-----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, BPd18/1Nv7R/Hjefma7IFOFzqTap6khbWmYrDSY8SdaUJ2dmDOX7nEDGegGzEnZ8 nT8L4M7M5n8roTGUsCMJWQ== 0000891554-02-004070.txt : 20020701 0000891554-02-004070.hdr.sgml : 20020701 20020701112423 ACCESSION NUMBER: 0000891554-02-004070 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020701 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13007 FILM NUMBER: 02692851 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-K 1 d50953_10k.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2002 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-21487 CARVER BANCORP, INC. (Exact name of registrant as specified in its charter) Delaware 13-3904174 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 75 West 125th Street, New York, New York 10027 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 876-4747 Securities Registered Pursuant to Section 12(b) of the Act: Common Stock, par value $.01 per share American Stock Exchange (Title of Class) (Name of Each Exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| As of May 31, 2002, there were 2,316,358 shares of common stock of the registrant outstanding. The aggregate market value of the Registrant's common stock held by non-affiliates (based on the closing sales price of $12.25 per share of the registrant's common stock on May 31, 2002) was approximately $28.4 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the annual meeting of stockholders for the fiscal year ended March 31, 2002 (the "Proxy Statement") are incorporated by reference into Part III. CARVER BANCORP, INC. 2002 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Part I Page Item 1. Business..................................................... 1 Item 2. Properties................................................... 28 Item 3. Legal Proceedings............................................ 28 Item 4. Submission of Matters to a Vote of Security Holders.......... 30 Part II Item 5. Market for Carver Bancorp, Inc. Common Equity and Related Stockholder Matters..................... 31 Item 6. Selected Financial Data...................................... 32 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 33 Item 7A. Quantitative and Qualitative Disclosures about Market Risk... 43 Item 8. Financial Statements and Supplementary Data.................. 44 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................ 44 Part III Item 10. Directors and Executive Officers of Carver Bancorp, Inc...... 44 Item 11. Executive Compensation....................................... 44 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 44 Item 13. Certain Relationships and Related Transactions............... 44 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................... 44 SIGNATURES ............................................................ 45 CONSOLIDATED FINANCIAL STATEMENTS OF CARVER BANCORP INC. AND SUBSIDIARIES............................ F-1 EXHIBIT INDEX.......................................................... E-1 FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated" and "potential." These forward-looking statements consist of estimates with respect to the financial condition, results of operations and business of the Company (as defined below) that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, without limitation, the Company's success in implementing its initiatives, including expanding its product line, achieving greater operating efficiencies and successfully opening its new branch, changes in general, economic and market, legislative and regulatory conditions, the development of an adverse interest rate environment that adversely affects the interest rate spread or other income anticipated from the Company's operations and investments, the ability of the Company to originate and purchase loans with attractive terms and acceptable credit quality, the ability of the Company to realize cost efficiencies and the economic effects of the September 11, 2001 terrorist attacks. The Company assumes no obligation to update the forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. PART I ITEM 1. BUSINESS GENERAL Carver Bancorp, Inc. Carver Bancorp, Inc., a Delaware corporation (the "Holding Company"), is the holding company for Carver Federal Savings Bank, a federally chartered savings bank (the "Bank" or "Carver Federal"). Collectively, the Holding Company and the Bank are referred to herein as the "Company" or "Carver." On October 17, 1996, the Bank completed its reorganization into a holding company structure (the "Reorganization") and became a wholly owned subsidiary of the Holding Company. Pursuant to an Agreement and Plan of Reorganization, dated May 21, 1996, each share of the Bank's outstanding common stock was exchanged for one share of common stock of the Holding Company. The Holding Company conducts business as a unitary savings and loan holding company, and the principal business of the Holding Company consists of the operation of its wholly owned subsidiary, the Bank. The Holding Company's executive offices are located at the home office of the Bank at 75 West 125th Street, New York, New York 10027. The Holding Company's telephone number is (212) 876-4747. Carver Federal Savings Bank The Bank was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally chartered mutual savings and loan association, at which time the Bank obtained federal deposit insurance and became a member of the Federal Home Loan Bank (the "FHLB") of New York. The Bank converted to a federal savings bank in 1986 and changed its name at that time to Carver Federal Savings Bank. On October 24, 1994, the Bank converted from mutual to stock form and issued 2,314,275 shares of its common stock at a price of $10 per share. Carver Federal was founded as an African-American operated institution to provide residents of under-served communities with the ability to invest their savings and obtain credit. Carver Federal's principal business consists of attracting deposit accounts through its branch offices and investing those funds in mortgage loans and other investments permitted to federal savings banks. Based on asset size as of March 31, 2002, Carver Federal is the largest African-American operated financial institution in the United States. Recent Terrorist Attack on the World Trade Center On September 11, 2001, a terrorist attack destroyed the World Trade Center towers and several other buildings in the New York City financial district. While the Bank does not have significant real estate loans in the New York City financial district, the overall effects of the terrorist attack and the resultant disruption of business may adversely impact our business. This adverse impact may be realized in the form of problem loans or deposit outflows resulting from reductions in customer income levels. At this time we cannot estimate the impact, if any, that this event will have on Carver's results of operations and business. 1 LENDING ACTIVITIES General. Carver Federal's principal lending activity is the origination of mortgage loans for the purpose of purchasing or refinancing one- to four-family residential, multifamily residential, and commercial properties. Carver Federal also originates or participates in loans for the construction or renovation of commercial property and residential housing developments and occasionally originates permanent financing upon completion. In addition, Carver Federal originates home equity loans and consumer loans secured by deposits. Carver Federal originates one- to four-family mortgage loans to service its retail customers. Carver continued to engage in first-mortgage loan purchases during the fiscal year ended March 31, 2002 ("fiscal 2002"), which accounted for 41.2% of loan additions. Loan purchases are used to complement retail originations. Gross loans receivable increased by $9.1 million, or 3.2%, to $297.5 million at March 31, 2002, compared to $288.4 million at March 31, 2001. Carver Federal's net loan portfolio as a percentage of total assets decreased to 64.3% at March 31, 2002, compared to 66.8% at March 31, 2001. Loan Portfolio Composition. One- to four-family mortgage loans decreased by $35.0 million, or 22.2%, to $122.8 million at March 31, 2002, compared to $157.8 million at March 31, 2001. During fiscal 2002, multifamily real estate loans increased by $35.0 million, or 41.8%, to $118.6 million at March 31, 2002, compared to $83.6 million at March 31, 2001. One- to four-family mortgage loans totaled $122.8 million, or 41.3% of Carver Federal's total gross loan portfolio, multifamily loans totaled $118.6 million, or 39.9% of total gross loans, non-residential real estate loans (including church loans) totaled $40.1 million, or 13.5% of total gross loans, and construction loans totaled $13.7 million, or 4.6% of total gross loans. Consumer (credit card loans, personal loans, automobile loans, home equity loans and home improvement loans) and business loans totaled $2.3 million, or 0.8% of total gross loans. Non-residential real estate loans (including church loans) increased by $4.0 million, or 11.0%, to $40.1 million at March 31, 2002, compared to $36.1 million at March 31, 2001. Construction loans increased by $6.6 million, or 92.6%, to $13.7 million at March 31, 2002, compared to $7.1 million at March 31, 2001. Consumer and business loans decreased by $1.5 million, or 38.4%, to $2.3 million at March 31, 2002, compared to $3.8 million at March 31, 2001. The decrease in consumer and business loans reflect the Bank's continued de-emphasis of consumer lending resulting from its decision during the fiscal year ended March 31, 1999 ("fiscal 1999") to discontinue the origination of unsecured consumer loans. Premiums on loans are paid when the effective yield on the loans being purchased is greater than the current market rate for comparable loans. These premiums are amortized as the loan is repaid. It is possible that in a declining interest rate environment the rate or speed at which loans repay may increase which may have the effect of accelerating the amortization of the premium and therefore reduce the effective yield of the loan. Premium on loans increased by $201,000, or 28.5%, to $906,000 at March 31, 2002, compared to $705,000 at March 31, 2001 primarily reflecting increased premiums paid on loans purchased, which was offset, in part, by the repayment of loans purchased at a premium. Loans in process increased by $2.6 million, or 207.5%, to $3.9 million at March 31, 2002, compared to $1.3 million at March 31, 2001. Allowance for loan losses increased by $577,000, or 16.2%, to $4.1 million at March 31, 2002, compared to $3.6 million at March 31, 2001, reflecting a revision in the allowance schedule. See "Asset Quality--Asset Classification and Allowance for Losses." The following table sets forth selected data relating to the composition of Carver Federal's loan portfolio by type of loan at the dates indicated. 2
At March 31, ------------------------------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent --------- ------- --------- ------- --------- ------- --------- ------- --------- ------- (Dollars in thousands) Real estate loans: One- to four-family $ 122,814 41.28% $ 157,767 54.71% $ 152,458 55.54% $ 181,320 65.39% $ 188,761 66.85% Multifamily 118,589 39.86 83,620 29.00 86,184 31.40 52,366 18.89 49,289 17.46 Non-residential 40,101 13.48 36,113 12.52 22,721 8.28 23,093 8.33 12,789 4.53 Construction 13,678 4.60 7,101 2.46 6,393 2.33 11,047 3.98 15,993 5.66 Consumer and business (1) 2,328 0.78 3,781 1.31 6,725 2.45 9,450 3.41 15,536 5.50 --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ Total gross loans 297,510 100.00% 288,382 100.00% 274,481 100.00% 277,276 100.00% 282,368 100.00% ====== ====== ====== ====== ====== Add: Premium on loans 906 705 582 1,014 1,555 Less: Loans in process (2) (3,936) (1,280) (1,062) (2,636) (4,752) Deferred fees and loan discounts (1,238) (819) (918) (1,110) (1,080) Allowance for loan losses (4,128) (3,551) (2,935) (4,020) (3,137) --------- --------- --------- --------- --------- Net loan portfolio $ 289,114 $ 283,437 $ 270,148 $ 270,524 $ 274,954 ========= ========= ========= ========= =========
(1) Includes automobile loans, personal loans, credit card loans, home equity, home improvement loans and business loans. (2) Represents undisbursed portion of of outstanding construction loans. One- to Four-Family Residential Lending. Traditionally, Carver Federal's lending activity has been the origination of loans secured by first mortgages on existing one- to four-family residences in Carver Federal's market area. During fiscal 2002, the Bank continued its practice of purchasing portfolios of first mortgage loans on existing one- to four-family residences to augment originations. Carver Federal originates and purchases one- to four-family residential mortgage loans in amounts that range between $35,000 and $750,000. Approximately 72% of Carver Federal's one-to four-family residential mortgage loans at March 31, 2002 had adjustable rates and approximately 28% had fixed rates. Carver Federal's one- to four-family residential mortgage loans are generally for terms of 30 years, amortized on a monthly basis, with principal and interest due each month. Residential mortgage loans often remain outstanding for significantly shorter periods than their contractual terms. These loans customarily contain "due-on-sale" clauses that permit the Bank to accelerate repayment of a loan upon transfer of ownership of the mortgaged property. Also, borrowers may refinance or prepay one- to four-family residential loans at their option without penalty. The Bank's lending policies generally limit the maximum loan-to-value ratio ("LTV") on one- to four-family residential mortgage loans secured by owner-occupied properties to 95% of the lesser of the appraised value or purchase price, with private mortgage insurance required on loans with LTV ratios in excess of 80%. Under a special loan program, consisting of loans originated and sold to the State of New York Mortgage Agency ("SONYMA") or General Motors Acceptance Corporation ("GMAC") secured by single-family homes purchased by first time home buyers, the LTV ratio may go to 97%. Carver Federal's fixed-rate, one- to four-family residential mortgage loans are underwritten in accordance with applicable guidelines and requirements for sale to the Federal National Mortgage Association ("Fannie Mae") or SONYMA in the secondary market. From time to time the Bank has sold such loans to Fannie Mae and to SONYMA. The Bank also originates, to a limited extent, loans underwritten according to Federal Home Loan Mortgage Corporation ("FHLMC") standards. Loans are sold with limited recourse on a servicing retained basis to Fannie Mae and on a servicing released basis to SONYMA and GMAC. Carver Federal uses several sub-servicing firms to service mortgage loans, whether held in portfolio or sold with the servicing retained. At March 31, 2002, the Bank, through its sub-servicers, was servicing $2.9 million of loans for Fannie Mae and FHLMC. Carver Federal offers one-year, three-year, five/one-year and five/three-year adjustable-rate one- to four-family residential mortgage loans. These loans are retained in Carver's portfolio and are not sold on the secondary market. They are indexed to the weekly average rate on the one-year, three-year and five-year U.S. Treasury securities, respectively, adjusted to a constant maturity (usually one year), plus a margin of 275 basis points. The rates at which interest accrues on these loans are adjustable every one or three years, generally with limitations on adjustments of two percentage points per adjustment period and six percentage points over the life of the one-year adjustable-rate mortgage and five percentage points over the life of a three-year adjustable-rate mortgage. 3 The retention of adjustable-rate loans in Carver Federal's portfolio helps reduce the Bank's exposure to increases in prevailing market interest rates. However, there are unquantifiable credit risks resulting from potential increases in costs to borrowers in the event of upward repricing of adjustable-rate loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate loans may increase due to increases in interest costs to borrowers. Although adjustable-rate loans allow the Bank to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest rate sensitivity is limited by periodic and lifetime interest rate adjustment limitations. Accordingly, there can be no assurance that yields on the Bank's adjustable-rate loans will fully adjust to compensate for increases in the Bank's cost of funds. Adjustable-rate loans increase the Bank's exposure to decreases in prevailing market interest rates, although decreases in the Bank's cost of funds would tend to offset this effect. Multifamily Real Estate Lending. At March 31, 2002, multi-family loans totaled $118.6 million, or 39.9% of Carver Federal's gross loan portfolio. The largest of these loans outstanding was a $1.8 million loan secured by a 72 unit, multifamily apartment building located in Brooklyn, New York. This loan was performing at March 31, 2002. The Bank intends to continue to emphasize its multifamily mortgage loan program, which has enabled the Bank to expand its presence in the multifamily lending market in the New York City area. Carver Federal offers competitive rates with flexible terms which make the product attractive to borrowers. Multifamily property lending entails additional risks compared to one- to four-family residential lending. For example, such loans are dependent on the successful operation of the real estate project and can be significantly impacted by supply and demand conditions in the market for multifamily residential units. Carver Federal's multifamily product guidelines generally require that the maximum LTV not exceed 75% while "cash out" refinances are limited to 65% LTV based on the appraised value. The Bank generally requires a debt coverage ratio ("DCR") of at least 1.3, which requires the properties to generate cash flow after expenses and allowances in excess of the principal and interest payment. Currently, with certain restrictions the Bank limits its maximum amount for an individual loan to $2.0 million pursuant to an Office of Thrift Supervision ("OTS") limitation. See "Regulation and Supervision--Federal Banking Regulation--Loans to One Borrower Limitations". The regulatory maximum for loans to one borrower is $5.5 million without this limitation. Carver Federal originates multi-family mortgage loans, the predominance of which are adjustable rate loans that generally amortize on the basis of a 15-, 20-, 25- or 30-year period but require a balloon payment after the first five years, or the borrower may have an option to extend the loan for two additional five-year periods. The Bank, on a case-by-case basis, originates ten-year fixed rate loans. To help ensure continued collateral protection and asset quality for the term of multi-family real estate loans, Carver Federal employs (with the assistance of an independent consulting firm) a risk-rating system. Under the risk-rating system, all multi-family real estate loans with balances over $250,000 are risk rated. Separate multi-family real estate loan portfolio reviews are performed annually resulting in written management summary reports. Non-residential Real Estate Lending. At March 31, 2002, non-residential real estate mortgage loans (including loans to churches) totaled $40.1 million, or 13.5% of the gross loan portfolio. Carver Federal originates non-residential real estate first mortgage loans in its market area. At March 31, 2002, the largest non-residential loan outstanding was a $3.9 million loan secured by a retail/office building located in New York, New York. This loan was performing at March 31, 2002. Carver Federal's non-residential real estate lending activity consists predominantly of loans for the purpose of purchasing or refinancing office, retail and church buildings in its market area. Non-residential real estate lending entails additional risks compared with one- to four-family residential lending. For example, such loans typically involve large loan balances to single borrowers or groups of related borrowers, and the payment experience on such loans typically is dependent on the successful operation of the real estate project. Carver Federal's maximum LTV on non-residential real estate mortgage loans is 75%, and "cash out" refinances are limited to 65% LTV based on the appraised value. The Bank generally requires a DCR of at least 1.3. Assignment of rents of all tenants leases in the subject property is a Bank requirement. To help ensure continued collateral protection and asset quality for the term of the non-residential real estate loans, Carver Federal employs (with the assistance of an independent consulting firm) a risk-rating system. Under the risk-rating system, all non-residential real estate loans with balances over $250,000 are risk rated. Independent third party non-residential loan portfolio reviews are performed at least annually resulting in written management summary reports. 4 Historically, Carver Federal has been a New York City area leader in the origination of loans to churches. At March 31, 2002, loans to churches totaled $8.0 million, or 2.7% of the Bank's gross loan portfolio. These loans generally have five-, seven- or ten-year terms with 15-, 20- or 25-year amortization periods and a balloon payment due at the end of the term, and generally have no greater than a 60% LTV ratio. At March 31, 2002, the largest permanent church loan was a $1.6 million loan secured by a building located in New York, New York. This loan was performing at March 31, 2002. The Bank provides construction financing for churches and generally provides permanent financing upon completion. Under the Bank's current loan policy, the maximum loan amount for such lending is $1.0 million, but larger loan amounts are considered on a case-by-case basis. There are currently 17 church loans in the portfolio. Loans secured by real estate owned by religious organizations generally are larger and involve greater risks than one- to four-family residential mortgage loans. Because payments on loans secured by such properties are often dependent on voluntary contributions by members of the church's congregation, repayment of such loans may be subject to a greater extent to adverse conditions in the economy. The Bank seeks to minimize these risks in a variety of ways, including reviewing the church's financial condition, limiting the size of such loans and establishing the quality of the collateral securing such loans. The Bank determines the appropriate amount and type of security for such loans based in part upon the governance structure of the particular organization, the length of time the church has been established in the community and a cash flow analysis of the church to determine its ability to service the proposed loan. Carver Federal will obtain a first mortgage on the underlying real property and usually requires personal guarantees of key members of the congregation and/or key person life insurance on the pastor of the congregation and may also require the church to obtain key person life insurance on specific members of the church's leadership. Asset quality in the church loan category has been exceptional throughout Carver Federal's history. Management believes that Carver Federal remains a leading lender to churches in its market area. Construction Lending. The Bank originates construction loans for the new construction and renovation of churches, multi-family buildings, residential developments, community service facilities and affordable housing programs. Carver Federal also offers construction loans to qualified individuals and developers for new construction and renovation of one- to four-family residences in the Bank's market area. The Bank's construction loans generally have adjustable interest rates and are underwritten in accordance with the same standards as the Bank's mortgage loans on existing properties. The loans provide for disbursement in stages as construction is completed. Construction terms are usually from 12 to 24 months, during which period the borrower is required to make monthly payments of accrued interest on the outstanding loan balance. Borrowers must satisfy all credit requirements that apply to the Bank's permanent mortgage loan financing for the subject property. Carver Federal has established additional criteria for construction loans to include an engineer's review on all construction budgets in excess of $500,000 and appropriate interest reserves for loans in excess of $250,000. Construction financing generally is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with a project having a value that is insufficient to assure full repayment. The ability of a developer to sell developed lots or completed dwelling units will depend on, among other things, demand, pricing, availability of comparable properties and economic conditions. The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers in the Bank's market areas, limiting the aggregate amount of outstanding construction loans and imposing a stricter LTV ratio requirement than that required for one- to four-family mortgage loans. At March 31, 2002, the Bank had $13.7 million (including $3.9 million of committed but undisbursed funds) in construction loans outstanding, comprising 4.6% of the Bank's total gross loan portfolio. At March 31, 2002, the largest construction loan was on a retail building for $2.0 million located in New York, New York. At March 31, 2002, this loan was performing. Consumer and Business Loans. At March 31, 2002, the Bank had approximately $2.3 million in consumer and business loans, or 0.8% of the Bank's gross loan portfolio. The secured loans in this portfolio were either secured by deposits at the Bank, homes or automobiles. At March 31, 2002, $500,000, or 21.7% of all consumer and business loans, were secured and $1.8 million, or 78.3%, were unsecured. 5 Consumer loans generally involve more risk than first mortgage loans. Loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Further, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered. These loans may also give rise to claims and defenses by a borrower against Carver Federal and a borrower may be able to assert claims and defenses against Carver Federal which it has against the seller of the underlying collateral. In addition, with respect to defaulted automobile loans, repossessed collateral may not provide an adequate source of repayment of the outstanding loan balance as a result of damage, loss or depreciation, and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In underwriting consumer loans, Carver Federal considers the borrower's credit history, an analysis of the borrower's income, expenses and ability to repay the loan and the value of the collateral. See "Asset Quality--Non-performing Assets." At March 31, 2002, the Bank had $275,000 in unsecured business loans. During the fourth quarter of fiscal 1999, the Bank discontinued the origination of unsecured commercial business loans. The Bank continues to make a limited number of commercial business loans that are secured in full by passbook and/or certificate of deposit accounts. Loan Processing. Carver Federal's loan originations are derived from a number of sources, including referrals by realtors, builders, depositors, borrowers and mortgage brokers, as well as walk-in customers. Loans are originated by the Bank's personnel who receive a salary. Loan application forms are available at each of the Bank's offices. All applications are forwarded to the Lending Department located in the main office. Carver Federal has established underwriting standards for multi-family and non-residential real estate. A non-residential real estate loan application is completed for all multi-family and non-residential properties which the Bank finances. Prior to loan approval, the property is inspected by a non-residential loan officer, who will prepare a property inspection report. As part of the loan approval process, consideration is given to the appraisal, location, accessibility, stability of neighborhood, environmental assessment, personal credit history of the applicant(s) and the financial capacity of the applicant(s). Upon receipt of a completed loan application from a prospective borrower, a credit report and verifications are ordered to verify specific information relating to the loan applicant's income and credit standing. It is the Bank's policy to obtain an appraisal of the real estate intended to secure a proposed mortgage loan from an independent fee appraiser approved by the Bank. It is Carver Federal's policy to record a lien on the real estate securing the loan and to obtain a title insurance policy which insures that the property is free of prior encumbrances. Borrowers must also obtain hazard insurance policies prior to closing and, when the property is in a flood plain as designated by the Department of Housing and Urban Development, paid flood insurance policies must be obtained. Most borrowers are also required to advance funds on a monthly basis, together with each payment of principal and interest, to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes and hazard insurance. Loan Approval. Except for loans in excess of $1.5 million, mortgage loan approval authority has been delegated by the Bank's Board of Directors ("Board") to the Bank's Management Loan Committee, which consists of certain members of executive management, and to the Bank's Asset Liability and Interest Rate Risk Committee. All one- to four-family mortgage loans that conform to Fannie Mae standards and limits may be approved by the Residential Mortgage Loan Underwriter. Loans above $1.5 million must be approved by the full Board. Loans to One Borrower. Under the loans-to-one-borrower limits of the OTS, with certain limited exceptions, loans and extensions of credit to a single or related group of borrowers outstanding at one time generally may not exceed 15% of the unimpaired capital and surplus of a savings bank. See "Regulation and Supervision-Federal Banking Regulation-Loans to One Borrower Limitations." At March 31, 2002, the maximum loan under this test would be $5.5 million. The Bank currently limits its maximum loans to one borrower to $2.0 million without prior OTS approval pursuant to OTS restriction. At March 31, 2002 there were four loan relationships that exceeded $2.0 million and none that exceed the $5.5 million limit. All of the loans are performing. Loan Sales. Originations of one- to four-family real estate loans are generally made on properties located within the New York City metropolitan area, although Carver Federal does occasionally fund loans secured by property in other areas. All such loans, however, satisfy the Bank's underwriting criteria regardless of location. The Bank continues to offer one- to four-family fixed-rate mortgage loans in response to consumer demand but requires that such loans satisfy 6 guidelines of either Fannie Mae or SONYMA to ensure subsequent sale in the secondary market as required to manage interest rate risk exposure. Loan Purchases. Carver Federal purchased a total of $45.2 million of mortgage loans consisting of performing multi-family and cooperative adjustable-rate mortgage loans to supplement its origination of one- to four-family first mortgage loans during fiscal 2002. This represented 41.2% of Carver Federal's net addition to its loan production at March 31, 2002. The Bank purchases loans in order to increase interest income and to manage its interest rate risk. The Bank continues to shift its loan production emphasis to take advantage of the higher yields and better interest rate risk characteristics available on multi-family and non-residential real estate mortgage loans as well as to increase its participation in multi-family and non-residential real estate mortgage loans with New York area lenders. Loans purchased in fiscal 2002 increased $14.3 million, or 46.3%, from loan purchases of $30.9 million during the fiscal year ended March 31, 2001 ("fiscal 2001"). The following table sets forth certain information with respect to Carver Federal's loan originations, purchases and sales during the periods indicated.
