with $388.4 million for the corresponding prior year period. Interest income on loans decreased by $509,000, or 4.6%, to $10.6 million for the six months ended September 30, 2002 compared to $11.1 million for the corresponding prior year period. The change was due to a decrease in the annualized average yield on mortgage loans to 7.49% compared to 7.72% for the six months ended September 30, 2001. Adding to the decline in interest income was a decrease in average mortgage loan balances of $4.8 million, or 1.6%, to $284.1 million for the six months ending September 30, 2002 compared to $288.9 million for the corresponding prior year period. The decrease in interest income was partially offset by an acceleration in the recognition of deferred loan fees of $212,000 resulting from higher than anticipated mortgage loan prepayments. Interest income on mortgage-backed securities increased by $566,000, or 43.6%, to $1.9 million for the six months ended September 30, 2002 compared to $1.3 million for the corresponding prior year period. The change was primarily due to an increase in the average balance of mortgage-backed securities of $26.7 million, or 62.6%, to $69.3 million for the six months ended September 30, 2002 compared to $42.6 million for the corresponding prior year period, partially offset by a decrease in the annualized average yield on mortgage-backed securities of 71 basis points to 5.38% from 6.09% during the same period. Interest income on investment securities decreased by $501,000, or 38.8%, to $789,000 for the six months ended September 30, 2002 compared to $1.3 million for the corresponding prior year period. The decline was partially due to the balance of average investment securities decreasing by $2.9 million, or 7.5%, to $36.0 million for the six months ended September 30, 2002 compared to $39.0 million for the corresponding prior year period. The primary reason contributing to the decrease in interest on investment securities was a 224 basis point decrease in the annualized average yield to 4.38% for the six months ended September 30, 2002 compared to 6.62% for the corresponding prior year period. Interest income on federal funds sold decreased by $153,000, or 44.9%, to $188,000 for the six months ended September 30, 2002 compared to $341,000 for the corresponding prior year period. The annualized yield on federal funds sold declined 211 basis points to 1.69% for the six months ended September 30, 2002 compared to 3.80% for the corresponding 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 $4.2 million, or 23.6%, to $22.2 million from $18.0 million for the corresponding prior year period. INTEREST EXPENSE Total interest expense decreased by $2.1 million, or 31.3%, to $4.5 million for the six months ended September 30, 2002 compared to $6.6 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 125 basis points to 2.39% from 3.64% 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 $16.2 million, or 4.4%, to $380.1 million from $363.9 million compared to the corresponding prior year period. 16 Interest expense on deposits decreased $1.2 million, or 28.7%, to $3.1 million for the six months ended September 30, 2002 compared to $4.3 million for the corresponding prior year period. The decrease in interest expense on deposits was due primarily to a 112 basis point decline in the rate paid on deposits to 1.96% for the six months ended September 30, 2002 compared to 3.08% for the corresponding prior year period. This was partially offset by a $34.3 million increase in the average balance of interest-bearing deposits to $313.9 million from $279.6 million for the corresponding prior year period. The decrease in the cost of deposits was primarily the result of the lower interest rate environment and the restructuring of deposit rates by management. 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 $1.9 million to $18.8 million from $20.7 million for the corresponding prior year period. The average balance of savings and club accounts declined $608,000 to $127.7 million from $128.3 million for the corresponding prior year period. The average balance of money market accounts declined $1.1 million to $15.2 million from $16.3 million for the corresponding prior year period. The average balance of certificates of deposit increased $38.0 million to $152.2 million from $114.2 million for the corresponding prior year period. Interest expense on FHLB-NY advances and other borrowed money decreased $832,000, or 36.0%, to $1.5 million for the six months ended September 30, 2002 compared to $2.3 million for the corresponding prior year period. This decrease in interest expense was primarily due to an $18.2 million, or 21.6%, decline in the average balance of borrowed money to $66.1 million from $84.3 million coupled with a decrease of 101 basis points in the cost of borrowings to 4.47% from 5.48% 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 $1.5 million, or 19.8%, to $8.9 million for the six months ended September 30, 2002 compared to $7.5 million for the corresponding prior year period. Total interest income decreased by $597,000 while total interest expense decreased by $2.1 million for the six months ended September 30, 2002. The Company's annualized average interest rate spread increased by 55 basis points to 4.16% for the six months ended September 30, 2002 compared to 3.61% for the corresponding prior year period. PROVISION FOR LOAN LOSSES AND ASSET QUALITY The Company did not provide for additional loan losses for the six months ended September 30, 2002, compared to $450,000 for the corresponding prior year period. The provision for loan losses was not increased during the six-month period due to improved credit quality and an overall reserve that the Company believes to be adequate at September 30, 2002 as explained below. During the first six months of fiscal 2003, Carver applied net loan recoveries of $44,000 to the allowance for loan losses compared to net loan charge-offs of $158,000 for the corresponding prior year period. At September 30, 2002, the Bank's allowance for loan losses at $4.1 million remained substantially unchanged from March 31, 2002. At September 30, 2002, non-performing loans totaled $2.1 million, or 0.74% of total loans, compared to non-performing loans of $2.8 million, or 0.96% of total loans, at March 31, 2002, a decrease of $717,000 or 25.4%. The reduction in non-performing loans improved the ratio of the allowance for loan losses to non-performing loans to 198.1% at September 30, 2002 compared to 146.0% at 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. 