Year Ended March 31, ---------------------------------------------------------------------- 2002 2001 2000 --------------------- --------------------- -------------------- Amount Percent Amount Percent Amount Percent --------- --------- --------- --------- --------- --------- (Dollars in thousands) Loans originated: One- to four-family $ 4,144 3.78% $ 2,274 3.70% $ 2,082 3.07% Multifamily 27,225 24.80 15,747 25.70 319 0.47 Non-residential 25,583 23.31 12,182 19.88 988 1.46 Construction 8,910 8.12 -- 0.00 1,000 1.47 Consumer and business (1) 53 0.05 320 0.52 232 0.34 --------- --------- --------- --------- --------- --------- Total loans originated 65,915 60.06 30,523 49.80 4,621 6.81 Loans purchased (2) 45,203 41.18 30,922 50.46 63,282 93.19 Loans sold (3) (1,361) (1.24) (160) (0.26) -- -- --------- --------- --------- --------- --------- --------- Net additions to loan portfolio $ 109,757 100.00% $ 61,285 100.00% $ 67,903 100.00% ========= ========= ========= ========= ========= =========
(1) Comprised of auto, credit card, personal and home equity. (2) Comprised primarily of one- to four-family and multi-family mortgage loans. (3) Comprise primarily of one- to four-family mortgage loans and student loans. Loan originations increased $35.4 million in fiscal 2002 to $65.9 million, compared to $30.5 million in fiscal 2001 as a result of a continued focus in lending. Loans purchased by the Bank entail certain risks not necessarily associated with loans the Bank originates. The Bank's purchased loans are generally acquired without recourse and in accordance with the Bank's underwriting criteria for originations. In addition, purchased loans have a variety of terms, including maturities, interest rate caps and indices for adjustment of interest rates that may differ from those offered at the time by the Bank in connection with the loans the Bank originates. Finally, the market areas in which the properties that secure the purchased loans are located are subject to economic and real estate market conditions that may significantly differ from those experienced in Carver Federal's market area. There can be no assurance that economic conditions in these out-of-state areas will not deteriorate in the future, resulting in increased loan delinquencies and loan losses among the loans secured by property in these areas. In an effort to reduce these risks, with its existing personnel and through the use of a quality control/loan review firm, the Bank has sought to ensure that purchased loans satisfy the Bank's underwriting standards and do not otherwise have a higher risk of collection or loss than loans originated by the Bank. A Lending Department officer monitors the inspection and confirms the review of each purchased loan. Carver Federal also requires appropriate documentation and further seeks to reduce its risk by requiring, in each buy/sell agreement, a series of warranties and representations as to the underwriting standards and the enforceability of the related legal documents. These warranties and representations remain in effect for the life of the loan. Any misrepresentation must be cured within ninety (90) days of discovery or trigger certain repurchase provisions in the buy/sell agreement. Interest Rates and Loan Fees. Interest rates charged by Carver Federal on mortgage loans are primarily determined by competitive loan rates offered in its market area and minimum yield requirements for loans purchased by Fannie Mae and SONYMA. Mortgage loan rates reflect factors such as prevailing market interest rate levels, the supply 7 of money available to the savings industry and the demand for such loans. These factors are in turn affected by general economic conditions, the monetary policies of the federal government, including the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the general supply of money in the economy, tax policies and governmental budget matters. Carver Federal charges fees in connection with loan commitments and originations, rate lock-ins, loan modifications, late payments and changes of property ownership and for miscellaneous services related to its loans. Loan origination fees are calculated as a percentage of the loan principal. The Bank typically receives fees of between zero and one point (one point being equivalent to 1% of the principal amount of the loan) in connection with the origination of fixed-rate and adjustable-rate residential mortgage loans. The loan origination fee, net of certain direct loan origination expenses, is deferred and accreted into income over the contractual life of the loan using the interest method. If a loan is prepaid, refinanced or sold, all remaining deferred fees with respect to such loan are taken into income at such time. In addition to the foregoing fees, Carver Federal receives fees for servicing loans for others, which in turn generally are sub-serviced for Carver Federal by a third party servicer. Servicing activities include the collection and processing of mortgage payments, accounting for loan repayment funds and paying real estate taxes, hazard insurance and other loan-related expenses out of escrowed funds. Income from these activities varies from period to period with the volume and type of loans originated, sold and purchased, which in turn is dependent on prevailing market interest rates and their effect on the demand for loans in the Bank's market area. Loan Maturity Schedule. The following table sets forth information at March 31, 2002 regarding the dollar amount of loans maturing in Carver Federal's portfolio, including scheduled repayments of principal, based on contractual terms to maturity. Demand loans, loans having no schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. The table below does not include any estimate of prepayments, which significantly shorten the average life of all mortgage loans and may cause Carver Federal's actual repayment experience to differ significantly from that shown below.
Due During the Year Ending March 31, ------------------------------------ Due three Due five Due ten Due after to five to ten to twenty twenty 2003 2004 2005 years years years years Total -------- -------- -------- --------- -------- --------- --------- -------- (In thousands) Real estate loans: One- to four-family $ 25 $ 11 $ 21 $ 214 $ 9,083 $ 11,075 $102,385 $122,814 Multi-family 653 -- 132 25,162 43,937 26,354 22,351 118,589 Non-residential 2,810 -- -- 8,506 18,067 6,404 4,314 40,101 Construction 13,678 -- -- -- -- -- -- 13,678 Consumer and business loans 219 -- -- 2,109 -- -- -- 2,328 -------- -------- -------- -------- -------- --------- -------- -------- Total $ 17,385 $ 11 $ 153 $ 35,991 $ 71,087 $ 43,833 $129,050 $297,510 ======== ======== ======== ======== ======== ======== ======== ========
The following table sets forth amounts in each loan category at March 31, 2002 that are contractually due after March 31, 2003, and whether such loans have fixed rates or adjustable interest rates. Scheduled contractual principal repayments of loans do not necessarily reflect the actual lives of such assets. The average life of long-term loans is substantially less than their contractual terms due to prepayments. In addition, due-on-sale clauses in mortgage loans generally give Carver Federal the right to declare a conventional loan due and payable in the event, among other things, that a borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and tends to decrease when current mortgage loan market rates are substantially lower than rates on existing mortgage loans. 8 Due After March 31, 2003 ------------------------------------------ Fixed Adjustable Total ---------- ---------- ---------- (In thousands) Real estate loans: One- to four-family $ 34,357 $ 88,432 $ 122,789 Multifamily 86,906 31,030 117,936 Non-residential 25,956 11,335 37,291 Consumer and business 151 1,958 2,109 ---------- ---------- ---------- Total $ 147,370 $ 132,755 $ 280,125 ========== ========== ========== ASSET QUALITY General. One of the Bank's key operating objectives has been and continues to be to maintain a high level of asset quality. Through a variety of strategies, including, but not limited to, borrower workout arrangements and marketing of foreclosed properties, the Bank has been proactive in addressing problem and non-performing assets which, in turn, has helped to build the strength of the Bank's financial condition. Such strategies, as well as the Bank's concentration on one- to four-family and multifamily mortgage lending, the maintenance of sound credit standards for new loan originations and a strong real estate market, have resulted in the Bank maintaining a low level of non-performing assets. The underlying credit quality of the Bank's loan portfolio is dependent primarily on each borrower's ability to continue to make required loan payments and, in the event a borrower is unable to continue to do so, the value of the collateral should be adequate to secure the loan. A borrower's ability to pay typically is dependent primarily on employment and other sources of income which, in turn, is impacted by general economic conditions, although other factors, such as unanticipated expenditures or changes in the financial markets may also impact the borrower's ability to pay. Collateral values, particularly real estate values, are also impacted by a variety of factors, including general economic conditions, demographics, maintenance and collection or foreclosure delays. Non-performing Assets. When a borrower fails to make a payment on a mortgage loan, immediate steps are taken by Carver Federal's sub-servicers to have the delinquency cured and the loan restored to current status. With respect to mortgage loans, once the payment grace period has expired (in most instances 15 days after the due date), a late notice is mailed to the borrower within two business days and a late charge is imposed if applicable. If payment is not promptly received, the borrower is contacted by telephone and efforts are made to formulate an affirmative plan to cure the delinquency. Additional calls are made by the 20th and 25th day of the delinquency. If a mortgage loan becomes 30 days delinquent, a letter is mailed to the borrower requesting payment by a specified date. If a mortgage loan becomes 60 days delinquent, Carver Federal seeks to make personal contact with the borrower and also has the property inspected. If a mortgage becomes 90 days delinquent, a letter is sent to the borrower demanding payment by a certain date and indicating that a foreclosure suit will be filed if the deadline is not met. If payment is still not made, management may pursue foreclosure or other appropriate action. When a borrower fails to make a payment on a consumer loan, steps are taken by Carver Federal's loan department to have the delinquency cured and the loan restored to current status. With the exception of automobile loans, once the payment grace period has expired (10 days after the due date), a late notice is mailed to the borrower immediately and a late charge is imposed if applicable. If payment is not promptly received, the borrower is contacted by telephone, and efforts are made to formulate an affirmative plan to cure the delinquency. If a consumer loan becomes 30 days delinquent, a letter is mailed to the borrower requesting payment by a specified date. If the loan becomes 60 days delinquent, the account is given to an independent collection agency to follow up with the collection of the account. If the loan becomes 90 days delinquent, a final warning letter is sent to the borrower and any co-borrower. If the loan remains delinquent, it is reviewed for charge-off. The Bank's collection efforts generally continue after the loan is charged off. 9 The following table sets forth information with respect to Carver Federal's non-performing assets at the dates indicated. Loans generally are placed on non-accrual status when they become 90 days delinquent.
At March 31, ------------------------------------------ 2002 2001 2000 1999 1998 ------ ------ ------ ------ ------ (Dollars in thousands) Loans accounted for on a non-accrual basis (1): Real estate: One- to four-family $ 756 $ 947 $ 966 $ 392 $1,134 Multifamily 253 978 870 1,051 258 Non-residential 1,754 565 -- -- -- Construction 23 23 122 560 3,089 Consumer and business 37 6 168 414 1,087 ------ ------ ------ ------ ------ Total non-accrual loans 2,823 2,519 2,126 2,417 5,568 ------ ------ ------ ------ ------ Accruing loans contractually past due 90 days or more: Real estate: One- to four-family -- -- -- 568 1,049 Multifamily -- -- -- 804 -- Construction -- -- -- 530 -- Consumer and business -- -- -- 183 226 ------ ------ ------ ------ ------ Total accruing 90-day past due loans -- -- -- 2,085 1,275 ------ ------ ------ ------ ------ Total of non-accrual and accruing 90-day past due loans 2,823 2,519 2,126 4,502 6,843 ------ ------ ------ ------ ------ Other non-performing assets (2): Real estate: One- to four-family -- -- 127 185 82 Multi-family -- 27 27 -- -- Non-residential -- 449 768 -- -- Consumer and business -- -- 16 99 -- ------ ------ ------ ------ ------ Total other non-performing assets -- 476 938 284 82 ------ ------ ------ ------ ------ Total non-performing assets (3) $2,823 $2,995 $3,064 $4,786 $6,925 ====== ====== ====== ====== ====== Non-performing loans to total loans 0.96% 0.88% 0.79% 1.66% 2.47% Non-performing assets to total assets 0.63% 0.71% 0.73% 1.15% 1.58% Troubled debt restructuring (4): Real estate: Multifamily and commercial $ -- $ -- $ -- $ -- $ 807 ====== ====== ====== ====== ======
(1) Non-accrual status denotes any loan where the delinquency exceeds 90 days past due and in the opinion of management the collection of additional interest is doubtful. After a careful review of individual loan history and related collateral by management, the loan may be designated as an accruing loan that is contractually past due 90 days or more or if in the opinion of management the collection of additional interest is doubtful the loan will remain in non-accrual status. Payments received on a non-accrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on assessment of the ability to collect on the loan. During the year ended March 31, 2002, gross interest income of $288,000 would have been recorded on loans accounted for on a non-accrual basis at the end of the year if the loans had been current throughout the year. Instead, there was no interest on such loans included in income during the period. (2) Other non-performing assets represent property acquired by the Bank in settlement of loans (i.e., through foreclosure or repossession or as an in-substance foreclosure). These assets are recorded at the lower of their fair value or the unpaid principal balance plus unpaid accrued interest of the related loans. (3) Total non-performing assets consist of non-accrual loans, accruing loans 90 days or more past due and property acquired in settlement of loans. (4) Troubled debt restructurings, as defined under Statement of Financial Accounting Standards ("SFAS") No. 15, are loans where the creditor has, for economic or legal reasons, granted concessions to the debtor that the creditor would not otherwise consider. At March 31, 2002, total non-performing assets decreased by $172,000, or 5.7%, to $2.8 million, compared to $3.0 million at March 31, 2001. 10 Loans accounted for on a non-accrual basis increased $304,000, or 12.1%, to $2.8 million at March 31, 2002, compared to $2.5 million at March 31, 2001. The increase primarily reflects an increase in non-performing non-residential real estate loans partially offset by decreases in non-performing one- to four-family and multifamily real estate loans. There were no accruing loans contractually past due 90 days or more at March 31, 2002 and March 31, 2001, reflecting the continued practice adopted by the Bank during fiscal 2000 to either write off or place on non-accrual status all loans contractually past due 90 days or more. There were no other non-performing assets at March 31, 2002, compared to $476,000 at March 31, 2001. The decrease reflects the sale of real estate acquired in settlement of loans. Asset Classification and Allowances for Losses. Federal regulations and the Bank's policies require the classification of assets on the basis of quality on a regular basis. An asset is classified as "substandard" if it is determined to be inadequately protected by the current net worth and paying capacity of the obligor or the current value of the collateral pledged, if any. An asset is classified as "doubtful" if full collection is highly questionable or improbable. An asset is classified as "loss" if it is considered uncollectible, even if a partial recovery could be expected in the future. The regulations also provide for a "special mention" designation, described as assets that do not currently expose a savings institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention. Assets classified as substandard or doubtful require a savings institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, a savings institution must either establish specific allowances for loan losses in the amount of the portion of the asset classified loss, or charge off such amount. Federal examiners may disagree with a savings institution's classifications. If a savings institution does not agree with an examiner's classification of an asset, it may appeal this determination to the OTS Regional Director. At March 31, 2002, Carver Federal had $2.8 million of loans classified as substandard which represented 0.6% of the Bank's total assets and 7.7% of the Bank's tangible regulatory capital at March 31, 2002. There were no loans classified as doubtful or loss at March 31, 2002. The OTS, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan losses and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management has analyzed all significant factors that affect the ability to collect the portfolio in a reasonable manner; and, that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary. Federal examiners may disagree with the savings institution as to the appropriate level of the institution's allowance for loan losses. While management believes Carver Federal has established its existing loss allowances in accordance with generally accepted accounting principles, there can be no assurance that regulators, in reviewing Carver Federal"s assets, will not require Carver Federal to increase its loss allowance, thereby negatively affecting Carver Federal's reported financial condition and results of operations. Carver Federal's methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific loans as well as losses that have not been identified but can be expected to occur. Further, management reviews the ratio of allowances to total loans (including projected growth) and recommends adjustments to the level of allowances accordingly. The Internal Asset Quality Review Committee conducts quarterly reviews of the Bank's loans and evaluates the need to establish general and specific allowances on the basis of this review. In addition, management actively monitors Carver Federal's asset quality and charges off loans and properties acquired in settlement of loans against the allowances for losses on loans and such properties when appropriate and provides specific loss reserves when necessary. Although management believes it uses the best information available to make determinations with respect to the allowances for losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations. 11 Carver Federal's Internal Asset Quality Review Committee reviews its assets on a quarterly basis to determine whether any assets require classification or re-classification. The Bank has a centralized loan servicing structure that relies upon outside servicers, each of which generates a monthly report of delinquent loans. The Board has designated the Internal Asset Quality Review Committee to perform quarterly reviews of the Bank's asset quality, and their report is submitted to the Board for review. The Asset Liability and Interest Rate Risk Committee, a committee of the Board of Directors, establishes policy relating to internal classification of loans and also provides input to the Internal Asset Quality Review Committee in its review of classified assets. In originating loans, Carver Federal recognizes that credit losses will occur and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. It is management's policy to maintain a general allowance for loan losses based on, among other things, regular reviews of delinquencies and loan portfolio quality, character and size, the Bank's and the industry's historical and projected loss experience and current and forecasted economic conditions. In addition, considerable uncertainty exists as to the future improvement or deterioration of the real estate markets in various states, or of their ultimate impact on Carver Federal as a result of its purchased loans in such states. See "Lending Activities-Loan Purchases." Carver Federal increases its allowance for loan losses by charging provisions for possible losses against the Bank's income. General allowances are established by the Board on at least a quarterly basis based on an assessment of risk in the Bank's loans, taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, the state of the real estate market and economic conditions generally. Specific allowances are provided for individual loans, or portions of loans, when ultimate collection is considered improbable by management based on the current payment status of the loan and the fair value or net realizable value of the security for the loan. At the date of foreclosure or other repossession or at the date the Bank determines a property is an impaired property, the Bank transfers the property to real estate acquired in settlement of loans at the lower of cost or fair value, less estimated selling costs. Fair value is defined as the amount in cash or cash-equivalent value of other consideration that a real estate parcel would yield in a current sale between a willing buyer and a willing seller. Any amount of cost in excess of fair value is charged-off against the allowance for loan losses. Carver Federal records an allowance for estimated selling costs of the property immediately after foreclosure. Subsequent to acquisition, the property is periodically evaluated by management and an allowance is established if the estimated fair value of the property, less estimated costs to sell, declines. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of real estate is recorded. At March 31, 2002, the Bank had no real estate acquired in settlement of loans. See Note 1 of Notes to Consolidated Financial Statements. 12 The following table sets forth an analysis of Carver Federal's allowance for loan losses for the periods indicated.
Year Ended March 31, ------------------------------------------ 2002 2001 2000 1999 1998 ------ ------ ------ ------ ------ (Dollars in thousands) Balance at beginning of period $3,551 $2,935 $4,020 $3,138 $2,246 ------ ------ ------ ------ ------ Loans charged off: Real estate: One- to four-family -- 252 138 -- -- Non-residential -- 194 171 -- -- Consumer and business 500 931 2,260 3,229 367 ------ ------ ------ ------ ------ Total charge-offs 500 1,377 2,569 3,229 367 ------ ------ ------ ------ ------ Recoveries: Construction -- -- -- 45 -- One- to four-family 3 -- 31 -- -- Multifamily -- -- 40 -- -- Non-residential -- -- 22 -- -- Consumer and business 174 200 292 37 -- ------ ------ ------ ------ ------ Total recoveries 177 200 385 82 -- ------ ------ ------ ------ ------ Net loans charged off 323 1,177 2,184 3,147 367 Provision for losses 900 1,793 1,099 4,029 1,259 ------ ------ ------ ------ ------ Balance at end of period $4,128 $3,551 $2,935 $4,020 $3,138 ====== ====== ====== ====== ====== Ratio of net charge-offs to average loans outstanding 0.11% 0.42% 0.84% 1.17% 0.15% Ratio of allowance to total loans 1.41% 1.24% 1.07% 1.48% 1.11% Ratio of allowance to non-performing assets (1) 146.23% 118.56% 95.79% 85.60% 45.30%
(1) Non-performing assets consist of non-accrual loans, accruing loans 90 days or more past due and property acquired in settlement of loans. The following table allocates the allowance for loan losses by asset category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
At March 31, ------------------------------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 ------------------- ------------------- ------------------- ------------------- ------------------- Percent of Percent of Percent of Percent of Percent of Loans in Loans in Loans in Loans in Loans in Each Each Each Each Each Category to Category to Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- ------- ----------- ------ ----------- ------ ----------- (Dollars in thousands) Loans: Real estate One- to four-family $ 429 41.28% $1,198 54.71% $1,050 55.54% $ 957 65.39% $1,691 66.85% Multifamily 1,468 39.86 748 29.00 764 31.40 902 18.89 400 17.46 Non-residential 729 13.48 353 12.52 202 8.28 251 8.33 111 4.53 Construction 76 4.60 290 2.46 272 2.33 424 3.98 340 5.66 Consumer and business 377 0.78 962 1.31 647 2.45 1,486 3.41 596 5.50 Unallocated 1,049 -- -- -- -- -- -- -- -- -- ------ ------ ------ ------ ------ ------ Total allowance for loan losses $4,128 100.00% $3,551 100.00% $2,935 100.00% $4,020 100.00% $3,138 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
13 Investment Activities General. The Bank utilizes mortgage-backed and other investment securities in virtually all aspects of its asset/liability management strategy. In making investment decisions, the Board considers, among other things, the Bank's yield and interest rate objectives, its interest rate and credit risk position and its liquidity and cash flow. The Bank must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. The Bank's liquidity policy requires that cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained. Generally, the investment policy of the Bank is to invest funds among categories of investments and maturities based upon the Bank's asset/liability management policies, investment quality, loan and deposit volume, liquidity needs and performance objectives. SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, requires that securities be classified into three categories: trading, held-to-maturity, and available-for-sale. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value with unrealized gains and losses included in earnings. Debt securities for which the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. All other securities not classified as trading or held-to-maturity are classified as available-for-sale and reported at fair value with unrealized gains and losses included, on an after-tax basis, in a separate component of stockholders' equity. At March 31, 2002, the Bank had no securities classified as trading. At March 31, 2002, $89.8 million, or 85.1% of the Bank's mortgage-backed and other investment securities, was classified as available-for-sale. The remaining $15.6 million, or 14.9%, was classified as held-to-maturity. Mortgage-Backed Securities. The Bank has invested in mortgage-backed securities in order to supplement loan production and achieve its asset/liability management goals. At March 31, 2002, mortgage-backed securities constituted 14.7% of total assets, as compared to 10.1% of total assets at March 31, 2001. Carver Federal maintains a significant portfolio of mortgage-backed securities in the form of Government National Mortgage Association ("GNMA") pass-through certificates, Fannie Mae and FHLMC participation certificates and collateralized mortgage obligations ("CMOs"). GNMA pass-through certificates are guaranteed as to the payment of principal and interest by the full faith and credit of the U.S. Government while Fannie Mae and FHLMC certificates are each guaranteed by their respective agencies as to principal and interest. Mortgage-backed securities generally entitle Carver Federal to receive a pro rata portion of the cash flows from an identified pool of mortgages. CMOs are securities issued by special purpose entities generally collateralized by pools of mortgage-backed securities. The cash flows from such pools are segmented and paid in accordance with a predetermined priority to various classes of securities issued by the entity. Carver Federal's CMOs are primarily adjustable-rate CMOs issued by the Resolution Trust Corporation ("RTC"). Carver Federal also has invested in pools of loans guaranteed as to principal and interest by the Small Business Administration ("SBA"). Although mortgage-backed securities generally yield from 60 to 100 basis points less than whole loans, they present substantially lower credit risk and are more liquid than individual mortgage loans and may be used to collateralize obligations of the Bank. Because Carver Federal receives regular payments of principal and interest from its mortgage-backed securities, these investments provide more consistent cash flows than investments in other debt securities which generally only pay principal at maturity. Mortgage-backed securities also help the Bank meet certain definitional tests for favorable treatment under federal banking and tax laws. See "Regulation and Supervision--Federal Banking Regulation--QTL Test" and "Federal and State Taxation." The Bank seeks to avoid interest rate risk by investing in adjustable-rate mortgage-backed securities which at March 31, 2002 constituted $52.3 million, or 79.1% of the mortgage-backed securities portfolio. Mortgage-backed securities, however, expose Carver Federal to certain unique risks. In a declining rate environment, accelerated prepayments of loans underlying these securities expose Carver Federal to the risk that it will be unable to obtain comparable yields upon reinvestment of the proceeds. In the event the mortgage-backed security has been funded with an interest-bearing liability with a maturity comparable to the original estimated life of the mortgage-backed security, the Bank's interest rate spread could be adversely affected. Conversely, in a rising interest rate environment, the Bank may experience a lower than estimated rate of repayment on the underlying mortgages, effectively extending the estimated life of the mortgage-backed security and exposing the Bank to the risk that it may be required to fund the asset with a liability bearing a higher rate of interest. 14 The following table sets forth the carrying value of Carver Federal's mortgage-backed securities at the dates indicated. At the beginning of fiscal 2002 the Bank transferred $45.7 million of mortgage-backed securities from held-to-maturity to available-for-sale.
At March 31, -------------------------------- 2002 2001 2000 -------- -------- -------- (In thousands) Available-for-Sale: GNMA $ 10,584 $ -- $ -- Fannie Mae 11,451 -- -- FHLMC 28,249 -- -- CMO 136 -- -- -------- -------- -------- Total available-for-sale 50,420 -- -- Held-to-Maturity: GNMA 3,448 5,774 6,516 Fannie Mae 5,607 21,633 26,222 FHLMC 6,149 14,672 18,780 SBA 439 594 760 CMO -- 193 1,951 -------- -------- -------- Total held to maturity 15,643 42,866 54,229 -------- -------- -------- Total mortgage-backed securities $ 66,063 $ 42,866 $ 54,229 ======== ======== ========
The following table sets forth the scheduled maturities, carrying values and fair values for Carver Federal's mortgage-backed securities at March 31, 2002. Expected maturities will differ from contractual maturities due to scheduled repayments and because borrowers may have the right to call or prepay obligations with or without prepayment penalties. The following table does not take into consideration the effects of scheduled repayments or the effects of possible prepayments. Carrying Fair Value Value --------- --------- (In thousands) Available-for-sale: One through five years $ 237 $ 247 Five through ten years 2,568 2,670 After ten years 47,137 47,503 --------- --------- $ 49,942 $ 50,420 ========= ========= Held-to-maturity: One through five years $ -- $ -- Five through ten years 513 526 After ten years 15,130 15,190 --------- --------- $ 15,643 $ 15,716 ========= ========= Other Investment Securities. In addition to mortgage-backed securities, the Bank also invests in high-quality assets (primarily government and agency obligations) with short and intermediate terms (typically seven years or less) to maturity. Carver Federal is permitted under federal law to make certain investments, including investments in securities issued by various federal agencies and state and municipal governments, deposits at the FHLB, certificates of deposit in federally insured institutions, certain bankers' acceptances and federal funds. The Bank may also invest, subject to certain limitations, in commercial paper having one of the two highest investment ratings of a nationally recognized credit rating agency, and certain other types of corporate debt securities and mutual funds. 15 The following table sets forth the carrying value of Carver Federal's other securities available-for-sale and held-to- maturity at the date indicated. At March 31, ----------------------------- 2002 2001 2000 ------- ------- ------- (In thousands) U.S. Government and Agency securities: Available-for-sale $39,401 $19,926 $24,952 Held-to-maturity -- 24,996 24,996 ------- ------- ------- Total other securities $39,401 $44,922 $49,948 ======= ======= ======= The following table sets forth the scheduled maturities, carrying values and fair values for Carver Federal's investments at March 31, 2002. Carrying Fair Value Value ---------- ---------- (In thousands) Available-for-sale: One year or less $ 15,018 $ 15,018 One through five years 24,645 24,383 ---------- ---------- $ 39,663 $ 39,401 ========== ========== Other Earning Assets. Federal regulations require the Bank to maintain an investment in FHLB stock and a sufficient amount of liquid assets which may be invested in cash and specified securities. For additional information, see "Regulation and Supervision-- Federal Banking Regulation--Liquidity." The following table sets forth the carrying value of Carver Federal's investment in FHLB stock and liquid assets at the dates indicated. At March 31, ------------------------------ 2002 2001 2000 -------- -------- -------- (In thousands) FHLB stock $ 3,763 $ 5,755 $ 5,755 Federal funds sold 21,100 23,700 11,300 Deposit Activity and Other Sources of Funds General. Deposits are the primary source of Carver Federal's funds for lending and other investment purposes. In addition to deposits, Carver Federal derives funds from loan principal repayments, interest payments and maturing investments. Loan repayments and interest payments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by prevailing market interest rates and money market conditions. Borrowed money may be used to supplement the Bank's available funds, and from time to time the Bank has borrowed funds from the FHLB and through repurchase agreements. Deposits. Carver Federal attracts deposits principally from within its market area by offering a variety of deposit instruments, including passbook and statement accounts and certificates of deposit, which range in term from 91 days to seven years. Deposit terms vary, principally on the basis of the minimum balance required, the length of time the funds must remain on deposit and the interest rate. Carver Federal also offers Individual Retirement Accounts. Carver Federal's policies are designed primarily to attract deposits from local residents through the Bank's branch network rather than from outside the Bank's market area. Carver Federal also holds deposits from various governmental agencies or authorities and corporations. Although the Board has authorized accepting brokered deposits, it has been the Bank's practice not to obtain these types of deposits, however, it may be considered as a source of funds if deemed necessary. 16 The Bank's interest rates, maturities, service fees and withdrawal penalties on deposits are established by management on a periodic basis. Management determines deposit interest rates and maturities based on the Bank's funds acquisition and liquidity requirements, the rates paid by the Bank's competitors, the Bank's growth goals and applicable regulatory restrictions and requirements. During fiscal 2002, the Bank sold its branch located in East New York. As a result of this sale the Bank transferred approximately $16.4 million of deposits to the purchaser, City National Bank of New Jersey. During fiscal 2001, the Bank sold its branches located in Roosevelt and Chelsea, New York. The total amount of deposits transferred as a result of these sales was $8.4 and $14.1 million, respectively. The following table sets forth the change in dollar amount of deposits in the various types of accounts offered by Carver Federal between the dates indicated. Included in the net increase (decrease) in deposits before interest credited is the amount of deposits sold during the year ended March 31, 2002 and 2001 of $16.4 and $22.5 million, respectively.
Year Ended March 31, --------- --------- --------- 2002 2001 2000 --------- --------- --------- (Dollars in thousands) Deposits at beginning of period $ 279,424 $ 281,941 $ 276,999 Net increase (decrease) before interest credited 37,403 (10,973) (3,670) Interest credited 8,127 8,456 8,612 --------- --------- --------- Deposits at end of period $ 324,954 $ 279,424 $ 281,941 ========= ========= ========= Net increase (decrease) during the year: Amount $ 45,530 $ (2,517) $ 4,942 ========= ========= ========= Percent 16.3% -0.9% 1.8% ========= ========= =========
The following table sets forth the distribution of the Bank's deposit accounts and the related weighted average interest rates at the dates indicated.
At March 31, --------------------------------------------------------------------------------------------------- 2002 2001 2000 ----------------------------- ------------------------------- ------------------------------- Percent of Weighted Percent Weighted Percent Weighted Total Average of Total Average of Total Average Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate -------- ---------- -------- -------- --------- -------- -------- -------- -------- (Dollars in thousands) Non-interest-bearing demand $ 13,463 4.1% --% $ 11,409 4.1% --% $ 12,337 4.4% --% NOW accounts 18,095 5.6 1.24 14,757 5.3 1.71 18,873 6.7 1.66 Savings and club 126,779 39.0 1.71 132,645 47.5 2.32 145,277 51.5 2.51 Money Market savings account 15,232 4.7 1.78 15,718 5.6 2.62 19,418 6.9 3.25 Certificates of deposit 151,385 46.6 2.73 104,895 37.5 4.55 86,036 30.5 4.70 -------- ------ -------- -------- -------- -------- -------- -------- -------- Total $324,954 100.0% 2.18% $279,424 100.0% 3.04% $281,941 100.0% 3.06% ======== ====== ======== ======== ======== ========
17 The following table sets forth the amount and maturities of time deposits in specified weighted average interest rate categories at March 31, 2002.
At March 31, 2002 Total at Period to Maturity March 31, --------------------------------------------------------------------------- ----------------------- Less Than After Percent One Year 1-2 Years 2-3 Years 3 Years Total of Total 2001 2000 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) 1%-1.99% $ 22,138 $ -- $ -- $ -- $ 22,138 14.6% $ -- $ -- 2%-3.99% 58,390 26,638 10,495 -- 95,523 63.1 752 5,129 4%-5.99% -- -- -- 33,724 33,724 22.3 104,143 80,907 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total $ 80,528 $ 26,638 $ 10,495 $ 33,724 $ 151,385 100.0% $ 104,895 $ 86,036 ========== ========== ========== ========== ========== ========== ========== ==========
Carver Federal's certificates of deposit of $100,000 or more were $90.6 million as of March 31, 2002. Borrowed Money. Savings deposits historically have been the primary source of funds for Carver Federal's lending, investment and general operating activities. Carver Federal is authorized, however, to use advances and securities sold under agreement to repurchase ("Repos") from the FHLB and approved primary dealers to supplement its supply of funds and to meet deposit withdrawal requirements. The FHLB functions as a central bank providing credit for savings institutions and certain other member financial institutions. As a member of the FHLB system, Carver Federal is required to own stock in the FHLB and is authorized to apply for advances. Advances are made pursuant to several different programs, each of which has its own interest rate and range of maturities. Advances from the FHLB are secured by Carver Federal's stock in the FHLB and a blanket pledge of Carver Federal's mortgage loan and mortgage-backed securities portfolios. One of the elements of Carver Federal's investment strategy is to leverage the balance sheet by increasing liabilities with FHLB advances and Repos and investing borrowed funds primarily in adjustable-rate mortgage loans. The Bank seeks to match as closely as possible the term of borrowed money with the repricing cycle of the mortgage loans on the balance sheet. At March 31, 2002, Carver Federal had outstanding $75.3 million in FHLB advances and no Repos. The following table sets forth certain information regarding Carver Federal's borrowed money at the dates and for the periods indicated:
At or for the Year Ended March 31, ------------------------ 2002 2001 -------- -------- (Dollars in thousands) Amounts outstanding at the end of period: FHLB advances $ 75,262 $100,299 Repos -- 4,930 Weighted average rate paid at period end: FHLB advances 4.18% 5.84% Repos --% 6.70% Maximum amount of borrowing outstanding at any month end: FHLB advances $100,094 $102,314 Repos 14,930 31,337 Approximate average amounts outstanding for period: FHLB advances $ 76,141 $ 80,591 Repos 2,888 17,165 Approximate weighted average rate paid during period: FHLB advances 5.50% 5.72% Repos 5.91% 5.99%
18 Subsidiary Activities The Holding Company is the parent of two wholly owned subsidiaries, Carver Federal and Alhambra. On March 8, 1995, the Bank formed CFSB Realty Corp. as a wholly owned subsidiary to hold real estate acquired through foreclosure pending eventual disposition. At March 31, 2002, this subsidiary had $221,000 in total capital and net operating income of $63,000. At March 31, 2002 there was no real estate owned pending disposition. The Bank also owns CFSB Credit Corp., currently an inactive subsidiary originally formed to undertake the Bank's credit card issuance. Market Area and Competition The Bank's primary market area for deposits consists of the areas served by its five branches, and the Bank considers its lending market to include Bronx, Kings, Manhattan, Queens and Richmond counties, together comprising New York City, and lower Westchester County, New York. See "Item 2 - Properties." Although Carver Federal's branches are located in areas that have been historically underserved by other financial institutions, Carver Federal is facing increasing competition for deposits and residential mortgage lending in its immediate market areas. Management believes that this competition has become more intense as a result of an increased examination emphasis by federal banking regulators on financial institutions' fulfillment of their responsibilities under the Community Reinvestment Act ("CRA") and the improving economic conditions in its market area. The Bank's competition for loans comes principally from mortgage banking companies, commercial banks, savings banks and savings and loan associations. The Bank's most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations and credit unions. Competition for deposits also comes from money market mutual funds and other corporate and government securities funds as well as from other financial intermediaries such as brokerage firms and insurance companies. Many of Carver Federal's competitors have substantially greater resources than Carver Federal and offer a wider array of financial services and products than Carver Federal. At times, these larger financial institutions may offer below market interest rates on mortgage loans and above market interest rates for deposits. These pricing concessions combined with competitors' larger presence in the New York market add to the challenges Carver Federal faces in expanding its current market share. The Bank believes that it can compete with these institutions by offering a competitive range of services as well as through personalized attention and community commitment. Employees As of March 31, 2002, Carver had 100.5 full-time equivalent employees, none of whom was represented by a collective bargaining agreement. The Bank considers its employees relations to be satisfactory. REGULATION AND SUPERVISION General The Bank is subject to extensive regulation, examination, and supervision by its primary regulator, the OTS. The Bank's deposit accounts are insured up to applicable limits by the FDIC, and it is a member of the FHLB. The Bank must file reports with the OTS concerning its activities and financial condition, and it must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The Holding Company, as a savings association holding company, is subject to regulation, examination, and supervision by the OTS and is required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and of the Securities and Exchange Commission (the "SEC") under the federal securities laws. Any change in such laws and regulations whether by the OTS, the FDIC or through legislation could have a material adverse impact on the Bank and the Holding Company and their operations and stockholders. On November 12, 1999, landmark financial services legislation, titled the Gramm-Leach-Bliley Act ("Gramm-Leach") became law. Gramm-Leach repeals historical restrictions, and eliminates many federal and state law barriers to, affiliations among banks and securities firms, insurance companies and other financial service providers. 19 Federal Banking Regulation Activity Powers. The Bank derives its lending and investment powers from the Home Owner's Loan Act, as amended ("HOLA"), and the regulations of the OTS. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. The Bank's authority to invest in certain types of loans or other investments is limited by federal law. Loans to One Borrower Limitations. The Bank is generally subject to the same limits on loans to one borrower as a national bank. With specified exceptions, the Bank's total loans or extension of credit to a single borrower or group of related borrowers may not exceed 15% of the Bank's unimpaired capital and surplus, which does not include accumulated other comprehensive income. The Bank may lend additional amounts up to 10% of its unimpaired capital and surplus if the loans or extensions of credit are fully secured by readily marketable collateral. At March 31, 2002, the Bank's limit on loans to one borrower based on its unimpaired capital and surplus was $5.5 million. Following a field visit that concluded on December 2, 1998, because of their review of the potential negative impact of possible write-offs that might have impacted capital levels at that time, the Bank was directed by the OTS to abstain from originating new loans that individually or in the aggregate exceed $2.0 million to one borrower or group of related borrowers without prior approval from the OTS. The Bank plans to seek revision of this limitation. The Bank currently complies with applicable loans to one borrower limitations. QTL Test. Under federal law, the Bank must comply with a qualified thrift lender ("QTL") test. Under the QTL test, the Bank is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" in at least nine months of the most recent twelve-month period. "Portfolio assets" means, in general, an association's total assets less the sum of (a) specified liquid assets up to 20% of total assets, (b) goodwill and other intangible assets and (c) the value of property used to conduct the Bank's business. "Qualified thrift investments" includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and consumer loans. At March 31, 2002, the Bank maintained approximately 76.0% of its portfolio assets in qualified thrift investments. The Bank had also met the QTL test in each of the prior 12 months and was, therefore, a qualified thrift lender. If the Bank fails the QTL test, it must either operate under certain restrictions on its activities or convert to a bank charter. Capital Requirements. OTS regulations require the Bank to meet three minimum capital standards: (1) a tangible capital ratio requirement of 1.5% of total assets, as adjusted under OTS regulations; (2) a leverage ratio requirement of 8% of core capital to such adjusted total assets; and (3) a risk-based capital ratio requirement of 8% of core and supplementary capital to total risk-weighted assets. The minimum leverage capital ratio for any other depository institution that does not have a composite rating of 1 will be 4%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution. In determining compliance with the risk based capital requirement, the Bank must compute its risk-weighted assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the U.S. government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulation based on the risks that the OTS believes are inherent in the type of asset. Tangible capital is defined, generally, as common stockholders' equity (including retained earnings), certain non-cumulative perpetual preferred stock and related earnings and minority interests in equity accounts of fully consolidated subsidiaries, less intangibles (other than certain mortgage servicing rights) and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital is defined similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital includes cumulative and other perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses. In addition, up to 45% of unrealized gains on available-for-sale equity securities with a readily determinable fair value may be included in supplementary capital. The allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets, and the amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital. 20 At March 31, 2002, the Bank met each of its capital requirements. Limitation on Capital Distributions. The OTS imposes various restrictions or requirements on the Bank's ability to make capital distributions, including cash dividends. A savings institution that is the subsidiary of a savings and loan holding company, such as the Bank, must file an application or a notice with the OTS at least 30 days before making a capital distribution. The Bank must file an application for prior approval if the total amount of its capital distributions, including the proposed distribution, for the applicable calendar year would exceed an amount equal to the Bank's net income for that year plus the Bank's retained net income for the previous two years. In other cases, as a savings association subsidiary of a savings and loan holding company, the Bank will have to file a notice. The OTS may disapprove of a notice or application if: o the Bank would be undercapitalized following the distribution; o the proposed capital distribution raises safety and soundness concerns; or o the capital distribution would violate a prohibition contained in any statute, regulation or agreement. Liquidity. The Bank maintains liquidity levels to meet operational needs. In the normal course of business, the levels of liquid assets during any given period are dependent on operating, investing and financing activities. Cash and due from banks, federal funds sold and repurchase agreements with maturities of three months or less are the Bank's most liquid assets. The Bank maintains a liquidity policy that sets minimum requirements to maintain sufficient liquidity to ensure its safe and sound operation. At March 31, 2002, the Bank's liquidity ratio was 7.99% of liquid assets to total assets which is in excess of minimum requirements. Branching. Subject to certain limitations, federal law permits federally chartered savings associations to establish branches in any state of the United States. The authority for a federal savings association to establish an interstate branch network would facilitate a geographic diversification of the association's activities. This authority under federal law and OTS regulations preempts any state law purporting to regulate branching by federal savings associations. Community Reinvestment. Under the CRA, as implemented by OTS regulations, the Bank has a continuing and affirmative obligation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for the Bank nor does it limit the Bank's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of the Bank, to assess the Bank's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the Bank. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating in its most recent examination conducted in 2001. CRA regulations rate an institution based on its actual performance in meeting community needs. In particular, the system focuses on three tests: o a lending test, to evaluate the institution's record of making loans in its assessment areas; o an investment test, to evaluate the institution's record of investing in community development projects, affordable housing and programs benefiting low or moderate income individuals and businesses; and o a service test, to evaluate the institution's delivery of services through its branches, ATMs and other offices. Transactions with Related Parties. The Bank's authority to engage in transactions with its "affiliates" is limited by OTS regulations and by Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, these transactions must be on terms which are as favorable to the Bank as comparable transactions with non-affiliates. Additionally, certain types of these transactions are restricted to an aggregate percentage of the Bank's capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from the Bank. In addition, OTS regulations prohibit a savings association from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate other than a subsidiary. The Bank's authority to extend credit to its directors, executive officers, and 10% shareholders, as well as to 21 entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank's capital. In addition, extensions of credit in excess of certain limits must be approved by the Bank's board of directors. Enforcement. The OTS has primary enforcement responsibility over the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices. Standards for Safety and Soundness. The OTS has adopted guidelines prescribing safety and soundness standards. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. In addition, OTS regulations authorize, but do not require, the OTS to order an institution that has been given notice that it is not satisfying these safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the "prompt corrective action" provisions of federal law. If an institution fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties. Prompt Corrective Action Regulations. Under the OTS prompt corrective action regulations, the OTS is authorized and, in some cases, required to take supervisory actions against undercapitalized savings associations. For this purpose, a savings association would be placed in one of the following four categories based on the association's regulatory capital: o well-capitalized; o adequately capitalized; o undercapitalized; or o critically undercapitalized. As of March 31, 2002, the Bank was considered well-capitalized by the OTS. When appropriate, the OTS can require corrective action by a savings association holding company under the "prompt corrective action" provisions of federal law. Insurance of Deposit Accounts. The Bank is a member of the Savings Association Insurance Fund ("SAIF") of the FDIC, and the Bank pays its deposit insurance assessments to the SAIF of the FDIC. The FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures the deposits of banks and state chartered savings banks. Under federal law, the FDIC established a risk based assessment system for determining the deposit insurance assessments to be paid by insured depository institutions. Under the assessment system, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of the quarter ending three months before the beginning of the assessment period. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the regulation, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Assessment rates currently range from 0.0% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.27% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern). The FDIC is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of the deposit insurance fund to 1.25%. In addition, all FDIC insured institutions are required to pay assessments to the FDIC at an annual rate of approximately .0212% of insured deposits to fund interest payments on the bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the Financing Corporation bonds mature in 2017. Federal Home Loan Bank System. The Bank is a member of the FHLB of New York ("FHLB-NY"), which is 22 one of the regional FHLBs composing the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. The Bank is required to acquire and hold shares of capital stock in the FHLB-NY in an amount equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations, but not less than $500 or 5% of its outstanding advances from the FHLB. The Bank was in compliance with this requirement with an investment in the capital stock of the FHLB at March 31, 2002 of $3.8 million. Any advances from a FHLB must be secured by specified types of collateral, and all long term advances may be obtained only for the purpose of providing funds for residential housing finance. FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, the Bank's net interest income would be adversely affected. Under Gramm-Leach, membership in the FHLB system is now voluntary for all federally-chartered savings associations such as the Bank. Gramm-Leach also replaces the existing redeemable stock structure of the FHLB system with a capital structure that requires each FHLB to meet a leverage limit and a risk-based permanent capital requirement. Two classes of stock are authorized: Class A (redeemable on 6-months notice) and Class B (redeemable on 5-years notice). Federal Reserve System. Under the Federal Reserve Board's regulations, the Bank is required to maintain non-interest-earning reserves against its transaction accounts. Federal Reserve Board regulations generally require that (a) reserves of 3% must be maintained against aggregate transaction accounts of $41.3 million or less, subject to adjustment by the Federal Reserve Board, and (b) a reserve of $1.2 million plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) must be maintained against that portion of total transaction accounts in excess of $41.3 million. The first $5.7 million of otherwise reservable balances are exempted from the reserve requirements. The Bank is in compliance with these reserve requirements. Because required reserves must be maintained in the form of either vault cash, a noninterest bearing account at a Federal Reserve Bank, or a passthrough account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the Bank's interest-earning assets to the extent that the requirement exceeds vault cash. Privacy Protection. Effective July 1, 2001, financial institutions, including Carver Federal, became subject to OTS regulations implementing the privacy protection provisions of Gramm-Leach. These regulations require the Bank to disclose its privacy policy, including identifying with whom it shares "nonpublic personal information," to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require the Bank to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, to the extent its sharing of such information is not exempted, the Bank is required to provide its customers with the ability to "opt-out" of having the Bank share their nonpublic personal information with unaffiliated third parties. The implementation of these regulations did not have a material adverse effect on our operations. Gramm-Leach also provides for the ability of each state to enact legislation that is more protective of consumers' personal information. Currently, there are a number of privacy bills pending in the New York legislature. No action has been taken on any of these bills, and we cannot predict whether any of them will become law or what impact, if any, these bills will have if enacted into law. On February 1, 2001, the OTS and other federal banking agencies adopted guidelines establishing standards for safeguarding customer information to implement certain provisions of Gramm-Leach. The guidelines describe the agencies' expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to insure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. The Bank developed a policy to comply with the guidelines prior to their effective date of July 1, 2001, and implementation of such policy is not expected to have a material adverse effect on the Bank's operations. 23 Holding Company Regulation. The Holding Company is a savings and loan holding company regulated by the OTS. As such, the Holding Company is registered with and is subject to OTS examination and supervision, as well as certain reporting requirements. In addition, the OTS has enforcement authority over the Holding Company and its subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of a subsidiary savings institution. Unlike bank holding companies, federal savings and loan holding companies are not subject to any regulatory capital requirements or to supervision by the Federal Reserve Board. Gramm-Leach restricts the powers of new unitary savings and loan holding companies. Unitary savings and loan holding companies that are "grandfathered," i.e., unitary savings and loan holding companies in existence or with applications filed with the OTS on or before May 4, 1999, such as Carver, retain their authority under the prior law. All other unitary savings and loan holding companies are limited to financially related activities permissible for bank holding companies, as defined under Gramm-Leach. Gramm-Leach also prohibits non-financial companies from acquiring grandfathered unitary savings and loan holding companies. Restrictions Applicable to All Savings and Loan Holding Companies. Federal law prohibits a savings and loan holding company, including the Holding Company, directly or indirectly, from acquiring: o control (as defined under HOLA) of another savings institution (or a holding company parent) without prior OTS approval; o through merger, consolidation, or purchase of assets, another savings institution or a holding company thereof, or acquiring all or substantially all of the assets of such institution (or a holding company), without prior OTS approval; or o control of any depository institution not insured by the FDIC (except through a merger with and into the holding company's savings institution subsidiary that is approved by the OTS). A savings and loan holding company may not acquire as a separate subsidiary an insured institution that has a principal office outside of the state where the principal office of its subsidiary institution is located, except: o in the case of certain emergency acquisitions approved by the FDIC; o if such holding company controls a savings institution subsidiary that operated a home or branch office in such additional state as of March 5, 1987; or o if the laws of the state in which the savings institution to be acquired is located specifically authorize a savings institution chartered by that state to be acquired by a savings institution chartered by the state where the acquiring savings institution or savings and loan holding company is located or by a holding company that controls such a state chartered association. Federal Securities Laws. The Holding Company is subject to the periodic reporting, proxy solicitation, tender offer, insider trading restrictions and other requirements under the Securities Exchange Act of 1934, as amended ("Exchange Act"). Delaware Corporation Law. The Holding Company is incorporated under the laws of the State of Delaware. Thus, it is subject to regulation by the State of Delaware and the rights of its shareholders are governed by the General Corporation Law of the State of Delaware. New York State Banking Regulations. The New York State Banking Department has proposed regulations that would impose restrictions and limitations on certain high cost home loans made by any individual or entity, including a federally-chartered savings association, that originates more than one high cost home loan in New York State in a 12-month period. The regulations, among other things, prohibit certain mortgage loan provisions and certain acts and practices by originators and impose certain disclosure and reporting requirements. It is unclear whether these provisions, if enacted, would be preempted by Section 5(a) of HOLA, as implemented by the lending and investment regulations of the OTS. The OTS has not yet adopted regulations regarding high-cost mortgage loans and is currently considering whether it will do so. Although the Bank does not originate loans that meet the definition of "high-cost mortgage loan" under the proposed regulations, in the event the Bank determines to originate such loans in the future, the Bank may be subject to such regulation, if adopted as proposed. 24 Other Federal Regulation. In response to the events of September 11, 2001, President George W. Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions: o Pursuant to Section 352, all financial institutions must establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures, and controls, (ii) specific designation of an anti-money laundering compliance officer, (iii) ongoing employee training programs, and (iv) an independent audit function to test the anti-money laundering programs. o Section 326 of the Act authorizes the Secretary of the Department of Treasury, in conjunction with the other bank regulators, to issue regulations by October 26, 2002 that provide for minimum standards with respect to customer identification at the time new accounts are opened. o Section 312 of the Act requires financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) to establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering. o Effective December 25, 2001, financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and will be subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks. o Bank regulators are directed to consider a holding company's effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications. FEDERAL AND STATE TAXATION Federal Taxation General. The Holding Company and the Bank currently file consolidated federal income tax returns, report their income for tax return purposes on the basis of a taxable-year ending March 31st, using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including in particular the Bank's tax reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Holding Company. Bad Debt Reserves. The Bank, as a "small bank" (one with assets having an adjusted tax basis of $500 million or less) is permitted to maintain a reserve for bad debts with respect to "qualifying loans," which, in general, are loans secured by certain interests in real property, and to make, within specified formula limits, annual additions to the reserve which are deductible for purposes of computing the Bank's taxable income. Pursuant to the Small Business Job Protection Act of 1996, the Bank is now recapturing (taking into income) over a multi-year period a portion of the balance of its bad debt reserve as of March 31, 1996. Distributions. To the extent that the Bank makes "nondividend distributions" to shareholders, such distributions will be considered to result in distributions from the Bank's "base year reserve," i.e., its reserve as of March 31, 1988, to the extent thereof and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in the Bank's taxable income. Nondividend distributions include distributions in excess of 25 the Bank's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not constitute nondividend distributions and, therefore, will not be included in the Bank's income. The amount of additional taxable income created from a nondividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately one and one-half times the nondividend distribution would be includable in gross income for federal income tax purposes, assuming a 34% federal corporate income tax rate. Corporate Alternative Minimum Tax. The Code imposes an Alternative Minimum Tax ("AMT") on alternative minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased by certain preference items. Only 90% of AMTI can be offset by net operating loss carryovers. AMTI is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Thus, the Company's AMTI is increased by an amount equal to 75% of the amount by which the Company's adjusted current earnings exceed its AMTI (determined without regard to this adjustment and prior to reduction for net operating losses). Elimination of Dividends; Dividends-Received Deduction. The Holding Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Holding Company and the Bank will not file a consolidated tax return, except that if the Holding Company or the Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted. State and Local Taxation State of New York. The Bank and the Holding Company are subject to New York State franchise tax on net income or one of several alternative bases, whichever results in the highest tax. "Net income" means federal taxable income with adjustments. The Bank and the Holding Company file combined returns and are subject to taxation in the same manner as other corporations with some exceptions, including the Bank's deductions for additions to its reserve for bad debts. The New York State tax rates for fiscal years 2001 and 2002 are 10% and 9.36%, respectively, (including the Metropolitan Commuter Transportation District Surcharge) of net income. In general, the Holding Company is not required to pay New York State tax on dividends and interest received from the Bank or on gains realized on the sale of Bank stock. New York State has enacted legislation that enabled the Bank to avoid the recapture of the New York State tax bad debt reserves that otherwise would have occurred as a result of the changes in federal law and to continue to utilize either the federal method or a method based on a percentage of its taxable income for computing additions to its bad debt reserve. New York City. The Bank and the Holding Company are also subject to a similarly calculated New York City banking corporation tax of 9% on income allocated to New York City. In this connection, legislation was recently enacted regarding the use and treatment of tax bad debt reserves that is substantially similar to the New York State legislation described above. Delaware Taxation. As a Delaware holding company not earning income in Delaware, the Holding Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. EXECUTIVE OFFICERS OF THE HOLDING COMPANY The name, position, term of office as officer and period during which he or she has served as an officer is provided below for each executive officer of the Holding Company as of May 31, 2002. Each of the persons listed below is an executive officer of the Holding Company and the Bank, holding the same office in each. 26