17 Management's judgment in determining the adequacy of the allowance for loan losses 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. Based on the process employed, management believes that the allowance for loan losses is adequate under prevailing economic conditions to absorb losses on existing loans that 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 $227,000, or 12.0%, to $1.7 million for the six-month period ended September 30, 2002 compared to $1.9 million for the corresponding prior year period. The change was primarily attributable to a net decrease in non-recurring income of $886,000 for the six-month period ended September 30, 2002, partially offset by a net increase in fees, charges and other non-interest income, excluding non-recurring items, of $659,000. The non-recurring income of $886,000 for the six months ended September 30, 2001 represented 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 income, excluding non-recurring items, increased $659,000, or 65.2%, to $1.7 million for the six-month period ended September 30, 2002 compared to $1.0 million for the corresponding prior year period, primarily attributable to an increase in loan fees and service charges that resulted from the recognition of substantially higher mortgage prepayment penalties and increases in loan origination, ATM and other depository fees as discussed in the quarterly results. Mortgage prepayment penalty income was greater due to significantly higher than usually experienced penalties of approximately $290,000 received from two loans. Excluding the non-recurring gain and loss, non-interest income represented 15.8% of operating income (net interest income plus non-interest income, excluding the non-recurring gain and loss) for the six-month period ended September 30, 2002 compared with 11.9% for the corresponding prior year period. NON-INTEREST EXPENSE Total non-interest expense increased $419,000, or 6.1%, to $7.3 million for the six months ended September 30, 2002 compared to $6.9 million for the corresponding prior year period. 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 $242,000 to $3.3 million for the six months ended September 30, 2002 compared to $3.0 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. Marketing and advertising expenses increased by $131,000 to $353,000 for the six-month period ended September 30, 2002 compared to $222,000 for the corresponding prior year period. The increase in marketing and advertising expenses is primarily attributable to the re-launch of the Company's new brand image, as well as the development of its online banking and debit card products. Marketing and advertising costs are expected to continue to exceed prior fiscal year expenses as the Company continues its rebranding efforts over the course of fiscal 2003. 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 six-month period ended September 30, 2002, estimated Federal, New York State and New York City income tax expense was $1.5 million. For the six-month period ended September 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 $388,000 for the six months ended September 30, 2001 represents an estimate of New York State and New York City income taxes only. 18 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/A, as filed with the SEC. The Company believes that there have been no material changes in the Company's market risk at September 30, 2002 compared to March 31, 2002. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 ("Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective and timely in alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. CHANGES IN INTERNAL CONTROLS. The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the Chief Executive Officer and Chief Financial Officer. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Disclosure regarding legal proceedings that the Company is a party to is presented on Carver's 2002 10-K/A as filed with the SEC. Except as set forth below, there have been no material changes with regard to such legal proceedings since the filing of the 2002 10-K/A. On or about December 28, 2000, plaintiff Thomas L. Clark ("Clark"), the former President and CEO of Carver Federal, filed suit against Carver Federal and certain individual defendants in the Supreme Court of the State of New York, County of New York (the "Clark Action"), claiming that the defendants should have been forced to obtain approval from the OTS to pay severance benefits that Clark believed Carver owed him under an employment agreement. Clark sought injunctive relief and asserted claims for breach of contract, equitable estoppel and estoppel by contract. On or about March 30, 2001, the defendants moved to dismiss the compliant in its entirety and, on November 27, 2001, the court dismissed the breach of contract claim against the individual defendants and the equitable estoppel and estoppel by contract claims against all defendants. Carver Federal appealed the lower court's failure to dismiss the breach of contract claim against Carver Federal. On September 26, 2002, the Appellate Division of the Supreme Court reversed the lower court and granted Carver Federal's motion in its entirety. On September 30, 2002, a Notice of Entry of the Appellate Division's decision was filed with the court and on October 30, 2002 judgment was entered in favor of Carver Federal and the individual