Name Age Position - ------------------------- --- -------------------------------------------------------------- Deborah C. Wright 44 President and Chief Executive Officer, Director Frank Deaton 33 Senior Vice President and Chief Auditor Linda J. Dunn 46 Senior Vice President, General Counsel and Corporate Secretary William Gray 47 Senior Vice President and Chief Financial Officer Margaret Peterson 51 Senior Vice President and Chief Administrative Officer Devon W. Woolcock 36 Senior Vice President and Chief of Retail Banking
Deborah C. Wright is currently President and Chief Executive Officer and a Director of the Holding Company and Carver Federal, positions she assumed on June 1, 1999. Prior to assuming her current positions, Ms. Wright was President & CEO of the Upper Manhattan Empowerment Zone Development Corporation, a position she held since May 1996. She previously served as Commissioner of the Department of Housing Preservation and Development under Mayor Rudolph W. Giuliani from January 1994 through March 1996. Prior to that appointment, Ms. Wright was named by Mayor David N. Dinkins to the New York City Housing Authority Board, which manages New York City's 189,000 public housing units. She is a member of the Board of Overseers of Harvard University and serves on the boards of Kraft Foods, Inc., The Lower Manhattan Development Corporation, the Initiative for a Competitive Inner City, The New York City Partnership, Inc. and the Ministers and Missionaries Benefit Board of the American Baptist Churches. Ms. Wright earned A.B., J.D. and M.B.A. degrees from Harvard University. Frank Deaton is Senior Vice President and Chief Auditor. He joined Carver in May 2001. Mr. Deaton was previously Vice President and Risk Review Manager with Key Bank in Cleveland, Ohio. He joined Key Bank in 1990 and was responsible for developing the scope and overseeing completion of credit, operational and regulatory compliance audits for a variety of business units. Mr. Deaton is a Certified Bank Auditor and a member of the Institute of Internal Auditors. Linda J. Dunn is Senior Vice President, General Counsel and Corporate Secretary. She joined Carver in June 2001. Ms. Dunn had been a corporate associate at the law firm Paul, Weiss, Rifkind, Wharton & Garrison since 1994. She was an Assistant Vice President in the Consumer Products Division of Chemical Bank from 1987 to 1991. From 1983 to 1987, she was employed at American/National Can Company where she held various positions from Financial Analyst to Manager of Performance Analysis in the Specialty Food Products Division. Ms. Dunn earned A.B., M.B.A. and J.D. degrees from Harvard University. William Gray is Senior Vice President and Chief Financial Officer. He joined Carver in February 2002. Mr. Gray had been a Vice President at the Dime Savings Bank of New York. He was responsible for accounting, reporting, budgeting and forecasting for the Retail Banking, Commercial Real Estate, Consumer Lending and Business Banking divisions of Dime. Mr. Gray earned a B.A. in accounting from Adelphi University in 1986. Margaret D. Peterson is Senior Vice President and Chief Administrative Officer, integrating Human Resources, Information Technology, Facilities, Vendor Management and other support activities. Ms. Peterson joined Carver in October 1999. She came to Carver from Deutsche Bank where she served as a Compensation Planning Consultant in Corporate Human Resources. Prior to joining Deutsche Bank, Ms. Peterson was a Vice President and Senior Human Resources Generalist for Citibank Global Asset Management. In addition to her 12 years in Human Resources, Ms. Peterson has ten years of Systems and Technology experience from various positions held at each of JP Morgan and Chase Manhattan Bank. Ms. Peterson is a member of the Board of Friends of Columbia University's Double Discovery Center. Ms. Peterson earned a Bachelors Degree from Pace University, an M.B.A. from Columbia University as a Citicorp Fellow, and has been designated a Certified Compensation Professional by the American Compensation Association. Devon W. Woolcock is Senior Vice President and Chief of Retail Banking. He is a 12-year veteran of retail banking. He joined Carver from Citibank where he was a Division Executive Vice President. Most recently, he managed six branches in Brooklyn and Queens. He joined Citibank in 1995 where he managed several South Florida branches, before moving to New York City. Mr. Woolcock began his career with Barnett Bank in Florida, holding positions including Head Teller, Division Operations Manager, and Branch Manager. Mr. Woolcock attended college at the University of Houston and Bethune Cookman College. 27 Changes in Executive Management In May 2001, James Boyle resigned as Chief Financial Officer of the Company. William Schult, Vice President and Controller, served as Acting Chief Financial Officer from June 2001 to February 2002 when he left the Company. Walter Bond and J. Kevin Ryan left the Company in December 2001 and March 2002, respectively. Frank Deaton was appointed Senior Vice President and Chief Auditor of the Company in May 2001, Linda J. Dunn was appointed Senior Vice President, General Counsel and Secretary of the Company in June 2001 and William Gray was appointed Senior Vice President and Chief Financial Officer of the Company in February 2002. For a description of the business experience of the executive officers, see "Executive Officers of the Holding Company." Catherine A. Papayiannis joined Carver as Executive Vice President and Chief Operating Officer in June 2002. Ms. Papayiannis was previously Senior Vice President/Director of Community Banking at Atlantic Bank of New York, where she oversaw the regional retail distribution network, the offsite ATM network, wealth and cash management services, residential and consumer lending and small business banking. ITEM 2. PROPERTIES. The following table sets forth certain information regarding Carver Federal's offices and other material properties at March 31, 2002. Lease Year Owned or Expiration Net Book Opened Lease Date Value -------------------------------------------------- (In thousands) MAIN OFFICE 75 West 125th Street 1996 Owned $ 5,489 New York, NY BRANCH OFFICES: 1281 Fulton Street Brooklyn, NY 1989 Owned 1,244 (Bedford-Stuyvesant Office) 1009-1015 Nostrand Avenue Brooklyn, NY 1975 Owned 200 (Crown Heights Office) 115-02 Merrick Boulevard Jamaica, NY 1982 Leased 2/28/2011 268 (St Alban's Office) 130 Malcolm X Boulevard New York, NY 2001 Leased 5/31/2006 599 (Malcolm X Blvd. Office) ------- Total $ 7,800 ======= The net book value of Carver Federal's investment in premises and equipment totaled approximately $10.3 million at March 31, 2002. ITEM 3. LEGAL PROCEEDINGS From time to time, Carver Federal is a party to various legal proceedings incident to its business. Certain claims, suits, complaints and investigations involving the Company, arising in the ordinary course of business, have been filed or are pending. The Company is of the opinion, after discussion with legal counsel representing the Bank in these proceedings, that the aggregate liability or loss, if any, arising from the ultimate disposition of these matters would not have a material adverse effect on the Company's consolidated financial position or results of operations. At March 31, 2002, except as set forth below, there were no material legal proceedings to which the Company or its subsidiaries was a party, or to which any of their property was subject. 28 On or about April 29, 1999, plaintiff Reginald St. Rose ("St. Rose"), a former Carver Federal employee, filed suit against Carver Federal in the Supreme Court of the State of New York, County of New York (the "St. Rose Action"). On or about January 12, 1999, Carver Federal and St. Rose entered into an agreement (the "Agreement") providing that St. Rose would resign from Carver Federal on the terms and conditions set forth in the Agreement. In the St. Rose Action, St. Rose alleged the following causes of action, which relate to the Agreement and St. Rose's separation from Carver Federal: (1) breach of contract; (2) promissory estoppel; and (3) fraudulent misrepresentation. St. Rose seeks damages in an amount not less than $50,000 with respect to the breach of contract cause of action and seeks undisclosed damages with respect to the promissory estoppel and fraudulent misrepresentation causes of action. On or about August 18, 1999, Carver Federal moved to dismiss St. Rose's fraudulent misrepresentation cause of action and the Court granted Carver Federal's motion to dismiss. Carver Federal has not filed an answer in the St. Rose Action. By written stipulation of the parties, Carver Federal's time to file an answer to St. Rose's complaint has been extended without date. Carver Federal plans to assert claims against St. Rose for, among other claims, payment of certain financial obligations to Carver Federal, which obligations remain outstanding as of the date of this Form 10-K. The parties have had intermittent settlement discussions, but have not reached an agreement. If the parties do not reach a settlement, Carver Federal intends to continue to defend the St. Rose Action vigorously. Carver Federal is also a defendant in an action brought by Ralph Williams (the "Williams Action") and an action brought by Janice Pressley (the "Pressley Action" and, together with the Williams Action, the "Actions"), both of which arise out of events concerning the Northeastern Conference Federal Credit Union ("Northeastern"). Plaintiff Williams is a former member of the Board of Directors, and plaintiff Pressley is a former treasurer, of Northeastern, a federal credit union that maintained accounts with Carver Federal and other banks in the New York metropolitan area. Plaintiffs' complaints (which are virtually identical) allege that the National Credit Union Administration (the "NCUA") acted improperly when it placed Northeastern into conservatorship and subsequent liquidation. On or about November 22, 2000, Williams filed his pro se complaint against the NCUA, Carver Federal, Chase Manhattan Bank ("Chase"), Astoria Federal Savings and Loan Association and Reliance Federal Savings Bank (Carver Federal with the last three defendants, collectively the "Bank Defendants") seeking damages in the amount of $1 million plus certain additional unspecified amounts. On or about November 22, 2000, plaintiff Pressley filed her pro se action against the same defendants seeking unspecified compensatory and punitive damages. Williams seeks damages for the allegedly "unauthorized" or "invalid" actions of the NCUA Board in taking control of Northeastern as well as damages for discrimination and civil rights violations. Pressley seeks damages based on identical allegations except that she also alleges certain claims of employment discrimination. While the bulk of the complaints relate to the action of the NCUA Board, the plaintiffs allege that the Bank Defendants "collaborated with the NCUA Board" in violating unspecified constitutional and privacy rights and that they engaged in discrimination. On or about December 15, 2000, defendant Chase moved to consolidate the Williams Action and Pressley Action. In anticipation of that consolidation, the Bank Defendants filed a joint motion to dismiss both complaints arguing that both Actions are barred by principles of res judicata and because both complaints fail to state claims on which relief can be granted. The Bank Defendants' motion to dismiss was denied without prejudice insofar as it applied to the Williams Action solely for the reason that it was a motion addressed to both Actions prior to the issuance of an order consolidating these cases. The Bank Defendants have refiled their motion to dismiss the Williams Action and it is sub judice. If the motion to dismiss is not granted, Carver Federal intends to defend the Williams Action vigorously. On September 20, 2001 the court granted the Bank Defendants' motion to dismiss the Pressley Action. Pressley has appealed the dismissal. Carver Federal is vigorously opposing the appeal. On or about December 28, 2000, plaintiff Thomas L. Clark ("Clark"), the former President and CEO of Carver, filed suit against Carver Federal and certain individual defendants in the Supreme Court of the State of New York, County of New York (the "Clark Action"). Clark claims that the defendants should be forced to obtain approval from the OTS to pay severance benefits that Clark believes Carver Federal owes him under an employment agreement. Clark seeks injunctive relief and asserts claims for breach of contract, equitable estoppel and estoppel by contract. On or about March 30, 2001, the defendants moved to dismiss the complaint in its entirety and in November 2001 the court dismissed the breach of contract action against the individual defendants and the equitable estoppel and estoppel by contract claims against all defendants. Carver Federal appealed the failure to dismiss the breach of contract claims. If Carver Federal does not prevail in the appeal, Carver Federal intends to vigorously defend this action. On or about January 28, 2002, plaintiff Monique Barrow, a former employee, filed suit against Carver Federal in the United States District Court for the Southern District of New York alleging pregnancy discrimination in violation of the Family Medical Leave Act, New York State and New York City laws. The plaintiff seeks compensatory damages in an amount not less than $5 million, punitive, liquidated and other compensatory damages in an amount not less than $10 29 million, as well as reinstatement to her former position. Carver Federal has answered the complaint denying any liability, and in the opinion of management, after consultation with legal counsel, the lawsuit is without merit and the ultimate outcome of this matter is not expected to have a material adverse effect on the Company's results of operations, business operations or consolidated financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Holding Company held its Annual Meeting on February 26, 2002 for the fiscal year ended March 31, 2001. The purpose of the Annual Meeting was to vote on the following proposals: 1. The election of three directors for terms of three years each; and 2. The ratification of the appointment of KPMG, LLP as independent auditors of the Holding Company for the fiscal year ended March 31, 2002. The results of voting were as follows: Proposal 1: Election of Directors: Holding Company Nominees David L. Hinds For 2,133,173 Withheld 16,326 Pazel G. Jackson, Jr. For 2,133,198 Withheld 16,301 Deborah C. Wright For 2,131,537 Withheld 17,962 Proposal 2: Ratification of Appointment of Independent For 2,142,717 Auditors Against 5,255 Abstain 1,527 In addition to the nominees elected at the Annual Meeting, the following persons' terms of office as directors continued after the Annual Meeting: Frederick O. Terrell, Kevin Cohee, Robert Holland, Jr., Teri Williams and Strauss Zelnick. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Holding Company's common stock is listed on the American Stock Exchange under the symbol "CNY." Prior to May 21, 1997, the common stock traded on the National Market of The Nasdaq Stock Market under the symbol "CARV." As of May 31, 2002, there were 2,316,358 shares of the common stock outstanding, held by approximately 1,140 stockholders of record. The following table shows the high and low per share sales prices of the common stock and the dividends declared for the quarters indicated.
High Low Dividend High Low Dividend ------ ------ -------- ------ ------ -------- Fiscal Year 2002 Fiscal Year 2001 June 30, 2001 $ 9.18 $ 8.60 $ -- June 30, 2000 $10.94 $ 7.50 $ -- September 30, 2001 $10.13 $ 8.15 $ -- September 30, 2000 $11.13 $ 7.88 $ -- December 31, 2001 $ 9.80 $ 8.64 $ -- December 31, 2000 $ 9.75 $ 7.00 $ -- March 31, 2002 $11.49 $ 9.60 $ 0.05 March 31, 2001 $10.60 $ 8.60 $ 0.05
On January 29, 2002, the Holding Company's Board of Directors declared a cash dividend of $0.05 per common share, payable on March 5, 2002, to common stockholders of record at the close of business on February 15, 2002. The 30 Board of Directors of the Holding Company has not determined to establish a regular dividend at this time, but will review the Company's position periodically for the possible declaration of additional dividends. The timing and amount of future dividends will be within the discretion of the Holding Company's Board and will depend on the earnings of the Holding Company and its subsidiaries, their financial condition, liquidity and capital requirements, applicable governmental regulations and policies and other factors deemed relevant by the Board. The Bank will not be permitted to pay dividends to the Holding Company on its capital stock if its regulatory capital would be reduced below applicable regulatory capital requirements or if its stockholders' equity would be reduced below the amount required to be maintained for the liquidation account, which was established in connection with the Bank's conversion to stock form. The OTS capital distribution regulations applicable to savings institutions (such as the Bank) that meet their regulatory capital requirements permit, after not less than 30 days prior notice to the OTS, capital distributions during a calendar year that do not exceed the association's net income for that year plus its retained net income for the prior two years. For information concerning the Bank's liquidation account, see Note 11 of the Notes to the Consolidated Financial Statements. Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the payment of dividends to its stockholders, although the source of such dividends will be dependent, in part, upon dividends from the Bank. The Holding Company is subject to the requirements of Delaware law, which generally limit dividends to an amount equal to the excess of the net assets of the Company (the amount by which total assets exceed total liabilities) over its statutory capital, or if there is no such excess, to its net profits for the current and/or immediately preceding fiscal year. 31 ITEM 6. SELECTED FINANCIAL DATA
At or for the Fiscal Year Ended March 31, ------------------------------------------------------------------------- 2002 2001 2000 1999 1998 -------- --------- --------- --------- -------- (Dollars in thousands, except per share data) Selected Financial Condition Data: Assets $449,710 $ 424,500 $ 420,119 $ 416,483 $437,458 Loans, net 289,114 283,437 270,148 270,522 274,954 Securities 105,464 87,788 104,177 96,502 119,524 Cash and cash equivalents 34,851 31,758 22,202 21,321 15,120 Deposits 324,954 279,424 281,941 276,999 274,894 Borrowed funds 75,651 105,600 98,578 102,038 124,946 Stockholders' equity 36,742 32,096 32,641 31,175 35,534 Number of Deposit accounts 41,200 44,751 54,597 58,113 51,550 Number of offices 5 5 7 7 7 Operating Data: Interest income 28,254 28,307 27,367 28,473 27,828 Interest expense 12,047 14,278 14,009 14,815 15,019 -------- --------- --------- --------- -------- Net interest income 16,207 14,029 13,358 13,658 12,809 Provision for loan losses 900 1,793 1,099 4,029 1,260 -------- --------- --------- --------- -------- Net interest income after provision for loan losses 15,307 12,236 12,259 9,629 11,549 Non-interest income 4,485 2,934 2,539 2,382 2,351 Non-interest expenses 14,198 15,461 15,823 17,963 11,651 -------- --------- --------- --------- -------- Income (loss) before income taxes 5,594 (291) (1,025) (5,952) 2,249 Income tax (benefit) 881 98 110 (1,499) 1,203 -------- --------- --------- --------- -------- Net income (loss) $ 4,713 $ (389) $ (1,135) $ (4,453) $ 1,046 ======== ========= ========= ========= ======== Diluted earnings (loss) per common share $ 1.89 $ (0.26) $ (0.53) $ (2.02) $ 0.48 ======== ========= ========= ========= ======== Selected Statistical Data: Return on average assets (1)(3) 1.11% (0.07)% (0.27)% (1.05)% 0.25% Return on average equity (2)(3) 13.78 (0.89) (3.29) (12.70) 3.00 Net interest margin (4) 4.05 3.61 3.47 3.43 3.27 Average interest rate spread (5) 3.92 3.48 3.38 3.29 3.14 Efficiency ratio (3) (6) 77.89 96.93 104.31 112.02 76.85 Operating expense to average assets (3) (7) 3.33 3.72 3.82 4.22 2.80 Equity to total assets at end of period 8.17 7.56 7.77 7.49 8.12 Average equity to average assets 8.03 7.85 8.33 8.24 8.39 Dividend payout ratio (8) 2.55 (17.24) (5.17) (2.60) 11.06 Asset Quality Ratios: Non-performing assets to total assets (9) 0.63% 0.71% 0.73% 1.15% 1.58% Non-performing assets to total loans receivable (9) 0.96 1.04 1.12 1.66 2.47 Allowance for loan losses to total loans receivable 1.41 1.24 1.07 1.48 1.11
(1) Net income divided by average total assets. (2) Net income divided by average total equity. (3) For fiscal 1999, excluding non-recurring expenses amounting to $7.8 million, the return on average assets, return on average equity, operating expenses to average assets and efficiency ratio were 0.24%, 2.85%, 2.98%, and 78.94%. (4) Net interest income divided by average interest-earning assets. (5) The difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (6) Non-interest expense (other than real estate owned expenses) divided by the sum of net interest income and non-interest income (other than net security gains and losses and other non-recurring income). (7) Non-interest expense less real estate owned expenses, divided by average total assets. (8) Dividends paid to common stockholders as a percentage of net income (loss) available to common stockholders. (9) Non performing assets consist of non-accrual loans, loans accruing 90 days or more past due, and property acquired in settlement of loans. 32 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements presented elsewhere in this report. General Carver's net income is dependent primarily on its net interest income, which is the difference between interest income earned on its loan, investment and mortgage-backed securities portfolios and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. In addition, net income is affected by the level of provision for loan losses, as well as non-interest income and operating expenses. The operations of Carver are significantly affected by prevailing economic conditions, competition and the monetary and fiscal policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flow and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities, and the levels of personal income and savings. Asset/Liability Management Net interest income, the primary component of Carver's net income, is determined by the difference or "spread" between the yield earned on interest-earning assets and the rates paid on its interest-bearing liabilities and the relative amounts of such assets and liabilities. Because Carver's interest-bearing liabilities consist primarily of shorter term deposit accounts, Carver's interest rate spread can be adversely affected by changes in general interest rates if its interest-earning assets are not sufficiently sensitive to changes in interest rates. Management has sought to reduce Carver's exposure to changes in interest rates by more closely matching the effective maturities and repricing periods of its interest-earning assets and interest-bearing liabilities through a variety of strategies, including the origination and purchase of adjustable-rate loans for its portfolio, investment in adjustable-rate mortgage-backed securities and shorter-term investment securities and the sale of all long-term fixed-rate loans originated into the secondary market. The Bank has also reduced interest rate risk through its origination and purchase of primarily adjustable-rate mortgage loans and extension of the term of borrowings. Discussion of Market Risk--Interest Rate Sensitivity Analysis As a financial institution, the Bank's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Bank's assets and liabilities, and the market value of all interest-earning assets, other than those which possess a short term to maturity. Since all of Carver's interest-bearing liabilities and virtually all of Carver's interest-earning assets are located at the Bank, virtually all of Carver's interest rate risk ("IRR") exposure lies at the Bank level. As a result, all significant interest rate risk management procedures are performed at the Bank level. Based upon the Bank's nature of operations, the Bank is not subject to foreign currency exchange or commodity price risk. The Bank does not own any trading assets. Carver seeks to manage its IRR by monitoring and controlling the variation in repricing intervals between its assets and liabilities. To a lesser extent, Carver also monitors its interest rate sensitivity by analyzing the estimated changes in market value of its assets and liabilities assuming various interest rate scenarios. As discussed more fully below, there are a variety of factors which influence the repricing characteristics of any given asset or liability. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate-sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific period of time and the amount of interest-bearing liabilities repricing within that same time period. A gap is considered positive when the amount of rate-sensitive assets exceeds the amount of rate-sensitive liabilities and is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of rate-sensitive assets. Generally, during a period of falling interest rates, a negative gap could result in an increase in net interest income, while a positive gap could adversely affect net interest income, and during a period of rising interest 33 rates a negative gap could adversely affect net interest income, while a positive gap could result in an increase in net interest income. As illustrated below, Carver had a negative one-year gap equal to 25.43% of total rate-sensitive assets at March 31, 2002, as a result of which its net interest income could be negatively affected by rising interest rates, and positively affected by falling interest rates. The following table sets forth information regarding the projected maturities, prepayments and repricing of the major rate-sensitive asset and liability categories of Carver as of March 31, 2002. Maturity repricing dates have been projected by applying prepayment rates which management believes are appropriate. The information presented in the following table is derived in part from data incorporated in "Schedule CMR: Consolidated Maturity and Rate," which is part of the Bank's quarterly reports filed with OTS. The repricing and other assumptions are not necessarily representative of the Bank's actual results. Classifications of items in the table below are different from those presented in other tables and the financial statements and accompanying notes included herein and do not reflect non-performing loans.
Over One Three or Four to Through Over Three Over Five Over Less Twelve Three Through Through Ten Months Months Months Years Five Years Ten Years Years Total - --------------------------------------- -------- --------- --------- ----------- ---------- -------- -------- (Dollars in thousands) Rate Sensitive Assets: Loans and Mortgage Backed Securities(1) $ 14 $ 17,385 $ 438 $ 35,990 $ 74,338 $235,422 $363,587 Federal Funds Sold 21,100 -- -- -- -- -- 21,100 Investment Securities 6,999 8,019 16,858 7,525 -- 3,763 43,164 -------- --------- --------- --------- --------- -------- -------- Total interest-earning assets $ 28,113 $ 25,404 $ 17,296 $ 43,515 $ 74,338 $239,185 $427,851 ======== ========= ========= ========= ========= ======== ======== Rate Sensitive Liabilities: NOW accounts $ 1,629 $ 2,170 $ 4,706 $ 2,353 $ 3,619 $ 3,618 $ 18,095 Savings Accounts 5,071 6,403 10,921 20,278 39,855 44,251 126,779 Money market accounts 2,894 8,987 1,522 1,219 305 305 15,232 Certificate of Deposits 28,204 91,460 18,874 12,847 -- -- 151,385 Borrowings 15,000 500 29,889 29,974 -- 288 75,651 -------- --------- --------- --------- --------- -------- -------- Total interest-bearing liabilities $ 52,798 $ 109,520 $ 65,912 $ 66,671 $ 43,779 $ 48,462 $387,142 ======== ========= ========= ========= ========= ======== ======== Interest Sensitivity Gap $(24,685) $ (84,117) $ (48,616) $ (23,156) $ 30,560 $190,723 $ 40,709 Cumulative Interest Sensitivity Gap $(24,685) $(108,801) $(157,417) $(180,573) $(150,014) $ 40,709 -- Ratio of Cumulative Gap to Total Rate Sensitive assets -5.77% -25.43% -36.79% -42.20% -35.06% 9.51% --
(1) Includes securities available-for-sale. In addition, it is assumed that fixed maturity deposits are not withdrawn prior to maturity and that transaction accounts will decay as disclosed in the table above. Certain shortcomings are inherent in the method of analysis presented in the table above. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in the market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, generally have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Additionally, an increased credit risk may result as the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. Virtually all of the adjustable-rate loans in Carver's portfolio contain conditions that restrict the periodic change in interest rate. Net Portfolio Value ("NPV") Analysis. As part of its efforts to maximize net interest income and manage the 34 risks associated with changing interest rates, management uses the NPV methodology. Under this methodology, IRR exposure is assessed by reviewing the estimated changes in net interest income ("NII") and NPV that would hypothetically occur if interest rates rapidly rise or fall all along the yield curve. Projected values of NII and NPV at both higher and lower regulatory defined rate scenarios are compared to base case values (no change in rates) to determine the sensitivity to changing interest rates. Presented below, as of March 31, 2002, is an analysis of the Bank's IRR as measured by changes in NPV and NII for instantaneous and sustained parallel shifts of 100 basis points in market interest rates. Such limits have been established with consideration of the impact of various rate changes and the Bank's current capital position. The information set forth below relates solely to the Bank; however, because virtually all of the Company's IRR exposure lies at the Bank level, management believes the table below also accurately reflects an analysis of the Company's IRR.
Net Portfolio Value NPV as a % of PV of Assets -------------------------------------------------------- -------------------------------------- Change in Rate $ Amount $ Change % Change NPV Ratio Change -------------------- ----------------- ------------------ ------------------ ------------------ ------------------ (Dollars in thousands) +300 bp 56,403 -10,126 -15% 12.23% -166 bp +200 bp 60,599 -5,930 -9% 12.96% - 94 bp +100 bp 64,051 -2,478 -4% 13.52% - 37 bp 0 bp 66,529 -- -- 13.89% -- (100) bp 67,623 1,094 2% 14.00% + 11 bp March 31, 2002 ------------------ Risk Measures: +200 BP Rate Shock Pre-Shock NPV Ratio: NPV as % of PV of Assets 13.89% Post-Shock NPV Ratio 12.96% Sensitivity Measure; Decline in NPV Ratio -94 bp
Certain shortcomings are inherent in the methodology used in the above IRR measurements. Modeling changes in NPV require the making of certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV table presented assumes that the composition of Carver's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV table provides an indication of Carver's IRR exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on Carver's net interest income and will differ from actual results. Average Balance, Interest and Average Yields and Rates The following table sets forth certain information relating to Carver's average interest-earning assets and average interest-bearing liabilities and reflects the average yield on assets and the average cost of liabilities for the years indicated. Such yields and costs are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods shown. Average balances are derived from average month-end balances, except for federal funds which are derived from daily balances. Management does not believe that the use of average monthly balances instead of average daily balances on all other accounts has caused any material difference in the information presented. The table also presents information for the years indicated with respect to the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, or "interest rate spread," which savings institutions have traditionally used as an indicator of profitability. Another indicator of an institution's profitability is its "net interest margin," which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed 35 interest-bearing liabilities, any positive interest rate spread will generate net interest income.
At March 31, 2002 Year Ended March 31, 2002 ------------------------ -------------------------------------- Average Average Balance Yield Balance Interest Yield ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Interest-earning Assets: Loans (1) $ 289,114 6.98% $ 297,130 $ 22,586 7.60% Investment securities (2) 43,164 3.81% 38,505 2,324 6.04% Mortgage-backed securities 66,063 5.58% 50,450 2,918 5.78% Federal funds 21,100 0.89% 13,662 426 3.12% ---------- ---------- ---------- ---------- ---------- Total interest-earning assets 419,441 6.13% 399,747 28,254 7.07% Non-interest-earning assets 30,269 26,177 ---------- ---------- Total assets $ 449,710 $ 425,924 ========== ========== Interest-bearing Liabilities: Deposits: Checking 18,095 1.24% 21,114 237 1.12% Savings and clubs 126,779 1.71% 126,065 2,342 1.86% Money market accounts 15,232 1.78% 16,181 302 1.87% Certificates of deposit 151,385 2.73% 133,624 5,246 3.93% ---------- ---------- ---------- ---------- ---------- Total deposits 311,491 2.18% 296,984 8,127 2.74% Borrowed money 75,651 3.95% 78,153 3,920 5.02% ---------- ---------- ---------- ---------- ---------- Total deposits and interest-bearing liabilities 387,142 2.53% 375,137 12,047 3.21% Non-interest-bearing liabilities: Checking 13,463 7,781 Other liabilities 12,363 8,809 ---------- ---------- Total liabilities 412,968 391,727 Stockholders' equity 36,742 34,197 Total liabilities and stockholders' equity $ 449,710 $ 425,924 ========== ========== Net interest income $ 16,207 ========== Average interest rate spread 3.60% 3.86% ========== ========== Net interest margin 3.75% 4.05% ========== ========== Ratio of average interest-earning assets to interest-bearing liabilities 108.34% 106.56% ========== ==========
36
Year Ended March 31, ---------------------------------------------------------------------------------- 2001 2000 -------------------------------------- --------------------------------------- Average Average Balance Interest Yield Balance Interest Yield ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Interest-earning Assets: Loans (1) $ 278,264 $ 21,398 7.69% $ 259,408 $ 19,443 7.50% Investment securities (2) 43,350 2,874 6.63% 57,357 3,593 6.26% Mortgage-backed securities 48,899 3,012 6.16% 55,075 3,641 6.61% Federal funds 18,256 1,023 5.60% 13,000 690 5.31% ---------- ---------- ---------- ---------- ---------- ---------- Total interest-earning assets 388,769 28,307 7.28% 384,840 27,367 7.12% Non-interest-earning assets 27,127 29,220 ---------- ---------- Total assets $ 415,896 $ 414,060 ========== ========== Interest-bearing Liabilities: Deposits: Checking 15,926 253 1.59% 18,032 314 1.74% Savings and clubs 137,305 3,051 2.22% 143,908 3,650 2.54% Money market accounts 17,598 412 2.34% 19,578 631 3.22% Certificates of deposit 94,006 4,740 5.04% 86,316 4,017 4.65% ---------- ---------- ---------- ---------- ---------- ---------- Total deposits 264,835 8,456 3.19% 267,834 8,612 3.22% Borrowed money 99,783 5,822 5.84% 95,769 5,397 5.64% ---------- ---------- ---------- ---------- ---------- ---------- Total interest-bearing liabilities 364,618 14,278 3.92% 363,603 14,009 3.85% Non-interest-bearing liabilities: Checking 11,568 11,388 Other liabilities 7,072 4,596 ---------- ---------- Total liabilities 383,258 379,587 Stockholders' equity 32,638 34,473 ---------- ---------- Total liabilities and stockholders' equity $ 415,896 $ 414,060 ========== ========== Net interest income $ 14,029 $ 13,358 ========== ========== Interest rate spread 3.36% 3.27% ========== ========== Net interest margin 3.61% 3.47% ========== ========== Ratio of avg interest-earning assets to interest-bearing liabilities 106.62% 105.84% ========== ==========
(1) Includes non-accrual loans. (2) Includes FHLB stock. Rate/Volume Analysis The following table sets forth information regarding the extent to which changes in interest rates and changes in volume of interest related assets and liabilities have affected Carver Federal's interest income and expense during the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided for changes attributable to (i) changes in volume (changes in volume multiplied by old rate), (ii) changes in rates (change in rate multiplied by old volume), and (iii) changes in rate/volume. Changes in rate/volume variance are allocated proportionately between changes in rate and changes in volume. 37
Year Ended March 31, ------------------------------------------------------------------------- 2002 vs. 2001 2001 vs. 2000 Increase (Decrease) due to Increase (Decrease) due to ---------------------------------- ---------------------------------- Volume Rate Total Volume Rate Total -------- -------- -------- -------- -------- -------- (Dollars in thousands) Interest-earning assets: Loans $ 1,434 ($ 246) $ 1,188 $ 1,420 $ 535 $ 1,955 Investment securities (a) (292) (258) (550) (859) 140 (719) Mortgage-backed securities 89 (184) (94) (408) (221) (629) Federal funds (143) (454) (597) 283 50 333 -------- -------- -------- -------- -------- -------- Total interest earning assets 1,088 (1,142) (53) 436 504 940 -------- -------- -------- -------- -------- -------- Interest-bearing liabilities: Checking 58 (74) (16) (37) (24) (61) Savings and clubs (209) (500) (709) (167) (432) (599) Money Market accounts (26) (84) (110) (64) (155) (219) Certificates of deposit 1,555 (1,049) 506 358 365 723 -------- -------- -------- -------- -------- -------- Total deposits 1,378 (1,707) (329) 90 (246) (156) Borrowed money (1,085) (817) (1,902) 227 198 425 -------- -------- -------- -------- -------- -------- Total deposits and interest-bearing liabilities 293 (2,524) (2,231) 317 (48) 269 -------- -------- -------- -------- -------- -------- Net change in net interest income $ 795 $ 1,382 $ 2,178 $ 119 $ 552 $ 671 ======== ======== ======== ======== ======== ========
Comparison of Financial Condition at March 31, 2002 and 2001 At March 31, 2002, total assets increased by $25.2 million, or 5.9%, to $449.7 million, compared to $424.5 million at March 31, 2001. The increase in total assets was primarily attributable to increases in securities available-for-sale and loans. Total securities at March 31, 2002 increased $17.8 million to $105.5 million from $87.8 million at March 31, 2001, reflecting a $69.9 million increase in available-for-sale securities substantially offset by a $52.2 million decrease in held-to-maturity securities. At the beginning of fiscal 2002, the Bank transferred $45.7 million of mortgage-backed and other securities from held-to-maturity to available-for-sale upon the adoption of FAS No.133 "Accounting for Derivative Instruments and Hedging Activities." The increase in available-for-sale securities, excluding securities transferred from held-to-maturity, primarily reflects purchases of $134.7 million and a $217,000 increase in the market value of the portfolio substantially offset by $79.2 million in principal repayments, maturities and calls and $32.7 million in sales. The decrease in held-to-maturity securities, excluding securities transferred to available-for-sale, primarily reflects principal payments, maturities and calls of $6.4 million. Available-for-sale securities represented 85.2% of the total securities portfolio at March 31, 2002, compared to 22.7% at March 31, 2001. Loans receivable, net, increased by $5.7 million, or 2.0%, to $289.1 million, compared to $283.4 million one year ago. The loan growth during fiscal 2002 represented loan originations of $62.6 million, loan purchases of $45.2 million, offset by principal repayments of $100.3 million, loans sold of $1.3 million, and an increase in the allowance for loan losses of $577,000. At March 31, 2002, total liabilities increased $20.6 million, or 5.2%, to $413.0 million, compared to $392.4 million at March 31, 2001. Deposit liabilities increased $45.6 million, or 16.3%, to $325.0 million at March 31, 2002 from $279.4 million at March 31, 2001. The increase in deposits was primarily attributable to a New York State deposit of $50.0 million, partially offset in part by the sale of deposits from the Bank's East New York branch during fiscal 2002. The branch had $18.4 million in deposits at March 31, 2001. Funds from the deposit growth were used to pay down higher cost borrowed money, which decreased $29.9 million to $75.7 million at March 31, 2002 from $105.6 million at March 31, 2001. This decrease was attributable to decreases of $25.0 million in advances from FHLB and $4.9 million in securities sold under agreement to repurchase. At March 31, 2002, stockholders' equity increased $4.6 million, or 14.5%, to $36.7 million, compared to $32.1 million at March 31, 2001. The increase in stockholders' equity was primarily attributable to net income retained after payment of dividends for fiscal 2002. The Bank's capital levels meet regulatory requirements of a well capitalized financial institution. 38 Comparison of Operating Results For The Years Ended March 31, 2002 and 2001 Net Income The Bank reported net income for fiscal 2002 of $4.7 million, compared to a net loss of $389,000 for the same period the prior year. Net income available to common stockholders for fiscal 2002 was $4.5 million, or $1.89 per diluted common share, compared to a loss of $586,000, or $0.26 per diluted common share, for fiscal 2001. The increase in the net income was primarily due to a $2.2 million improvement in net interest income, a gain on the sale of securities of $1.4 million, a $1.2 million reduction in non-interest expense, and a $893,000 decrease in the provision for loan losses, partially offset by a $783,000 increase in income taxes. Interest Income Interest income for fiscal 2002 amounted to $28.3 million, a decrease of $53,000, or 0.2%, from the prior year. The decrease in interest income was primarily attributable to a decline in the average yield on interest-earning assets to 7.07% for fiscal 2002, compared to 7.28% for fiscal 2001. Interest income on loans increased by $1.2 million, or 5.6%, to $22.6 million for fiscal 2002 compared to $21.4 million for fiscal 2001. The increase in interest income from loans reflects an increase of $18.9 million, or 6.8%, in the average balance of loans to $297.1 million for fiscal 2002 compared to $278.3 million for fiscal 2001, partially offset by a nine basis point decrease in the average rate earned on loans to 7.60% for fiscal 2002 from 7.69% for the prior year. Interest income on mortgage-backed securities decreased by $94,000, or 3.1%, to $2.9 million for fiscal 2002, compared to $3.0 million for the prior year reflecting a 38 basis point decrease in the average rate earned on mortgage-backed securities to 5.78% from 6.16%, partially offset by an increase of $1.6 million in the average balance of mortgage-backed securities to $50.5 million for fiscal 2002, compared to $48.9 million for fiscal 2001. Interest income on investment securities decreased by approximately $550,000, or 19.1%, to $2.3 million for fiscal 2002, compared to $2.9 million for the prior year, reflecting a decrease of $4.9 million in the average balance of investment securities to $38.5 million for fiscal 2002 compared to $43.4 million for fiscal 2001, coupled with a 59 basis point decrease in the average rate earned on investment securities to 6.04% from 6.63%. Interest income on federal funds decreased $597,000, to $426,000 for fiscal 2002, compared to $1.0 million for the prior year. The decrease is attributable to a 248 basis point decrease in the average rate earned on federal funds, as well as a $4.6 million decrease in the average balance of federal funds. Interest Expense Interest expense decreased by $2.3 million, or 15.6%, to $12.0 million for fiscal 2002, compared to $14.3 million for the prior year. The decrease in interest expense reflects an improvement of 71 basis points in the average cost of interest-bearing liabilities, slightly offset by a $10.5 million increase in the average balance of interest-bearing liabilities. Interest expense on deposits decreased $329,000, or 3.9%, to $8.1 million for fiscal 2002, compared to $8.5 million for the prior year. This decrease is attributable to a 45 basis point decrease in the cost of average deposits partially offset by a $32.2 million, or 12.2%, increase in the average balance of interest-bearing deposits to $297.0 million for fiscal 2002, compared to $264.8 million for fiscal 2001. Interest expense on borrowed money decreased by $1.9 million, or 32.7%, to $3.9 million for fiscal 2002, compared to $5.8 million for the prior year. Funds from deposit growth were used to pay down borrowed money. The decrease in interest expense on borrowed money for fiscal 2002 reflects a $21.6 million decline in the average balance of borrowed money coupled with an 82 basis points decrease in the average cost of borrowed money. 39 Net Interest Income Net interest income before the provision for loan losses increased $2.2 million, or 15.5%, to $16.2 million for fiscal 2002 compared to $14.0 million for the prior year. Net interest income benefited from a general interest rate decline, a reduction in borrowed money, as well as an increase in deposits, loan originations and average loan balances. This benefit was partially offset by accelerated prepayments of mortgage-backed securities and the sale of lower cost deposits in a non-strategic branch that were replaced by comparatively higher cost certificates of deposit. The 71 basis point decrease in the cost of interest-bearing liabilities used to fund interest-earning assets coupled with a 21 basis point decrease in the return on average interest-earning assets contributed to a 50 basis point increase in the interest rate spread to 3.86% for fiscal 2002, compared to 3.36% for the prior year. The net interest margin increased to 4.05% for fiscal 2002, compared to 3.61% for fiscal 2001. Provision for Loan Losses Provision for loan losses decreased by $893,000 or 49.8%, to $900,000, for fiscal 2002, compared to $1.8 million for fiscal 2001. The Bank records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level that is considered appropriate to absorb probable losses inherent in the existing loan portfolio. The provision in each period reflects management's evaluation of the adequacy of the allowance for loan losses. Factors considered include the volume and type of lending conducted, the Bank's previous loan loss experience, the known and inherent risks in the loan portfolio, adverse situations that may affect the borrowers' ability to repay, the estimated value of any underlying collateral, trends in the local and national economy and trends in the real estate market. During fiscal 2002, the Bank charged-off approximately $303,000 of loans as compared to $1.2 million for fiscal 2001. At March 31, 2002, non-performing loans totaled $2.8 million, or 1.0% of total loans, compared to $2.5 million, or 0.9% of total loans, at March 31, 2001. At March 31, 2002, the Bank's allowance for loan losses was $4.1 million compared to $3.6 million at March 31, 2001, resulting in a ratio of the allowance to non-performing loans of 146.2% at March 31, 2002, compared to 141.0% at March 31, 2001, and a ratio of allowance for possible loan losses to total loans of 1.41% and 1.24% at March 31, 2002 and March 31, 2001, respectively. Non-Interest Income Non-interest income is composed of loan fees and service charges, gains or losses from the sale of securities and certain other items, fee income for banking services and miscellaneous non-interest income. Non-interest income increased $1.6 million, or 54.2%, to $4.5 million for fiscal 2002, compared to $2.9 million for fiscal 2001. The increase in non-interest income is primarily due to non-recurring income of $1.4 million relating to the sale of securities and to a lesser extent a $316,000 increase in other non-interest income, partially offset by a $101,000 loss in connection with the sale of the Bank's automobile loan portfolio during fiscal 2002. Excluding non-recurring income from sales of securities, loans and deposits, total non-interest income increased by $305,000, or 16.1%, compared to fiscal 2001. Non-Interest Expense Non-interest expense decreased by $1.2 million, or 8.0%, to $14.2 million for fiscal 2002, compared to $15.4 million for the prior fiscal year. The decrease in non-interest expense was primarily attributable to decreases of $1.0 million in other non-interest expenses and $279,000 in net occupancy and equipment expenses, slightly offset by an increase of $61,000 in salaries and employee benefits. The decreases in non-interest expense were attributable in part to cost reductions as a result of branch sales and decreases in professional fees and FDIC deposit insurance costs. Income Tax Expense Income tax expense was approximately $881,000 for fiscal 2002, an increase from $98,000 for fiscal 2001, reflecting higher pre-tax income in fiscal 2002 as compared to a pre-tax loss in fiscal 2001. During the fourth quarter of fiscal year 2002, the Bank fully utilized its tax loss carryforward resulting from prior period losses and began to accrue for federal taxes. The effective tax rate in fiscal 2002 was 15.7% as compared to (33.7%) in fiscal 2001. 40 Comparison of Operating Results For The Years Ended March 31, 2001 and 2000 Net Loss The Bank reported a net loss for fiscal 2001 of $389,000, compared to a net loss of $1.1 million for the same period the prior year. The decrease in the net loss was primarily due to a gain on the sale of deposits of $1.0 million, a $671,000 improvement in net interest income and a $362,000 reduction in non-interest expense, partially offset by a non-recurring gain of $728,000 on the sale of an investment property recognized in fiscal 2000 and a $694,000 increase in the provision for loan losses. Interest Income Interest income increased by $941,000, or 3.4%, to $28.3 million for fiscal 2001, compared to $27.4 million for fiscal 2000. The increase in interest income was primarily attributable to an improvement in the average yield on interest-earning assets from 7.12% for fiscal 2000, compared to 7.28% for fiscal 2001. Interest income on loans increased by $2.0 million, or 10.3%, to $21.4 million for fiscal 2001, compared to $19.4 million for fiscal 2000. The increase in interest income from loans reflects an increase of $18.9 million, or 7.3%, in the average balance of loans to $278.3 million for fiscal 2001, compared to $259.4 million for fiscal 2000, coupled with a 19 basis point increase in the average rate earned on loans to 7.69% for fiscal 2001 from 7.50% for the prior year. Interest income on investment securities decreased by approximately $0.7 million, or 19.4%, to $2.9 million for fiscal 2001, compared to $3.6 million for the prior year, reflecting an decrease of $14 million in the average balance of investment securities to $43.4 million for fiscal 2001 compared to $57.4 million for fiscal 2000, coupled with a 37 basis point increase in the average rate earned on investment securities to 6.63% from 6.26%. Interest income on mortgage-backed securities decreased by $0.6 million, or 16.7%, to $3.0 million for fiscal 2001, compared to $3.6 million for the prior year, reflecting a decrease of $6.2 million in the average balance of mortgage-backed securities to $48.9 million for fiscal 2001, compared to $55.1 million for fiscal 2000, and, to a lesser extent, a 45 basis point decrease in the average rate earned on mortgage-backed securities to 6.16% from 6.61%. Interest Expense Interest expense increased by $269,000, or 1.92%, to $14.3 million for fiscal 2001, compared to $14.0 million for the prior year. The increase in interest expense is attributable to a $1.2 million increase in the average balance of interest-bearing liabilities combined with a 6 basis point increase in the average cost of interest bearing liabilities. Interest expense on deposits decreased $156,000, or 1.8%, to $8.5 million for fiscal 2001, compared to $8.6 million for the prior year. This decrease is attributable to a $3.0 million, or 1.1%, decrease in the average balance of interest-bearing deposits to $264.8 million for fiscal 2001, compared to $267.8 million for fiscal 2000, and, to a lesser extent, to a three basis point decrease in the cost of average deposits. Interest expense on borrowed money increased by $425,000, or 7.9%, to $5.8 million for fiscal 2001, compared to $5.4 million for the prior year. The average balance of borrowed money was $4.0 million, or 4.19%, higher during fiscal 2001 than during fiscal 2000, and the average cost of borrowed money for fiscal 2001 was 20 basis points higher than the average cost of borrowed money for fiscal 2000. Net Interest Income Net interest income before the provision for loan losses increased $671,000, or 5.0%, to $14.0 million for fiscal 2001, compared to $13.4 million for the prior year. The 16 basis point increase in the return on average interest-earning assets coupled with the seven basis point increase in the cost of interest-bearing liabilities used to fund interest-earning assets contributed to a nine basis point increase in the interest rate spread to 3.36% for fiscal 2001, compared to 3.27% for the prior year. The net interest margin increased to 3.61% for fiscal 2001, compared to 3.47% for fiscal 2000. The improved interest rate spread and margin were the most significant items responsible for the improvement in net interest income in fiscal 2001 compared to fiscal 2000. 41 Provision for Loan Losses Provision for loan losses increased by $694,000, or 63.2%, to $1.8 million, for fiscal 2001, compared to $1.1 million for the year ended March 31, 2000. When determining the provision for loan losses, management assesses the risk inherent in its loan portfolio based on the information available at such time relating to trends in the local and national economy, trends in the real estate market and the Bank's level of non-performing loans and assets and net charge offs. The provision for loan losses for fiscal 2001 represents the amount required to maintain the allowance for loan losses at the level required by the Company's policy. During fiscal 2001, the Bank charged off approximately $1.4 million of loans. At March 31, 2001, non-performing loans totaled $2.5 million, or 0.9% of total loans, compared to $2.1 million, or 0.8% of total loans, at March 31, 2000. At March 31, 2001, the Bank's allowance for loan losses was $3.6 million, compared to $2.9 million at March 31, 2000, resulting in a ratio of the allowance to non-performing loans of 141.0% at March 31, 2001, compared to 138.1% at March 31, 2000, and a ratio of the allowance for possible loan losses to total loans of 1.24% and 1.1% at March 31, 2001 and March 31, 2000, respectively. Non-Interest Income Non-interest income is composed of loan fees and service charges, gains or losses from the sale of securities and certain other items, fee income for banking services and miscellaneous non-interest income. Non-interest income increased $369,000, or 14.5%, to $2.9 million for fiscal 2001, compared to $2.5 million for fiscal 2000. The increase in non-interest income is primarily due to non-recurring income of $1.0 million relating to the sale of deposits less the non-recurrence of $728,000 of income in 2000 resulting from the sale of the Alhambra Building by the Holding Company's subsidiary, Alhambra. Excluding from the 2001 fiscal year the gain from the sale of deposits and excluding the 2000 income from the sale of the Alhambra Building, total non-interest income increased by $84,000, or 4.6%, compared to fiscal 2000. Non-Interest Expense Non-interest expense decreased by $388,000, or 2.5%, to $15.4 million for fiscal 2001, compared to $15.8 million for the prior fiscal year. The decrease in non-interest expense was primarily attributable to decreases of $777,000 in other non-interest expenses, $62,000 in net occupancy expenses and $57,000 in equipment expense, offset in part by an increase of $508,000 in salaries and employee benefits. The decrease in other non-interest expenses was primarily attributable to reductions in accounting records adjustments and a decrease in the Bank's insurance assessment rate. Income Tax Expense In connection with the loss from operations incurred for fiscal 2001 and fiscal 2000, the Company has an operating loss carryforward available to offset future taxable income totaling approximately $5.7 million that will expire in 2019. The Company recorded income tax expense of $98,000 for fiscal 2001 and $110,000 for fiscal 2000, respectively. The income tax expense for fiscal 2001 and fiscal 2000 represents taxes payable to New York State and New York City. Liquidity And Capital Resources Carver Federal's primary sources of funds are deposits, FHLB advances, and proceeds from principal and interest payments on loans and mortgage-backed securities. While maturities and scheduled amortization of loans and investments are predictable sources of funds, deposit flow and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Congress eliminated the statutory liquidity requirement which required federal savings associations to maintain a minimum amount of liquid assets of between four and ten percent, as determined by the Director of the OTS, the Bank's primary federal regulator. The OTS recently conformed its implementing regulations to reflect this statutory change. Under the revised regulations, which became effective March 15, 2001, the Bank is required to maintain sufficient liquidity to ensure its safe and sound operation. As a result of the elimination of the liquidity requirement the Bank manages its liquidity through a Board approved liquidity policy. At March 31, 2002, the Bank's liquidity ratio was 7.99%. 42 The Bank's most liquid assets are cash and short-term investments. The level of these assets are dependent on the Bank's operating, financing and investing activities during any given period. At March 31, 2002, and 2001, assets qualifying for short-term liquidity, including cash and short-term investments, totaled $50.0 million for both years. The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During fiscal 2002, cash and cash equivalents increased by $3.1 million. Net cash provided by operating activities was $8.9 million, representing primarily the results of operations adjusted for depreciation and amortization and the provision for loan losses. Net cash used in investing activities was $22.0 million, which was primarily the result of purchases of securities available-for-sale. Net cash provided by financing activities was $16.2 million, reflecting primarily a net increase in deposits, partially offset by repayment of borrowed money. Regulatory Capital Position The Bank must satisfy three minimum capital standards established by the OTS. For a description of the OTS capital regulation, see "Regulation and Supervision--Federal Banking Regulation--Capital Requirements." The Bank presently exceeds all capital requirements as currently promulgated. At March 31, 2002, the Bank had tangible, core, and risk-based capital ratios of 8.1%, 8.1%, and 18.3%, respectively. The following table reconciles the Bank's stockholders' equity at March 31, 2002, under accounting principles generally accepted in the United States of America to regulatory capital requirements.