defendants dismissing the Clark Action as to all defendants. Clark cannot appeal the Appellate Division's decision or the judgment as of right. Clark's time to move for permission to appeal has not run as of the date of this form 10-Q. On or about January 28, 2002, plaintiff Monique Barrow, a former employee, filed suit against Carver Federal in the United States District Court for the Southern District of New York alleging pregnancy discrimination in violation of the Family Medical Leave Act, New York State and New York City laws seeking punitive and compensatory damages as well as reinstatement to her former position. Carver Federal answered the complaint denying any liability. Carver Federal unsuccessfully sought permission to make a motion for summary judgment before the conclusion of discovery. However, the court allowed expedited discovery on liability to be completed on or before November 4, 2002. The discovery period has ended and Carver Federal intends to make a motion for summary judgment for an order dismissing this case in its entirety. In the opinion of management, after consultation with legal counsel, the lawsuit is without merit and the ultimate outcome of this matter is not expected to have a material adverse effect on the Company's results of operations, business operations or consolidated financial condition. 19 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. On August 9, 2002, the Company filed a Current Report on Form 8-K under items 5 and 7 regarding its August 6, 2002 announcement of a program to repurchase up to 10% of the Company's common stock, par value $0.01, outstanding as of May 31, 2002. 20 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: November 14, 2002 /s/ Deborah C. Wright ------------------------------------- Deborah C. Wright President and Chief Executive Officer Date: November 14, 2002 /s/ William C. Gray ------------------------------------- William C. Gray Chief Financial Officer 21 CERTIFICATIONS -------------- I, Deborah C. Wright, President and Chief Executive Officer of Carver Bancorp, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Carver Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Deborah C. Wright ------------------------------------- Deborah C. Wright President and Chief Executive Officer 22 CERTIFICATIONS -------------- I, William C. Gray, Senior Vice President and Chief Financial Officer of Carver Bancorp, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Carver Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/William C. Gray ------------------------------------ William C. Gray Senior Vice President and Chief Financial Officer 23
EXHIBIT 11 COMPUTATION OF NET INCOME PER SHARE FOR THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (Unaudited) (In thousands, except share data) THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Earnings per common share - basic - --------------------------------- Net income $935 $489 $1,809 $1,654 Preferred dividends (49) (49) (98) (98) --------- --------- --------- --------- Net income - basic $886 $440 $1,711 $1,556 --------- --------- --------- --------- Weighted average common shares outstanding - basic 2,291,129 2,276,928 2,289,500 2,280,522 --------- --------- --------- --------- Earning per common share - basic $0.39 $0.19 $0.75 $0.68 ========= ========= ========= ========= Earnings per common share - diluted - ----------------------------------- Net income - basic $886 $440 $1,711 $1,556 Impact of potential conversion of convertible preferred stock to common stock 49 49 98 98 --------- --------- --------- --------- Net income- diluted $935 $489 $1,809 $1,654 ========= ========= ========= ========= Weighted average common shares outstanding - basic 2,291,129 2,276,928 2,289,500 2,280,522 Effect of dilutive securities - convertible preferred stock 208,333 208,333 208,333 208,333 Effect of dilutive securities - options 23,891 - 29,202 - --------- --------- --------- --------- Weighted average shares outstanding - diluted 2,523,353 2,485,261 2,527,035 2,488,855 ========= ========= ========= ========= Earning per common share-diluted $0.37 $0.19 $0.72 $0.66 ========= ========= ========= =========
24 EXHIBIT 99.1 WRITTEN STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, Deborah C. Wright, is the President and Chief Executive Officer of Carver Bancorp, Inc. (the "Company"). This statement is being furnished in connection with the filing by the Company of the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2002 (the "Report"). By execution of this statement, I certify that: A) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and B) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. This statement is authorized to be attached as an exhibit to the Report so that this statement will accompany the Report at such time as the Report is filed with the Securities and Exchange Commission, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934, as amended. November 14, 2002 /s/ Deborah C. Wright - --------------------------- --------------------------- Date Deborah C. Wright 25 EXHIBIT 99.2 WRITTEN STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, William C. Gray, is the Senior Vice President and Chief Financial Officer of Carver Bancorp, Inc. (the "Company"). This statement is being furnished in connection with the filing by the Company of the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2002 (the "Report"). By execution of this statement, I certify that: C) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and D) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. This statement is authorized to be attached as an exhibit to the Report so that this statement will accompany the Report at such time as the Report is filed with the Securities and Exchange Commission, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934, as amended. November 14, 2002 /s/ William C. Gray - ----------------- ------------------- Date William C. Gray -----END PRIVACY-ENHANCED MESSAGE-----