Regulatory Capital Requirements ----------------------------------------------- GAAP Tangible Tier 1/Core Risk-Based Capital Capital Capital Capital -------- -------- -------- --------- (In thousands) Stockholders' Equity at March 31, 2002 (1) $ 36,949 $ 36,949 $ 36,949 $ 36,949 Add: General valuation allowances -- -- 2,698 Deduct: Unrealized loss(gain) on securities available for sale, net (116) (116) (116) Excess of cost over net assets acquired (391) (391) (391) -------- -------- -------- Regulatory Capital 36,442 36,442 39,140 Minimum Capital requirement 6,744 17,984 17,153 -------- -------- -------- Regulatory Capital Excess $ 29,698 $ 18,458 $ 21,987 ======== ======== ========
(1) Reflects Bank only. Impact of Inflation and Changing Prices The financial statements and accompanying notes appearing elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of Carver Federal's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a greater impact on Carver Federal's performance than do the effects of the general level of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The information required by this item appears under the caption "Discussion of Market Risk--Interest Rate Sensitivity Analysis" in Item 7, incorporated herein by reference. 43 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. For our Consolidated Financial Statements, see index on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding directors and executive officers who are not directors of the Registrant, will be presented under the headings "Executive Officers," "Information With Respect To Nominees and Continuing Directors," "Nominees for Election As Directors," "Continuing Directors" and "Board and Committee Meetings" in the definitive Proxy Statement for Carver's Annual Meeting of Stockholders for the fiscal year ended March 31, 2002, which will be filed with the SEC, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information relating to executive (and director) compensation will be included under the headings "Summary Compensation Table," "Option/SAR Grants in Last Fiscal Year," "Fiscal Year End Option/SAR Values," "Pension Plan," "Directors' Compensation," "Employment Agreements," "Management Recognition Plan," "Option Plan" and "Compensation Committee Interlocks and Insider Participation" and in portions of the "Compensation Committee Report" in the definitive Proxy Statement for Carver's Annual Meeting of Stockholders for the fiscal year ended March 31, 2002, which will be filed with the SEC, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information relating to security ownership of certain beneficial owners and management will be included under the headings "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the definitive Proxy Statement for Carver's Annual Meeting of Stockholders for the fiscal year ended March 31, 2002, which will be filed with the SEC, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information regarding certain relationships and related transactions will be included under the headings "Transactions with Certain Related Persons" and "Compensation Committee Interlocks and Insider Participation" in the definitive Proxy Statement for Carver's Annual Meeting of Stockholders for the fiscal year ended March 31, 2002, which will be filed with the SEC, and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) List of Documents Filed as Part of this Report (1) Consolidated Financial Statements. For our Consolidated Financial Statements, see index on page F-1. (2) Financial Statement Schedules. All financial statement schedules have been omitted, as the required information is either inapplicable or included in the Financial Statements or related notes. (b) Reports on Form 8-K Filed During the Last Quarter of the Registrant's Fiscal Year Ended March 31, 2002 - None. (c) Exhibits required by Item 601 of Regulation S-K: See Index of Exhibits on page E-1. 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CARVER BANCORP, INC. June 25, 2002 By /s/ Deborah C. Wright ------------------------------------- Deborah C. Wright President and Chief Executive Officer (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below on June 26, 2002 by the following persons on behalf of the registrant and in the capacities indicated. /s/ Deborah C. Wright President, Chief Executive Officer and Director - -------------------------- (Principal Executive Officer) Deborah C. Wright /s/ William Gray Senior Vice President and Chief Financial - -------------------------- Officer (Principal Financial and Accounting William Gray Officer) /s/ Frederick O. Terrell - -------------------------- Frederick O. Terrell Chairman /s/ Kevin Cohee - -------------------------- Kevin Cohee Director /s/ David L. Hinds - -------------------------- David L. Hinds Director /s/ Robert Holland, Jr. - -------------------------- Robert Holland, Jr. Director /s/ Pazel G. Jackson, Jr. - -------------------------- Pazel G. Jackson, Jr. Director /s/ Teri Williams - -------------------------- Teri Williams Director - -------------------------- Strauss Zelnick Director CONSOLIDATED FINANCIAL STATEMENTS OF CARVER BANCORP INC. AND SUBSIDIARIES INDEX Page Consolidated Financial Statements as of March 31, 2002, 2001 and 2000 KPMG LLP Independent Auditor's Report....................................F-2 Management's Report......................................................F-3 Consolidated Statements of Financial Condition as of March 31, 2002 and 2001...............................................................F-4 Consolidated Statements of Operations for the years ended March 31, 2002, 2001 and 2000....................................................F-5 Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income for the years ended March 31, 2002, 2001 and 2000...............................................................F-6 Consolidated Statements of Cash Flows for the years ended March 31, 2002, 2001 and 2000....................................................F-7 Notes to Consolidated Financial Statements...............................F-8 F-1 LETTERHEAD OF KPMG LLP Independent Auditor's Report To the Board of Directors and Stockholders Carver Bancorp, Inc.: We have audited the accompanying consolidated statements of financial condition of Carver Bancorp, Inc. and subsidiaries (the "Company") as of March 31, 2002 and 2001 and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2002 and 2001, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP May 10, 2002 F-2 MANAGEMENT'S REPORT Management is responsible for the preparation and integrity of the consolidated financial statements and other information presented in this annual report. The consolidated financial statements have been prepared in conformity with the generally accepted accounting principles and reflect management's judgments and estimates with respect to certain events and transactions. Management is responsible for maintaining a system of internal control. The purpose of the system is to provide reasonable assurance that transactions are recorded in accordance with management's authorization; that assets are safeguarded against loss or unauthorized use; and that the underlying financial records support the preparation of financial statements. The system includes the communication of written policies and procedures, selection of qualified personnel, appropriate segregation of responsibilities and the ongoing internal audit function. The Board of Directors meets periodically with Company management, the internal auditor, and the independent auditors, KPMG LLP, to review matters relative to the quality of financial reporting, internal controls, and the nature, extent and results of audit efforts. The independent auditors conduct an annual audit to enable them to express an opinion on the Company's consolidated financial statements. In connection with the audit, the independent auditors consider the Company's internal controls to the extent they consider necessary to determine the nature, timing and extent of their audit procedures. /s/ Deborah C. Wright /s/ William C. Gray Deborah C. Wright William C. Gray President and Chief Executive Officer Senior Vice President and Chief Financial Officer F-3 CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except share data)
March 31, ----------------------- 2002 2001 --------- --------- ASSETS Cash and cash equivalents: Cash and due from banks $ 13,751 $ 8,058 Federal Funds sold 21,100 23,700 --------- --------- Total cash and cash equivalents 34,851 31,758 --------- --------- Securities: Available-for-sale, at fair value (including pledged as collateral of $76,720 at March 31, 2002 and $0 at March 31, 2001) 89,821 19,926 Held-to-maturity, at amortized cost (including pledged as collateral of $15,549 at March 31, 2002 and $26,398 at March 31, 2001) (fair value of $15,716 at March 31, 2002 and $68,931 at March 31, 2001) 15,643 67,862 --------- --------- Total securities 105,464 87,788 --------- --------- Loans receivable: Real estate mortgage loans 290,914 283,022 Consumer and commercial business loans 2,328 3,966 Allowance for loan losses (4,128) (3,551) --------- --------- Total loans receivable, net 289,114 283,437 --------- --------- Office properties and equipment, net 10,251 10,421 Federal Home Loan Bank of New York stock, at cost 3,763 5,755 Accrued interest receivable 2,804 2,541 Excess of cost over net assets acquired, net 391 603 Other assets 3,072 2,197 --------- --------- Total assets $ 449,710 $ 424,500 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 324,954 $ 279,424 Securities sold under agreements to repurchase -- 4,930 Advances from the Federal Home Loan Bank of New York and other borrowed money 75,651 100,670 Other liabilities 12,363 7,380 --------- --------- Total liabilities 412,968 392,404 --------- --------- Stockholders' equity: Preferred stock (par value $0.01 per share; 1,000,000 shares authorized; 100,000 issued and outstanding) 1 1 Common stock (par value $0.01 per share: 5,000,000 shares authorized; 2,314,275 shares issued) 23 23 Additional paid-in capital 23,756 23,769 Retained earnings 13,194 8,793 Unallocated common stock held by employee stock ownership plan ("ESOP") (152) (334) Unamortized awards of common stock under management recognition plan ("MRP") (58) (95) Treasury stock, at cost (15,489 shares at March 31, 2002 and 7,989 at March 31, 2001) (138) (61) Accumulated other comprehensive income 116 -- --------- --------- Total stockholders' equity 36,742 32,096 --------- --------- Total liabilities and stockholders' equity $ 449,710 $ 424,500 ========= =========
See accompanying notes to consolidated financial statements. F-4 CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
For the Year Ended March 31, ---------------------------------- 2002 2001 2000 -------- -------- -------- Interest income: Loans $ 22,586 $ 21,398 $ 19,443 Mortgage-backed securities 2,918 3,012 3,641 Investment securities 2,324 2,874 3,593 Federal funds sold 426 1,023 690 -------- -------- -------- Total interest income 28,254 28,307 27,367 -------- -------- -------- Interest expense: Deposits 8,127 8,456 8,612 Advances and other borrowed money 3,920 5,822 5,397 -------- -------- -------- Total interest expense 12,047 14,278 14,009 -------- -------- -------- Net interest income 16,207 14,029 13,358 Provision for loan losses 900 1,793 1,099 -------- -------- -------- Net interest income after provision for loan losses 15,307 12,236 12,259 -------- -------- -------- Non-interest income: Loan fees and service charges 319 330 353 Gain on sale of investment securities 1,399 -- -- Income from sale of branches 987 1,013 -- Loss from sale of loans (101) -- -- Proceeds from sale of Alhambra Building -- -- 728 Other 1,881 1,565 1,458 -------- -------- -------- Total non-interest income 4,485 2,908 2,539 -------- -------- -------- Non-interest expense: Compensation and benefits 6,291 6,230 5,722 Net occupancy expense 1,144 1,401 1,463 Equipment 1,272 1,294 1,351 Other 5,491 6,510 7,287 -------- -------- -------- Total non-interest expense 14,198 15,435 15,823 -------- -------- -------- Income (loss) before income taxes 5,594 (291) (1,025) Income taxes/(benefits) 881 98 110 -------- -------- -------- Net income (loss) $ 4,713 $ (389) $ (1,135) ======== ======== ======== Dividends applicable to preferred stock $ 197 $ 197 $ 45 Net income (loss) available to common stockholders $ 4,516 $ (586) $ (1,180) ======== ======== ======== Earnings (loss) per common share: Basic $ 1.98 $ (0.26) $ (0.53) ======== ======== ======== Diluted $ 1.89 $ (0.26) $ (0.53) ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (In thousands)
ACCUMULATED COMMON COMMON TOTAL ADDITIONAL OTHER STOCK STOCK STOCK- PREFERRED COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ACQUIRED BY ACQUIRED HOLDERS' STOCK STOCK CAPITAL EARNINGS STOCK INCOME ESOP BY MRP EQUITY --------- ------ ---------- --------- -------- ------------- ----------- -------- --------- Balance--March 31, 1999 $ -- $23 $ 21,424 $ 10,721 $ -- $ -- $(993) $ -- $ 31,175 Comprehensive income (loss): Net loss -- -- -- (1,135) -- -- -- -- (1,135) ------- --- -------- -------- ----- ---- ----- ---- -------- Comprehensive income (loss), net of taxes (1,135) Preferred stock issued 1 -- 2,365 -- -- -- -- -- 2,366 Allocation of ESOP Stock -- -- -- -- -- -- 341 -- 341 Dividends paid -- -- -- (106) -- -- -- -- (106) ------- --- -------- -------- ----- ---- ----- ---- -------- Balance--March 31, 2000 1 23 23,789 9,480 -- -- (652) -- 32,641 Comprehensive income (loss): Net loss -- -- -- (389) -- -- -- -- (389) ------- --- -------- -------- ----- ---- ----- ---- -------- Comprehensive income (loss), net of taxes (389) Dividends paid -- -- -- (298) -- -- -- -- (298) Purchase of treasury stock -- -- -- -- (61) -- -- -- (61) Allocation of ESOP Stock -- -- (20) -- -- -- 318 -- 298 Purchase of shares for MRP -- -- -- -- -- -- -- (95) (95) ------- --- -------- -------- ----- ---- ----- ---- -------- Balance--March 31, 2001 1 23 23,769 8,793 (61) -- (334) (95) 32,096 Comprehensive income (loss): Net income -- -- -- 4,713 -- -- -- -- 4,713 Change in net unrealized gain (loss) on available-for-sale securities, net of taxes -- -- -- -- -- 116 -- -- 116 ------- --- -------- -------- ----- ---- ----- ---- -------- Comprehensive income (loss), net of taxes 4,829 Dividends paid -- -- -- (312) -- -- -- -- (312) Purchase of treasury stock -- -- (5) -- (77) -- -- -- (82) Allocation of ESOP Stock -- -- (8) -- -- -- 182 -- 174 Purchase of shares for MRP -- -- -- -- -- -- -- 37 37 ------- --- -------- -------- ----- ---- ----- ---- -------- Balance--March 31, 2002 $ 1 $23 $ 23,756 $ 13,194 $(138) $116 $(152) $(58) $ 36,742 ======= === ======== ======== ===== ==== ===== ==== ========
See accompanying notes to consolidated financial statements. F-6 CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended March 31, ------------------------------------- 2002 2001 2000 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 4,713 $ (389) $ (1,135) Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 900 1,793 1,099 ESOP and MRP expense 206 203 341 Depreciation and amortization expense 1,155 1,142 1,222 Amortization of intangibles 213 214 213 Other accretion and amortization 625 (719) 355 Loss from sale of loans 101 -- -- Gain from sale of Alhambra -- -- (728) Gain on sale of branches (987) (1,013) -- Gain on sale of foreclosed real estate (77) (24) -- Impairment of foreclosed real estate -- 90 -- Net gain on sales of available-for-sale securities (1,399) -- -- Charge-off of branch improvements and related items, net -- 222 -- Changes in assets and liabilities: (Increase) decrease in accrued interest receivable (77) 112 207 (Increase) decrease in other assets (1,451) 549 2,776 Increase in other liabilities 5,589 802 675 (Decrease) increase in accrued interest payable (606) (381) 12 --------- --------- --------- Net cash provided by operating activities 8,905 2,601 5,037 --------- --------- --------- Cash flows from investing activities: Purchases of securities: Available-for-sale (134,721) (166,227) (460,000) Held-to-maturity -- -- (25,000) Proceeds from principal payments, maturities and calls of securities: Available-for-sale 79,233 172,254 465,000 Held-to-maturity 6,357 11,077 12,209 Proceeds from sales of available-for-sale securities 32,676 -- -- Disbursements for loan originations (62,594) (30,180) (6,387) Loans purchased from third parties (45,881) (31,265) (62,850) Principal collections on loans 100,306 46,207 68,272 Redemption of FHLB stock 1,992 -- -- Proceeds from loans sold 1,260 160 -- Proceeds from sale of Alhambra building -- -- 1,369 Proceeds from sale of other real estate owned 553 380 -- Additions to premises and equipment (1,172) (610) (512) --------- --------- --------- Net cash used in investing activities (21,991) 1,796 (7,899) --------- --------- --------- Cash flows from financing activities: Net increase in deposits 61,900 19,960 4,942 Repayment of securities repurchase agreements (4,930) (26,407) (4,000) (Repayment of) proceeds from FHLB advances and other borrowed money (25,019) 33,429 541 Common stock repurchased (77) (61) -- Proceeds from issuance of Preferred stock -- -- 2,366 Cash paid to fund sale of deposits (15,383) (21,464) -- Dividends paid (312) (298) (106) --------- --------- --------- Net cash provided by financing activities 16,179 5,159 3,743 --------- --------- --------- Net increase in cash and cash equivalents 3,093 9,556 881 Cash and cash equivalents at beginning of the period 31,758 22,202 21,321 --------- --------- --------- Cash and cash equivalents at end of the period $ 34,851 $ 31,758 $ 22,202 ========= ========= ========= Supplemental information: Noncash Transfers- Loan receivable transferred to real estate owned $ -- $ -- $ 738 Securities transferred from held-to-maturity to available-for-sale 45,700 -- -- Change in unrealized gain/(loss) on valuation of investments available-for-sale, net 116 -- -- Cash paid for- Interest paid $ 12,685 $ 13,897 $ 13,506 Income taxes paid 473 238 29 ========= ========= =========
See accompanying notes to consolidated financial statements F-7 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of operations Carver Bancorp, Inc. ("Carver" or the "Holding Company"), was incorporated in May 1996 and its principal wholly owned subsidiary is Carver Federal Savings Bank (the "Bank" or "Carver Federal"). CFSB Realty Corp. and CFSB Credit Corp. are wholly owned subsidiaries of the Bank. CFSB Credit Corp. is currently inactive. The Bank was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally chartered mutual savings and loan association. The Bank converted to a federal savings bank in 1986 and changed its name at that time. On October 24, 1994, the Bank converted from mutual stock form and issued 2,314,275 shares of its common stock, par value $0.01 per share. On October 17, 1996, the Bank completed its reorganization into a holding company structure (the "Reorganization") and became a wholly owned subsidiary of the Holding Company. In connection with the Reorganization, each share of the Bank's outstanding common stock was exchanged for one share of the Holding Company's common stock, par value $.01 per share. See Note 11. Carver Federal's principal business consists of attracting passbook and other savings accounts through its branch offices and investing those funds in mortgage loans and other investments permitted by federal savings banks. The Bank has five branches located throughout the City of New York that primarily serve the communities in which they operate. Basis of consolidated financial statement presentation The consolidated financial statements include the accounts of the Holding Company, the Bank, the Bank's wholly owned subsidiaries CFSB Realty Corp. and CFSB Credit Corp., and Alhambra Holding Corp., a subsidiary of the Holding Company which is inactive. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the period then ended. Estimates that are particularly susceptible to significant changes in the near-term relate to prepayment assumptions on mortgage-backed securities, the determination of the allowance for loan losses and the valuation of real estate owned. Actual results could differ significantly from those estimates. Management believes that prepayment assumptions on mortgage-backed securities are appropriate, the allowance for loan losses is adequate and real estate owned is properly valued. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowance for loan losses or future write downs of real estate owned may be necessary based on changes in economic conditions in the areas where Carver had extended mortgages and other credit instruments. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Carver's allowance for loan losses and real estate owned valuations. Such agencies may require Carver to recognize additions to the allowance for loan losses or additional write downs of real estate owned based on their judgments about information available to them at the time of their examination. Cash and cash equivalents Cash and cash equivalents include cash and amounts due from depository institutions and federal funds sold. Generally, federal funds sold are sold for one-day periods. F-8 Securities The Bank does not have trading securities, but does differentiate between held-to-maturity securities and available-for-sale securities. When purchased, securities are classified in either the securities held-to-maturity portfolio or the securities available-for-sale portfolio. Securities can be classified as held-to-maturity and carried at amortized cost only if the Bank has a positive intent and ability to hold those securities to maturity. If not classified as held-to-maturity, such securities are classified as securities available-for-sale. Available-for-sale securities are reported at fair value. Unrealized holding gains or losses for securities available-for-sale are to be excluded from earnings and reported net of deferred income taxes as a separate component of accumulated other comprehensive income, a component of Stockholders' Equity. Securities held-to-maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using the level-yield method over the remaining period until maturity. Gains or losses on sales of securities of all classifications are recognized based on the specific identification method. Loans receivable Loans receivable are carried at unpaid principal balances plus unamortized premiums, less the allowance for loan losses and deferred loan fees and discounts. The Bank defers loan origination fees and certain direct loan origination costs and accretes such amounts as an adjustment of yield over the contractual lives of the related loans using methodologies which approximate the interest method. Premiums and discounts on loans purchased are amortized or accreted as an adjustment of yield over the contractual lives of the related loans using methodologies which approximate the interest method. Loans are generally placed on non-accrual status when they are past due 90 days or more as to contractual obligations or when other circumstances indicate that collection is questionable. When a loan is placed on non-accrual status, any interest accrued but not received is reversed against interest income. Payments received on a non-accrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on an assessment of the ability to collect the loan. A non-accrual loan is restored to accrual status when principal and interest payments become current and its future collectibility is reasonably assured. A loan is considered to be impaired, as defined by Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), when it is probable that Carver Federal will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. Carver Federal tests loans covered under SFAS 114 for impairment if they are on nonaccrual status or have been restructured. Consumer credit nonaccrual loans are not tested for impairment because they are included in large groups of smaller-balance homogeneous loans that, by definition along with leases, are excluded from the scope of SFAS 114. Impaired loans are required to be measured based upon the present value of expected future cash flows, discounted at the loan's initial effective interest rate, or at the loan's market price or fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, an impairment reserve must be established for the difference. The impairment reserve is established by either an allocation of the reserve for credit losses or by a provision for credit losses, depending on various circumstances. Impairment reserves are not needed when credit losses have been recorded so that the recorded investment in an impaired loan is less than the loan valuation. Allowance for loan losses An allowance for loan losses is maintained at a level considered adequate to provide for potential loan losses. Management is responsible for determining the adequacy of the allowance for loan losses and the periodic provisioning for estimated losses included in the consolidated financial statements. The evaluation process is undertaken on a quarterly basis, but may increase in frequency should conditions arise that would require management's prompt attention, F-9 such as business combinations and opportunities to dispose of non-performing and marginally performing loans by bulk sale or any development which may indicate an adverse trend. The methodology employed for assessing the appropriateness of the allowance consists of the following criteria: o Establishment of reserve amounts for all specifically identified criticized loans, that have been designated as requiring attention by management's internal loan review program, bank regulatory examinations or the external auditors. o An average loss factor is applied to smaller balance homogenous types of loans not subject to specific review. These loans include residential 1-4 family, multifamily, nonresidential and construction properties, which also includes consumer and business loans. o An allocation to the remaining loans giving effect to historical loss experience over several years and linked to cyclical trends. Recognition is also given to the changed risk profile brought about by business combinations, customer knowledge, the results of ongoing credit quality monitoring processes and the cyclical nature of economic and business conditions. An important consideration in applying these methodologies is the concentration of real estate related loans located in the New York metropolitan area. The initial allocation or specific-allowance methodology commences with loan officers and underwriters grading the quality of their loans on an eight-category risk classification scale. Loans identified from this process as below investment grade are referred to the Internal Asset Review Committee (ARC) for further analysis and identification of those factors that may ultimately affect the full recovery or collectibility of principal and/ or interest. These loans are subject to continuous review and monitoring while they remain in the criticized category. Additionally, ARC is responsible for performing periodic reviews of the loan portfolio that are independent from the identification process employed by loan officers and underwriters. Gradings that fall into criticized categories are further evaluated and reserve amounts are established for each loan. The second allocation or loss factor approach to common or homogeneous loans is made by applying the average loss factor to the outstanding balances in each loan category. The final allocation of the allowance is made by applying several years of loss experience to categories of loans. It gives recognition to the loss experience of acquired businesses, business cycle changes and the real estate components of loans. Since many loans depend upon the sufficiency of collateral, any adverse trend in the real estate markets could seriously affect underlying values available to protect against loss. Other evidence used to support the amount of the allowance and its components are as follows: o Regulatory examinations o Amount and trend of criticized loans o Actual losses o Peer comparisons with other financial institutions o Economic data associated with the real estate market in the Company's market area o Opportunities to dispose of marginally performing loans for cash consideration Carver Federal maintains a loan review system, which allows for a periodic review of its loan portfolio and the early identification of potential problem loans. Such system takes into consideration, among other things, delinquency status, size of loans, type of collateral and financial condition of the borrowers. Loan loss allowances are established for F-10 problem loans based on a review of such information and/or appraisals of the underlying collateral. On the remainder of its loan portfolio, loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of loan portfolio, current economic conditions and management's judgment. Although management believes that adequate loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of the loan loss allowance may be necessary in the future. Concentration of risk The Bank's principal lending activities are concentrated in loans secured by real estate, a substantial portion of which is located in the State of New York and the State of California. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio is susceptible to changes in New York's and California's market conditions. Premises and equipment Premises and equipment are comprised of land, at cost, and buildings, building improvements, furnishings and equipment and leasehold improvements, at cost, less accumulated depreciation and amortization. Depreciation and amortization charges are computed using the straight-line method over the following estimated useful lives: Buildings and improvements 10 to 40 years Furnishings and equipment 3 to 10 years Leasehold improvements The lesser of useful life or remaining term of lease Significant renewals and betterments are charged to the property and equipment account. Maintenance and repairs are charged to expense in the year incurred. Real estate owned Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at the fair value at the date of acquisition and thereafter carried at the lower of cost or fair value less estimated selling costs. The fair value of such assets is determined based primarily upon independent appraisals and other relevant factors. The amounts ultimately recoverable from real estate owned could differ from the net carrying value of these properties because of economic conditions. Costs incurred to improve properties or get them ready for sale are capitalized. Revenues and expenses related to the holding and operating of properties are recognized in operations as earned or incurred. Gains or losses on sale of properties are recognized as incurred. Excess of cost over net assets acquired In connection with the acquisition of two branches, core deposit premiums paid and other capitalized acquisition costs are being amortized to expense over periods from five to 15 years using the straight-line method. The Bank reviews these assets annually for signs of permanent impairment. Interest-rate risk The Bank is principally engaged in the business of attracting deposits from the general public and using these deposits, together with borrowings and other funds, to originate and purchase loans secured by real estate and to purchase investment and mortgage-backed securities. The potential for interest-rate risk exists as a result of the shorter duration of interest-sensitive liabilities compared to the generally longer duration of interest-sensitive assets. In a rising rate environment, liabilities will reprice faster than assets, thereby reducing the market value of long-term assets and net interest income. For this reason, management regularly monitors the maturity structure of the assets and liabilities in order to measure its level of interest-rate risk and plan for future volatility. F-11 Income taxes Carver accounts for income taxes using the asset and liability method. Temporary differences between the basis of assets and liabilities for financial reporting and tax purposes are measured as of the balance sheet date. Deferred tax liabilities or recognizable deferred tax assets are calculated on such differences, using current statutory rates, which result in future taxable or deductible amounts. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Comprehensive income SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general purpose financial statements. SFAS 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid in capital in the equity section of a statement of financial position. Carver has included the required disclosures in the Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income. Earnings (loss) per common share Basic earnings per share ("EPS") is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS includes any additional common shares as if all potentially dilutive common shares were issued (e.g. convertible preferred stock). For the purpose of these calculations, unreleased shares of the Carver Federal Savings Bank Employee Stock Ownership Plan ("ESOP") are not considered to be outstanding. Treasury Stock Treasury stock is recorded at cost and is presented as a reduction of stockholders' equity. Pension Plans In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. Carver has made the required disclosures in the accompanying Notes to the Consolidated Financial Statements. Stock-Based Compensation Plans Compensation expense is recognized for the Bank's ESOP equal to the fair value of shares committed to be released for allocation to participant accounts. Any difference between the fair value at that time and the ESOP's original acquisition cost is charged or credited to stockholders' equity (additional paid-in capital). The cost of unallocated ESOP shares (shares not yet committed to be released) is reflected as a reduction of stockholders' equity. The Holding Company accounts for its stock option plan in accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, compensation expense is recognized only if the exercise price of the option is less than the fair value of the underlying stock at the grant date. SFAS 123, Accounting for Stock-Based Compensation, encourages entities to recognize the fair value of all stock-based awards (measured on the grant date) as compensation expense over the vesting period. Alternatively, SFAS 123 allows entities to apply the provisions of APB Opinion No. 25 and provide pro forma disclosures of net income and earnings per share as if the fair-value-based method defined in SFAS 123 had been applied. The Holding Company has elected to apply the provisions of APB Opinion No. 25 and provide these pro forma disclosures. F-12 The Holding Company's management recognition and retention plan ("MRP") is also accounted for in accordance with APB Opinion No. 25. The fair value of the shares awarded, measured at the grant date, is recognized as unearned compensation (a deduction from stockholders' equity) and amortized to compensation expense as the shares become vested. When MRP shares become vested, the Company records a credit to additional paid-in capital for tax benefits attributable to any MRP deductions for tax purposes in excess of the grant-date fair value charged to expense for financial reporting purposes. Reclassifications Certain amounts in the consolidated financial statements presented for prior periods have been reclassified to conform with the current year presentation. NOTE 2. SECURITIES The following is a summary of securities at March 31, 2002:
Gross Unrealized -------------------- Carrying Estimated Value Gains Losses Fair Value -------- -------- -------- ---------- (Dollars in thousands) Available-for-Sale: Mortgage-backed securities: Pass-through certificates: Government National Mortgage Association $ 10,531 $ 55 $ (2) $ 10,584 Federal Home Loan Mortgage Corporation 27,840 416 (7) 28,249 Federal National Mortgage Association 11,435 88 (72) 11,451 Collateralized Mortgage Obligations 136 -- -- 136 -------- -------- -------- -------- Total mortgage-backed securities 49,942 559 (81) 50,420 U.S. Government Agency Securities 39,663 1 (263) 39,401 -------- -------- -------- -------- Total available-for-sale 89,605 560 (344) 89,821 -------- -------- -------- -------- Held-to-Maturity: Mortgage-backed securities: Pass-through certificates: Government National Mortgage Association 3,448 24 -- 3,472 Federal Home Loan Mortgage Corporation 6,149 23 (53) 6,119 Federal National Mortgage Association 5,607 74 (2) 5,679 Small Business Administration 439 7 -- 446 -------- -------- -------- -------- Total mortgage-backed securities 15,643 128 (55) 15,716 -------- -------- -------- -------- U.S. Government Agency Securities -- -- -- -- -------- -------- -------- -------- Total held-to-maturity 15,643 128 (55) 15,716 -------- -------- -------- -------- Total securities $105,248 $ 688 $ (399) $105,537 ======== ======== ======== ========
F-13 The following is a summary of securities at March 31, 2001:
Gross Unrealized -------------------- Carrying Estimated Value Gains Losses Fair Value -------- -------- -------- ---------- (Dollars in thousands) Available-for-Sale: U.S. Government Agency Securities $ 19,926 $ -- $ -- $ 19,926 -------- -------- -------- -------- Total available-for-sale 19,926 -- -- 19,926 -------- -------- -------- -------- Held-to-Maturity: Mortgage-backed securities: Pass-through certificates: Government National Mortgage Association 5,774 81 -- 5,855 Federal Home Loan Mortgage Corporation 14,672 143 (179) 14,636 Federal National Mortgage Association 21,633 132 (143) 21,622 Small Business Administration 594 -- (52) 542 Collateralized Mortgage Obligations 193 -- (6) 187 -------- -------- -------- -------- Total mortgage-backed securities 42,866 356 (380) 42,842 -------- -------- -------- -------- U.S. Government Agency Securities 24,996 1,093 -- 26,089 -------- -------- -------- -------- Total held-to-maturity 67,862 1,449 (380) 68,931 -------- -------- -------- -------- Total securities $ 87,788 $ 1,449 $ (380) $ 88,857 ======== ======== ======== ========
F-14 The net unrealized gain on available-for-sale securities was $216,000 ($116,000 after taxes) at March 31, 2002. There was no net unrealized gain on available-for-sale securities at March 31, 2001. Changes in unrealized holding gains and losses resulted in an after-tax increase in stockholders' equity of $116,000. These gains and losses will continue to fluctuate based on changes in the portfolio and market conditions. Sales of available-for-sale securities resulted in gross realized gains during the fiscal year ended March 31, 2002 of $1.4 million. There were no sales of securities in the fiscal years ended March 31, 2001("fiscal 2001") and 2000 ("fiscal 2000"). The following is a summary of the carrying value (amortized cost) and fair value of securities at March 31, 2002, by remaining period to contractual maturity (ignoring earlier call dates, if any). Actual maturities may differ from contractual maturities because certain security issuers have the right to call or prepay their obligations. Carrying Fair Value Value -------- -------- (Dollars in thousands) Available-for-sale: Due in one year or less $ 15,018 $ 15,018 One through five years 24,882 24,630 Five through ten years 2,568 2,670 After ten years 47,137 47,503 -------- -------- $ 89,605 $ 89,821 ======== ======== Held-to-maturity: Five through ten years $ 513 $ 526 After ten years 15,130 15,190 -------- -------- $ 15,643 $ 15,716 ======== ======== NOTE 3. LOANS RECEIVABLE, NET
March 31, -------------------------------------------------- 2002 2001 ----------------------- ----------------------- Amount Percent Amount Percent --------- --------- --------- --------- (Dollars in thousands) Real estate loans: One- to four-family $ 122,814 41.28% $ 157,767 54.71% Multi-family 118,589 39.86 83,620 29.00 Non-residential 40,101 13.48 36,113 12.52 Construction 13,678 4.60 7,101 2.46 Consumer and business 2,328 0.78 3,781 1.31 --------- --------- --------- --------- Total gross loans 297,510 100.00% 288,382 100.00% ========= ========= Add: Premium on loans 906 705 Less: Loans in process (3,936) (1,280) Deferred fees and loan discounts (1,238) (819) Allowance for loan losses (4,128) (3,551) --------- --------- Net loan portfolio $ 289,114 $ 283,437 ========= =========
F-15 At March 31, 2002, the Company's real estate loans receivable were principally secured by properties located in the State of New York (82.8%). The mortgage loan portfolios serviced for the FHLMC and Fannie Mae are not included in the accompanying consolidated financial statements. The unpaid principal balances of these loans aggregated $2.9 million, $2.1million and $2.8 million at March 31, 2002, 2001 and 2000, respectively. Custodial escrow balances, maintained in connection with the foregoing loan servicing, were approximately $28,000, $34,000 and $56,000 at March 31, 2002, 2001 and 2000, respectively. During the year ended March 31, 2002 the Bank sold $481,000 in automobile loans and recognized a loss of $101,000. The following is an analysis of the allowance for loan losses: Year ended March 31, ------------------------------- 2002 2001 2000 ------- ------- ------- (Dollars in thousands) Balance-beginning $ 3,551 $ 2,935 $ 4,020 Provision charged to operations 900 1,793 1,099 Recoveries of amounts previously charged off 177 200 385 Loans charged-off (500) (1,377) (2,569) ------- ------- ------- Balance-ending $ 4,128 $ 3,551 $ 2,935 ======= ======= ======= Non-accrual loans consist of loans for which the accrual of interest has been discounted as a result of such loans becoming 90 days or more delinquent as to principal and/or interest payments. Interest income on non-accrual loans is recorded when received. Restructured loans consist of loans where borrowers have been granted concessions in regards to the terms of their loans due to financial or other difficulties, which rendered them unable to repay their loans under the original contractual terms. At March 31, 2002, 2001and 2000 the recorded investment in impaired loans was $2.8 million, $2.5 million and $2.1 million, respectively all of which represented non-accrual loans. The related allowance for credit losses was approximately $146,000 and $291,000 at March 31, 2002 and 2001, respectively. The impaired loan portfolio is primarily collateral dependent. The average recorded investment in impaired loans during the fiscal years ended March 31, 2002, 2001 and 2000 was approximately $2.3 million, $3.2 million and $2.3 million, respectively. For the years ended March 31, 2002, 2001 and 2000, the Company did not recognize any interest income on these impaired loans. Interest income of $288,000, $202,000 and $345,000, respectively, for the years ended March 31, 2002, 2001 and 2000 would have been recorded on impaired loans had they performed in accordance with the original contract. At March 31, 2002 and 2001, there were no loans to officers. NOTE 4. PREMISES AND EQUIPMENT, NET The detail of premises and equipment is as follows: March 31, ---------------------- 2002 2001 ------- ------- (Dollars in thousands) Land $ 415 $ 451 Buildings and improvements 8,074 8,556 Leasehold improvements 934 335 Furniture and equipment 6,992 6,469 ------- ------- 16,415 15,811 Less accumulated depreciation and amortization 6,164 5,390 ------- ------- $10,251 $10,421 ======= ======= F-16 Depreciation and amortization charged to operations for the years ended March 31, 2002, 2001 and 2000 were $1.2 million, $1.2 million and $1.0 million respectively. NOTE 5. ACCRUED INTEREST RECEIVABLE The detail of accrued interest receivable is as follows: March 31, ---------------------- 2002 2001 ------- ------ (Dollars in thousands) Loans receivable $1,735 $1,632 Mortgage-backed securities 517 788 Investments and other interest bearing assets 552 121 ------ ------ Total accrued interest receivable $2,804 $2,541 ====== ====== NOTE 6. EXCESS OF COST OVER NET ASSETS ACQUIRED, NET The excess of cost over net assets acquired relates to the acquisition of the Bedford-Stuyvesant Branch office. The detail is as follows: March 31, ---------------------- 2002 2001 ------ ------ (Dollars in thousands) Core deposit premium $ 377 $ 581 Acquisition costs 14 22 ------ ------ $ 391 $ 603 ====== ====== NOTE 7. DEPOSITS Deposit balances and weighted average stated interest rates at March 31 are summarized as follows:
2002 2001 ------------------------------- -------------------------------- Percent of Weighted Percent Weighted Total Average of Total Average Amount Deposits Rate Amount Deposit Rate -------- ---------- -------- -------- --------- -------- (Dollars in thousands) Non-interest -bearing demand $ 13,463 4.1% --% $ 11,409 4.1% --% NOW accounts 18,095 5.6 1.24 14,757 5.3 1.71 Savings and club 126,779 39.0 1.71 132,645 47.5 2.32 Money Market savings account 15,232 4.7 1.78 15,718 5.6 2.62 Certificates 151,385 46.6 2.73 104,895 37.5 4.55 -------- -------- -------- -------- Total $324,954 100.0% 2.18% $279,424 100.0% 3.04% ======== ======== ======== ========
F-17 The scheduled maturities of certificates of deposits are as follows: March 31, ------------------------ 2002 2001 -------- -------- (In thousands) Certificates of deposit by remaining term to contractual maturity: Within one year $ 80,528 $ 28,449 After one but within two years 26,638 22,067 After two but within three years 10,495 10,682 After three years 33,724 43,697 -------- -------- Total $151,385 $104,895 ======== ======== The aggregate amount of certificates of deposit with minimum denominations of $100,000 or more was approximately $90.6 million and $16.3 million at March 31, 2002 and 2001, respectively. Interest expense on deposits for the year ended March 31 consists of the following: 2002 2001 2000 ------- ------- ------- (In thousands) Demand $ 237 $ 253 $ 314 Savings and club 2,342 3,081 3,650 Money Market 302 412 631 Certificates of deposit 5,263 4,739 4,047 ------- ------- ------- 8,144 8,485 8,642 Penalty for early withdrawal of certificates of deposit (17) (29) (30) ------- ------- ------- Total interest expense $ 8,127 $ 8,456 $ 8,612 ======= ======= ======= NOTE 8. BORROWED MONEY 2002 2001 ---------------------- --------------------- (Dollars in thousands) Maturing Year Ended March 31, Rate Amount Rate Amount - ----------- ------- -------- ------ -------- 2002 --% $ -- 5.86% $ 96,500 2003 2.41 15,500 -- -- 2004 4.28 3,500 -- -- 2005 4.05 26,000 -- -- 2006 5.29 10,490 5.44 3,490 2007 5.17 19,484 -- -- 2012 3.50 288 3.50 309 ------- -------- ------ -------- 4.18% $ 75,262 5.84% $100,299 ======= ======== ====== ======== FHLB Advances. FHLB advances and weighted average interest rates at March 31 are summarized as follows, by remaining period to maturity: F-18 As a member of the FHLB, the Bank may have outstanding FHLB borrowings in a combination of term advances and overnight funds of up to 25% of its total assets, or approximately $112.4 million at March 31, 2002. Borrowings are secured by the Bank's investment in FHLB stock and by a blanket security agreement. This agreement requires the Bank to maintain as collateral certain qualifying assets (principally securities and residential mortgage loans) not otherwise pledged. At March 31, 2002 and 2001, the advances were secured by pledges of the Bank's investment in the capital stock of the Federal Home Loan Bank totaling $3.8 million and $5.8 million, respectively, and a blanket assignment of the Bank's unpledged qualifying mortgage, mortgage-backed securities and investment portfolios. Securities Sold Under Agreements to Repurchase. In securities sold under agreements to repurchase, the Bank borrows funds through the transfer of debt securities to the FHLB, as counterparty, and concurrently agrees to repurchase the identical securities at a fixed price on a specified date. Repurchase agreements are collateralized by the securities sold and, in certain cases, by additional margin securities. At March 31, 2002 there were no securities sold under agreements to repurchase outstanding. At March 31, 2001 securities sold under agreements to repurchase amounted to $4.9 million. The following table sets forth certain information regarding Carver's borrowed money at the dates and for the periods indicated:
At or for the Year Ended March 31, ------------------------ 2002 2001 --------- -------- (Dollars in thousands) Amounts outstanding at the end of period: FHLB advances $ 75,262 $100,299 Repos -- 4,930 Weighted average rate paid at period end: FHLB advances 4.18% 5.84% Repos --% 6.70% Maximum amount of borrowing outstanding at any month end: FHLB advances $100,094 $102,314 Repos 14,930 31,337 Approximate average amounts outstanding for period: FHLB advances $ 76,141 $ 80,591 Repos 2,888 17,165 Approximate weighted average rate paid during period: FHLB advances 5.50% 5.72% Repos 5.91% 5.99%
F-19 NOTE 9. INCOME TAXES The components of income tax expense for the years ended March 31 are as follows: 2002 2001 2000 -------- -------- -------- (In thousands) Federal income tax expense (benefit): Current $ 569 $ -- $ -- Deferred 1,792 -- -- -------- -------- -------- 2,361 -- -- -------- -------- -------- State and local income tax expense: Current 913 98 110 Deferred 46 -- -- -------- -------- -------- 959 98 110 -------- -------- -------- Valuation allowance (2,439) -- -- Total provision for income tax expense $ 881 $ 98 $ 110 ======== ======== ======== The reconciliation of the expected federal tax rate to the consolidated effective tax rate for the years ended March 31 is as follows:
2002 2001 2000 --------------------- --------------------- --------------------- Amount Percent Amount Percent Amount Percent -------- -------- -------- -------- -------- -------- (Dollars in thousands) Statutory Federal income tax $ 1,902 34.0% $ (99) 34.0% $ (349) 34.0% State and local income taxes, net of Federal tax benefit 632 11.3 98 (33.6) 110 (10.7) Change in valuation allowance (2,439) (43.6) 157 (54.0) 298 (29.0) Other 786 14.0 (58) 19.9 51 (5.0) -------- -------- -------- -------- -------- -------- Total income tax expense $ 881 15.7% $ 98 (33.7)% $ 110 (10.7)% ======== ======== ======== ======== ======== ========
At March 31, 2001, Carver had net operating loss carryforwards for federal income tax purposes of approximately $5.7 million. These net operating loss carryforwards were fully utilized during the year ended March 31, 2002. Carver's stockholders' equity includes approximately $4.2 million and $3.6 million at March 31, 2002 and 2001, respectively, which has been segregated for federal income tax purposes as a bad debt reserve. The use of this amount for purposes other than to absorb losses on loans may result in taxable income for Federal income taxes at the then current tax rate. F-20 The tax effects of existing temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at March 31 are as follows: 2002 2001 -------- -------- (In thousands) Deferred tax assets Net operating loss carryforward $ -- $ 1,939 Allowance for loan losses 1,235 1,649 Deferred loan fees 607 354 Employees' pension plan 132 132 Reserves for losses on other assets 38 -- Contributions carryforward 95 67 -------- -------- Total deferred tax assets before valuation allowance 2,107 4,141 Valuation allowance -- (2,439) -------- -------- Total deferred tax assets 2,107 1,702 -------- -------- Deferred tax liabilities Unrealized gain on available-for-sale securities 100 -- Excess of cost over net assets acquired 168 250 Depreciation 315 430 -------- -------- Total deferred tax liabilities 583 680 -------- -------- Net deferred tax assets $ 1,524 $ 1,022 ======== ======== Management believes it is more likely than not that the results of future operations will generate sufficient future taxable income to realize the deferred tax asset. The Company will have to generate approximately $4.5 million of future taxable income to realize this asset. Therefore, a valuation allowance against the deferred tax assets at March 31, 2002 is not considered necessary. Accordingly, during 2002, the valuation allowance was reduced by $2,439. NOTE 10. EARNINGS PER COMMON SHARE The following table reconciles the earnings (loss) available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted EPS for the periods presented:
Year Ended March 31, ---------------------------------- 2002 2001 2000 -------- -------- -------- (In thousands) Net income (loss) $ 4,713 $ (389) $ (1,135) Preferred stock dividends (197) (196) (45) -------- -------- -------- Net income (loss) - basic 4,516 (585) (1,180) Impact of potential conversion of convertible preferred stock to common stock 197 196 45 -------- -------- -------- Net income (loss) - diluted $ 4,713 $ (389) $ (1,135) ======== ======== ======== Weighted average common shares outstanding - basic 2,277 2,256 2,239 Effect of dilutive securities convertible preferred stock 218 208 46 -------- -------- -------- Weighted average common shares outstanding - diluted 2,495 2,464 2,285 ======== ======== ========
F-21 NOTE 11. STOCKHOLDERS' EQUITY Conversion and Stock Offering. On October 24, 1994, the Bank issued in an initial public offering 2,314,375 shares of common stock (par value $0.01) at a price of $10 per share resulting in net proceeds of $21,519,000. As part of the initial public offering, the Bank established a liquidation account at the time of conversion, in an amount equal to the surplus and reserves of the Bank at September 30, 1994. In the unlikely event of a complete liquidation of the Bank (and only in such event), eligible depositors who continue to maintain accounts shall be entitled to receive a distribution from the liquidation account. The total amount of the liquidation account may be decreased if the balances of eligible deposits decreased as measured on the annual determination dates. The balance of the liquidation account was approximately $2.5 million (unaudited), and $3.0 million (unaudited) at March 31, 2002 and 2001, respectively, based on an assumed decrease of 15.25% of eligible deposits per annum. On October 17, 1996, the Bank completed the Reorganization and became the wholly owned subsidiary of the Holding Company. Pursuant to an Agreement and Plan of Reorganization, dated May 21, 1996, each share of the Bank's outstanding common stock was exchanged for one share of the Holding Company's common stock. In connection with the Reorganization, a shareholder of the Bank exercised appraisal rights and 100 shares of the Bank's common stock were purchased from such shareholder in the fourth fiscal quarter of 1997. Accordingly, 2,314,275 shares of the Holding Company's common stock were outstanding. The Bank is not permitted to pay dividends to the Holding Company on its capital stock if the effect thereof would cause its net worth to be reduced below either: (i) the amount required for the liquidation account or (ii) the amount required for the Bank to comply with applicable minimum regulatory capital requirements. Convertible Preferred Stock. On January 11, 2000, the Holding Company sold, pursuant to a Securities Purchase Agreement, dated January 11, 2000, in a private placement 40,000 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock") to Morgan Stanley & Co. Incorporated ("MSDW") and 60,000 Shares of Series B Convertible Preferred Stock (the "Series B Preferred Stock") to Provender Opportunities Fund L.P. ("Provender"). In addition, Carver entered into a Registration Rights Agreement, dated January 11, 2000, with MSDW and Provender. The gross proceeds from the private placement were $2.5 million. The Series A Preferred Stock and Series B Preferred Stock (collectively the "Preferred Stock") accrue annual dividends at $1.97 per share. Dividends are payable semi-annually on June 15 and December 15 of each year. Each share of Preferred Stock is convertible at the option of the holder, at any time, into 2.083 shares of Carver's Common Stock, subject to certain antidilution adjustments. The Holding Company may redeem the Preferred Stock beginning January 15, 2004. In the event of any liquidation, dissolution or winding up of Carver, whether voluntary or involuntary, the holders of the shares of Preferred Stock shall be entitled to receive $25 per share of Preferred Stock plus all dividends accrued and unpaid thereon. Each share of Preferred Stock is entitled to one vote for each share of Common Stock into which the Preferred Stock can be converted. At March 31, 2002 unpaid accrued dividends related to the Preferred Stock amounted to $57,000. Regulatory Capital. The operations and profitability of the Bank are significantly affected by legislation and the policies of the various regulatory agencies. The Office of Thrift Supervision ("OTS") has promulgated capital requirements for financial institutions consisting of minimum tangible and core capital ratios of 1.5% and 3.0%, respectively, of the institution's adjusted total assets and a minimum risk-based capital ratio of 8.0% of the institution's risk weighted assets. Although the minimum core capital ratio is 3.0%, the Federal Deposit Insurance Corporation Improvement Act ("FDICIA") stipulates that an institution with less than 4.0% core capital is deemed undercapitalized. At March 31, 2002 and 2001, the Bank exceeded all of its regulatory capital requirements. F-22 The following is a summary of the Bank's actual capital amounts and ratios as of March 31, 2002 and 2001, compared to the OTS requirements for minimum capital adequacy and for classification as a well-capitalized institution:
Minimum Capital Classification as Bank Actual Adequacy Well Capitalized ----------------------- ---------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollars in thousands) March 31, 2002 Tangible capital $ 36,442 8.1% $ 6,744 1.5% N/A N/A Tier I (core)capital 36,442 8.1 17,984 4.0 $ 22,480 5.0% Risk-based capital: Tier I 36,442 17.0 N/A N/A 12,865 6.0 Total 39,140 18.3 17,153 8.0 21,442 10.0 March 31, 2001 Tangible capital $ 30,360 7.0% $ 6,360 1.5% N/A N/A Tier I (core)capital 30,360 7.0 16,960 4.0 $ 21,200 5.0% Risk-based capital: Tier I 30,360 14.5 N/A N/A 12,310 6.0 Total 32,333 15.8 16,413 8.0 20,516 10.0
The following table reconciles the Bank's stockholders' equity at March 31, 2002, in accordance with accounting principles generally accepted in the U.S. to regulatory capital requirements:
Regulatory Capital Requirements ----------------------------------------------- GAAP Tangible Tier 1/Core Risk-Based Capital Capital Capital Capital -------- --------- ----------- ---------- (In thousands) Stockholders' Equity at March 31, 2002 (1) $ 36,949 $ 36,949 $ 36,949 $ 36,949 Add: General valuation allowances -- -- 2,698 Deduct: Unrealized loss (gain) on securities available-for-sale, net (116) (116) (116) Excess of cost over net assets acquired (391) (391) (391) -------- -------- -------- Regulatory Capital 36,442 36,442 39,140 Minimum Capital requirement 6,744 17,984 17,153 -------- -------- -------- Regulatory Capital Excess $ 29,698 $ 18,458 $ 21,987 ======== ======== ========
(1) Reflects Bank only. Comprehensive Income. Comprehensive income represents net income and certain amounts reported directly in stockholders' equity, such as the net unrealized gain or loss on securities available for sale. The Holding Company has reported its comprehensive income for fiscal 2002, 2001 and 2000 in the consolidated statements of changes in stockholders' equity and comprehensive income. Carver's other comprehensive income or loss (other than net income), which is attributable to gains and losses on securities available-for-sale, for the year ended March 31, 2002 was $116,000. There was no other comprehensive income or loss for the years ended March 31, 2001 and 2000. NOTE 12. EMPLOYEE BENEFIT AND STOCK COMPENSATION PLANS Pension Plan. Carver has a non-contributory defined benefit pension plan covering all eligible employees. The benefits are based on each employee's term of service. Carver's policy is to fund the plan with contributions which equal the maximum amount deductible for federal income tax purposes. The plan was curtailed during the fiscal year ended F-23 March 31, 2001. The following table sets forth the plan's changes in benefit obligation, changes in plan assets and funded status and amounts recognized in Carver's consolidated financial statements at March 31: 2002 2001 -------- -------- (In thousands) Change in projected benefit obligation during the year Projected benefit obligation at the beginning of year $ 2,527 $ 2,846 Service cost -- 121 Interest cost 182 207 Actuarial gain 154 (84) Benefits paid (240) (243) Curtailment -- (320) -------- -------- Projected benefit obligation at end of year $ 2,623 $ 2,527 ======== ======== Change in fair value of plan assets during the year Fair value of plan assets at beginning of year $ 3,594 $ 3,791 Actual return on plan assets 15 46 Employer contributions -- -- Benefits paid (240) (243) -------- -------- Fair value of plan assets at end of year $ 3,369 $ 3,594 ======== ======== Funded status $ 746 $ 1,067 Contributions -- -- Unrecognized transition obligation -- -- Unrecognized gain (600) (1,074) Unrecognized past service liability -- -- -------- -------- Accrued pension cost $ 146 $ (7) ======== ======== Net periodic pension cost included the following components for the years ended March 31 are:
2002 2001 2000 -------- -------- -------- (In thousands) Service cost $ -- $ 121 $ 159 Interest cost 182 207 191 Expected return on plan assets (279) (298) (284) Amortization of: Unrecognized transition (benefit) obligation -- 36 36 Unrecognized gain (loss) (56) (96) (62) Unrecognized past service liability -- 2 2 Curtailment credit -- (84) -- -------- -------- -------- Net periodic pension (benefit) cost $ (153) $ (112) $ 42 ======== ======== ========
Significant actuarial assumptions used in determining plan benefits for the years ended March 31 are:
2002 2001 2000 -------- -------- -------- Annual salary increase (1) N/A 4.75% 5.50% Long-term return on assets 8.00% 8.00% 8.00% Discount rate used in measurement of benefit obligations 7.00% 7.25% 8.00%
(1) The annual salary increase rate is not applicable as the plan is frozen. F-24 Savings Incentive Plan. Carver has a savings incentive plan, pursuant to Section 401(k) of the Code, for all eligible employees of the Bank. Through December 31, 2000, employees had the option to elect to defer up to the lesser of 15% or the maximum amount allowed under law of their compensation and receive a 50% matching contribution from Carver up to the maximum allowed by law. Effective January 1, 2001, the plan was modified. In connection with this modification, Carver will make an annual non-elective contribution to the 401(k) plan on behalf of each eligible employee equal to 2% of the employee's annual pay. This 2% Carver contribution will be made regardless of whether or not the employee makes a contribution to the 401(k) plan. To be eligible for the 2% Carver contribution, the employee must have completed at least one year of service and be employed as of the last day of the plan year or December 31s of each year. In addition, effective January 1, 2001, Carver matches contributions to the plan equal to 100% of the pre-tax contributions made by each employee up to a maximum of 4% of their pay. All such matching contributions to the plan will be fully vested and non-forfeitable at all times regardless of the years of service. However, the one to five year vesting schedule that previously applied to matching contributions will apply to the new 2% Carver contribution. Total incentive plan expenses for the years ended March 31, 2002, 2001 and 2000 were $60,000, $45,000 and $56,000 respectively. Directors' Retirement Plan. Concurrent with the conversion to the stock form of ownership, Carver adopted a retirement plan for non-employee directors. The plan was curtailed during the fiscal year ended March 31, 2001. The benefits are payable based on the term of service as a director. The following table sets forth the plan's changes in benefit obligation, changes in plan assets and funded status and amounts recognized in Carver's consolidated financial statements at March 31: ----- ----- 2002 2001 ----- ----- (In thousands) Change in projected benefit obligation during the year Projected benefit obligation at beginning of year $ 296 $ 670 Service cost -- -- Interest cost 19 35 Actuarial loss (gain) -- 14 Benefits paid (51) (51) Curtailment -- (372) ----- ----- Projected benefit obligation at end of year $ 264 $ 296 ===== ===== Change in fair value of plan assets during the year Fair value of plan assets at beginning of year $ -- $ -- Actual return on plan assets -- -- Employer contributions 51 51 Benefits paid (51) (51) ----- ----- Fair value of plan assets at end of year $ -- $ -- ===== ===== Funded Status $(264) $(296) Contributions -- -- Unrecognized loss 21 21 Unrecognized past service liability -- -- ----- ----- Accrued pension cost $(243) $(275) ===== ===== F-25 Net periodic pension cost for the years ended March 31, 2002, 2001 and 2000 included the following: 2002 2001 2000 ------ ------ ------ (In thousands) Service cost $ -- $ -- $ -- Interest cost 20 35 51 Expected return on plan assets -- -- -- Amortization of: Unrecognized gain -- 4 27 Unrecognized past service liability -- 23 55 Curtailment credit -- (179) -- ------ ------ ------ Net periodic pension cost $ 20 $ (117) $ 133 ====== ====== ====== The actuarial assumptions used in determining plan benefits include annual fee increases of 5.50% during the year ended March 31, 2000, and a discount rate of 7.25%, 7.25% and 8.00% for the years ended March 31, 2002, 2001 and 2000, respectively. Management Recognition Plan. The MRP provides for automatic grants of restricted stock to certain employees as of the September 12, 1995 adoption of the MRP. In addition, the MRP provides for additional discretionary grants of restricted stock to those employees selected by the committee established to administer the MRP. Awards generally vest in three to five equal annual installments commencing on the first anniversary date of the award, provided the recipient is still an employee of the Holding Company or the Bank on such date. Awards will become 100% vested upon termination of service due to death or disability. When shares become vested and are distributed, the recipients will receive an amount equal to any accrued dividends with respect thereto. Pursuant to the MRP, the Bank recognized $119,000, $0 and $178,000 as expense for the years ended March 31, 2002, 2001 and 2000, respectively. Employee Stock Ownership Plan. Effective upon conversion, an ESOP was established for all eligible employees. The ESOP used $1,821,320 in proceeds from a term loan obtained from a third-party institution to purchase 182,132 shares of Bank common stock in the initial public offering. The term loan principal is payable over forty equal quarterly installments through September 2004. Interest on the term loan is payable quarterly, at a rate of 3.00% over the average federal funds rate. On May 20, 2002, the term loan was modified to provide for interest at a fixed rate of 4% per annum. Each year, the Bank intends to make discretionary contributions to the ESOP, which will be equal to principal and interest payments required on the term loan less any dividends received by the ESOP on unallocated shares. Shares purchased with the loan proceeds were initially pledged as collateral for the term loan and are held in a suspense account for future allocation among the participants on the basis of compensation, as described by the Plan, in the year of allocation. Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP shares in the consolidated statements of financial condition. As shares are committed to be released from collateral, the Bank reports compensation expense equal to the current market price of the shares, and the shares become outstanding for net income per common share computations. ESOP compensation expense was $174,000, $298,000 and $326,000 for the years ended March 31, 2002, 2001 and 2000, respectively. F-26 The ESOP shares at March 31 are as follows: 2002 2001 -------- -------- (In thousands) Allocated shares 149 134 Unreleased shares 33 48 -------- -------- Total ESOP shares 182 182 ======== ======== Fair value of unreleased shares $ 374 $ 293 Stock Option Plan. During 1995, the Holding Company adopted the 1995 Stock Option Plan (the "Plan") to advance the interests of the Bank through providing select key employees and directors of the Bank and its affiliates. The number of shares reserved for issuance under the plan was 138,862. At March 31, 2002, there were 107,267 options outstanding and 106,267 were exercisable. Options are granted at the fair market value of Carver common stock at the time of the grant for a period not to exceed ten (10) years. Under the Plan, as amended, option grants generally vest on an annual basis ratably over either three or five years, commencing after one year of service. In some instances, portions of option grants vest at the time of the grant. All options are exercisable immediately upon a participant's disability, death or a change in control, as defined in the Plan. Information regarding stock options as of and for the years ended March 31 follows:
2002 2001 2000 ------------------------ ------------------------- -------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price -------- -------- -------- -------- -------- -------- Outstanding, beginning of year 112,963 9.17 58,463 9.57 79,115 10.74 Granted 29,767 9.79 56,000 8.94 31,000 8.21 Exercised -- -- -- -- -- -- Forfeited (35,463) 10.61 (1,500) 16.13 (51,652) 10.55 -------- -------- -------- -------- -------- -------- Outstanding, end of year 107,267 8.86 112,963 9.17 58,463 9.57 ======== ======== ======== ======== ======== ======== Exercisable at year end 106,267 -- 89,663 -- 34,470 -- ======== ======== ======== ======== ======== ========
The following table summarizes information about stock options at March 31, 2002:
Options Outstanding Options Exercisable ----------------------------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Range of Remaining Exercise Exercise Exercise Prices Shares Life Price Shares Price - --------------------- -------- ---------- -------- -------- --------- $ 8.00 $ 8.99 70,000 8 years $ 8.24 70,000 $ 8.24 9.00 9.99 28,267 9 years 9.79 28,267 9.79 10.00 10.99 8,000 9 years 10.42 8,000 10.42 13.00 13.99 1,000 6 years 13.81 -- -- ------- ------- Total 107,267 106,267 ======= =======
Carver applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our stock-based Plan under which there is no charge to earnings for stock option awards and the dilutive effect of outstanding options is reflected as additional share dilution in the computation of F-27 earnings per share. Alternatively, Carver could have accounted for under SFAS 123, under which compensation cost for stock option awards would be calculated and recognized over the service period (generally equal to the vesting period). Had Carver applied SFAS 123 for its Plan, net income and earnings per common share would have been to the pro forma amounts indicated below for the years ended March 31:
2002 2001 2000 ------------- -------------- -------------- (Dollars in thousands, except per share data) Net Gain (loss) available to common shareholders: As reported $ 4,516 $ (586) $ (1,180) Pro forma 4,414 (759) (1,268) Basic gain (loss) per share: As reported $ 1.98 $ (0.26) $ (0.53) Pro forma 1.94 (0.34) (0.57) Diluted gain (loss) per share: As reported $ 1.89 $ (0.26) $ (0.53) Pro forma 1.85 (0.34) (0.57) Weighted average number of shares outstanding 2,276,920 2,256,441 2,238,846
The fair value of the option grants was estimated on the date of the grant using the Black-Scholes option pricing model applying the following weighted average assumptions: risk-free interest rate of 5.50%, volatility of 30%, expected dividend yield of 0.60%, and an expected life of five years. NOTE 13. COMMITMENTS AND CONTINGENCIES The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to extend credit and to sell loans. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements of financial condition. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies making commitments as it does for on-balance-sheet instruments. The Bank has outstanding various loan commitments as follows: 2002 2001 -------- -------- (In thousands) Commitments to originate mortgage loans $ 14,723 $ 6,137 Consumer loans 2,877 3,380 -------- -------- Total $ 17,600 $ 9,517 ======== ======== F-28 At March 31, 2002, of the $14.7 million in outstanding commitments to originate mortgage loans, $3.1 million represented commitments to originate multi-family mortgage loans at fixed rates within a range of 6.25% to 7.75%, $7.7 million represented the balance of all other real estate loans at fixed rates between 5.50% to 8.50% and $3.9 million represented construction loans at an average rate of 6.36%. At March 31, 2002, undisbursed funds from approved consumer lines of credit, primarily credit cards, totaled $2.9 million. Such lines consist of unsecured and secured lines of credit of $2.7 million and $207,000 respectively. All such lines carry adjustable rates. At March 31, 2002, undisbursed funds from approved unsecured commercial lines of credit totaled $45,000. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management's credit evaluation of the counter-party. Collateral held consists primarily of residential real estate, but may include income-producing commercial properties. Rentals, including real estate taxes, under long-term operating leases for certain branch offices aggregated approximately $142,000, $191,000, and $273,000 for the years ended March 31, 2002, 2001 and 2000, respectively. As of March 31, 2002, minimum rental commitments under all noncancellable leases with initial or remaining terms of more than one year and expiring through 2012 are as follows: Year Ending Minimum March 31, Rental ----------- -------------- (In thousands) 2003 $ 186 2004 189 2005 192 2006 195 2007 94 Thereafter 317 ------ $1,173 ====== The Bank also has, in the normal course of business, commitments for services and supplies. Management does not anticipate losses on any of these transactions. Legal Proceedings. From time to time, Carver Federal is a party to various legal proceedings incident to its business. Certain claims, suits, complaints and investigations involving the Company, arising in the ordinary course of business, have been filed or are pending. The Company is of the opinion, after discussion with legal counsel representing the Bank in these proceedings, that the aggregate liability or loss, if any, arising from the ultimate disposition of these matters would not have a material adverse effect on the Company's consolidated financial position or results of operations. At March 31, 2002, except as set forth below, there were no material legal proceedings to which the Company or its subsidiaries was a party, or to which any of their property was subject. On or about April 29, 1999, plaintiff Reginald St. Rose ("St. Rose"), a former Carver Federal employee, filed suit against Carver Federal in the Supreme Court of the State of New York, County of New York (the "St. Rose F-29 Action"). On or about January 12, 1999, Carver Federal and St. Rose entered into an agreement (the "Agreement") providing that St. Rose would resign from Carver Federal on the terms and conditions set forth in the Agreement. In the St. Rose Action, St. Rose alleged the following causes of action, which relate to the Agreement and St. Rose's separation from Carver Federal: (1) breach of contract; (2) promissory estoppel; and (3) fraudulent misrepresentation. St. Rose seeks damages in an amount not less than $50,000 with respect to the breach of contract cause of action and seeks undisclosed damages with respect to the promissory estoppel and fraudulent misrepresentation causes of action. On or about August 18, 1999, Carver Federal moved to dismiss St. Rose's fraudulent misrepresentation cause of action and the Court granted Carver Federal's motion to dismiss. Carver Federal has not filed an answer in the St. Rose Action. By written stipulation of the parties, Carver Federal's time to file an answer to St. Rose's complaint has been extended without date. Carver Federal plans to assert claims against St. Rose for, among other claims, payment of certain financial obligations to Carver Federal, which obligations remain outstanding as of the date of this Form 10-K. The parties have had intermittent settlement discussions, but have not reached an agreement. If the parties do not reach a settlement, Carver Federal intends to continue to defend the St. Rose Action vigorously. Carver Federal is also a defendant in an action brought by Ralph Williams (the "Williams Action") and an action brought by Janice Pressley (the "Pressley Action" and, together with the Williams Action, the "Actions"), both of which arise out of events concerning the Northeastern Conference Federal Credit Union ("Northeastern"). Plaintiff Williams is a former member of the Board of Directors, and plaintiff Pressley is a former treasurer, of Northeastern, a federal credit union that maintained accounts with Carver Federal and other banks in the New York metropolitan area. Plaintiffs' complaints (which are virtually identical) allege that the National Credit Union Administration (the "NCUA") acted improperly when it placed Northeastern into conservatorship and subsequent liquidation. On or about November 22, 2000, Williams filed his pro se complaint against the NCUA, Carver Federal, Chase Manhattan Bank ("Chase"), Astoria Federal Savings and Loan Association and Reliance Federal Savings Bank (Carver Federal with the last three defendants, collectively the "Bank Defendants") seeking damages in the amount of $1 million plus certain additional unspecified amounts. On or about November 22, 2000, plaintiff Pressley filed her pro se action against the same defendants seeking unspecified compensatory and punitive damages. Williams seeks damages for the allegedly "unauthorized" or "invalid" actions of the NCUA Board in taking control of Northeastern as well as damages for discrimination and civil rights violations. Pressley seeks damages based on identical allegations except that she also alleges certain claims of employment discrimination. While the bulk of the complaints relate to the action of the NCUA Board, the plaintiffs allege that the Bank Defendants "collaborated with the NCUA Board" in violating unspecified constitutional and privacy rights and that they engaged in discrimination. On or about December 15, 2000, defendant Chase moved to consolidate the Williams Action and Pressley Action. In anticipation of that consolidation, the Bank Defendants filed a joint motion to dismiss both complaints arguing that both Actions are barred by principles of res judicata and because both complaints fail to state claims on which relief can be granted. The Bank Defendants' motion to dismiss was denied without prejudice insofar as it applied to the Williams Action solely for the reason that it was a motion addressed to both Actions prior to the issuance of an order consolidating these cases. The Bank Defendants have refiled their motion to dismiss the Williams Action and it is sub judice. If the motion to dismiss is not granted, Carver Federal intends to defend the Williams Action vigorously. On September 20, 2001 the court granted the Bank Defendants' motion to dismiss the Pressley Action. Pressley has appealed the dismissal. Carver Federal is vigorously opposing the appeal. On or about December 28, 2000, plaintiff Thomas L. Clark ("Clark"), the former President and CEO of Carver, filed suit against Carver Federal and certain individual defendants in the Supreme Court of the State of New York, County of New York (the "Clark Action"). Clark claims that the defendants should be forced to obtain approval from the OTS to pay severance benefits that Clark believes Carver Federal owes him under an employment agreement. Clark seeks injunctive relief and asserts claims for breach of contract, equitable estoppel and estoppel by contract. On or about March 30, 2001, the defendants moved to dismiss the complaint in its entirety and in November 2001 the court dismissed the breach of contract action against the individual defendants and the equitable estoppel and estoppel by contract claims against all defendants. Carver Federal appealed the failure to dismiss the breach of contract claims. If Carver Federal does not prevail in the appeal, Carver Federal intends to vigorously defend this action. On or about January 28, 2002, plaintiff Monique Barrow, a former employee, filed suit against Carver Federal in F-30 the United States District Court for the Southern District of New York alleging pregnancy discrimination in violation of the Family Medical Leave Act, New York State and New York City laws. The plaintiff seeks compensatory damages in an amount not less than $5 million, punitive, liquidated and other compensatory damages in an amount not less than $10 million, as well as reinstatement to her former position. Carver Federal has answered the complaint denying any liability, and in the opinion of management, after consultation with legal counsel, the lawsuit is without merit and the ultimate outcome of this matter is not expected to have a material adverse effect on the Company's results of operations, business operations or consolidated financial condition. NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than a forced or liquidation sale. Significant estimations were used by the Bank for the purpose of this disclosure. Estimated fair values have been determined by the Bank using the best available data and estimation methodology suitable for each category of financial instrument. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate their recorded book balances. The estimation methodologies used and the estimated fair values and carrying values of the Bank's financial instruments are set forth below: Cash and cash equivalents and accrued interest receivable The carrying amounts for cash and cash equivalents and accrued interest receivable approximate fair value because they mature in three months or less. Securities The fair values for securities available-for-sale, mortgage-backed securities held-to-maturity and investment securities held-to-maturity are based on quoted market or dealer prices, if available. If quoted market or dealer prices are not available, fair value is estimated using quoted market or dealer prices for similar securities. Loans receivable The fair value of loans receivable is estimated by discounting future cash flows, using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities of such loans. Deposits The fair value of demand, savings and club accounts is equal to the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market. Borrowings The fair values of advances from the Federal Home Loan Bank of New York, securities sold under agreement to repurchase and other borrowed money are estimated using the rates currently available to the Bank for debt with similar terms and remaining maturities. Commitments The fair market value of unearned fees associated with financial instruments with off-balance sheet risk at March 31, 2002 approximates the fees received. The fair value is not considered material. F-31 The carrying amounts and estimated fair values of the Bank's financial instruments at March 31, 2002 and 2001 are as follows:
At March 31, ----------------------------------------------------------- 2002 2001 -------------------------- --------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ---------- ---------- ---------- ---------- (In thousands) Financial Assets: Cash and cash equivalents $ 34,851 $ 34,851 $ 31,758 $ 31,758 Securities available-for-sale $ 39,663 $ 39,401 $ 19,926 $ 19,926 Investment securities held-to-maturity $ 15,643 $ 15,716 $ 24,996 $ 26,089 Mortgage backed securities $ 49,942 $ 50,420 $ 42,866 $ 42,842 Loans receivable $ 289,114 $ 300,251 $ 283,437 $ 290,140 Accrued interest receivable $ 2,804 $ 2,804 $ 2,541 $ 2,541 Financial Liabilities: Deposits $ 324,954 $ 324,982 $ 279,424 $ 258,920 Securities sold under agreements to repurchase -- -- $ 4,930 $ 4,930 Advances from Federal Home Loan Bank of New York $ 75,262 $ 74,375 $ 100,299 $ 105,421 Other borrowed money $ 389 $ 384 $ 371 $ 371 Commitments -- -- -- --
Limitations The fair value estimates are made at a discrete point in time based on relevant market information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no quoted market value exists for a significant portion of the Bank's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair value estimates are based on existing off balance sheet financial instruments without attempting to value anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment and advances from borrowers for taxes and insurance. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair values. F-32 NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of unaudited quarterly financial data for the fiscal years ended March 31, 2002 and 2001:
Three Months Ended --------------------------------------------------------------------- June 30 September 30 December 31 March 31 ------------ ------------ ------------ ------------ (In thousands, except per share data) Fiscal 2002 Interest income $ 7,049 $ 7,024 $ 7,162 $ 7,020 Interest expense (3,387) (3,233) (2,959) (2,469) Net interest income 3,662 3,791 4,203 4,551 Provision for loan losses (225) (225) (225) (225) Non-interest income 1,420 476 1,976 613 Non-interest expense (3,419) (3,438) (3,836) (3,505) Income tax expense (273) (115) (402) (91) ------------ ------------ ------------ ------------ Net income $ 1,165 $ 489 $ 1,716 $ 1,343 ============ ============ ============ ============ Earnings per common share Basic 0.49 0.19 0.73 0.57 Diluted 0.47 0.19 0.69 0.53 ============ ============ ============ ============ Fiscal 2001 Interest income $ 7,082 $ 7,082 $ 7,197 $ 6,946 Interest expense (3,393) (3,497) (3,745) (3,643) Net interest income 3,689 3,585 3,452 3,303 Provision for loan losses (443) (450) (450) (450) Non-interest income 681 1,264 498 491 Non-interest expense (3,754) (3,941) (3,942) (3,824) Income taxes (expense) benefit (24) (178) 45 59 ------------ ------------ ------------ ------------ Net income (loss) $ 149 $ 280 $ (397) $ (421) ============ ============ ============ ============ Earnings (loss) per common share Basic 0.04 0.10 (0.20) (0.21) Diluted 0.04 0.10 (0.20) (0.21) ============ ============ ============ ============
F-33 NOTE 16. CARVER BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL STATEMENTS CONDENSED STATEMENTS OF FINANCIAL CONDITION AS OF MARCH 31, --------------------- 2002 2001 -------- -------- (Dollars in thousands) ASSETS Cash on deposit with the Bank $ 439 $ 2,128 Investment in the Bank 37,567 30,360 -------- -------- Total assets $ 38,006 $ 32,488 ======== ======== LIABILITIES Accounts payable to the Bank $ 14 $ 118 Other liabilities 1,250 274 -------- -------- Total liabilities 1,264 392 Stockholders' equity 36,742 32,096 -------- -------- Total liabilities and stockholders' equity $ 38,006 $ 32,488 ======== ======== CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31, -------------------------------------- 2002 2001 2000 -------- -------- -------- (In thousands) INCOME Equity in net income (loss) from the Bank $ 6,247 $ 624 $ (413) Equity in net income (loss) from Alhambra Holding -- -- 720 Interest income from deposit with the Bank 33 48 77 Interest income from promissory note -- -- 12 Other income -- -- 13 Total income 6,280 672 409 EXPENSES Salaries and employee benefits 82 64 113 Legal expense 236 233 659 Shareholder expense 296 510 432 Other 72 156 340 -------- -------- -------- Total expense 686 963 1,544 Income (loss) before income taxes 5,594 (291) (1,135) Income tax expense 881 98 -- -------- -------- -------- Net income (loss) $ 4,713 $ (389) $ (1,135) ======== ======== ========
F-34 CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, -------------------------------------- 2002 2001 2000 -------- -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 4,714 $ (389) $ (1,135) Adjustments to reconcile net loss to net cash provided by operating activities: Equity in net (income) loss of the Bank (6,247) (624) 413 Equity in net income of Alhambra Holding -- -- (720) Decrease (increase) in accounts receivable -- 3 (3) Decrease (increase) in promissory note receivable -- 50 (50) Increase (decrease) in accounts payable to Bank (104) 45 73 Increase (decrease) in other liabilities 976 (802) 914 Allocation of ESOP Stock and MRP activity 206 203 341 Other, net (845) (203) (25) -------- -------- -------- Net cash provided by operating activities (1,300) (1,717) (192) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the disposition of Alhambra Building -- 2,136 -- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of preferred stock -- -- 2,366 Purchase of treasury stock - net (77) (61) -- Dividends paid (312) (298) (106) Decrease in unrealized loss on investments -- -- -- -------- -------- -------- Net cash (used in) provided by financing activities (389) (359) 2,260 -------- -------- -------- Net (decrease) increase in cash (1,689) 60 2,068 Cash and cash equivalents - beginning 2,128 2,068 -- -------- -------- -------- Cash and cash equivalents - ending $ 439 $ 2,128 $ 2,068 ======== ======== ========
NOTE 17. RECENT ACCOUNTING PRONOUNCEMENTS ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective April 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The statement requires that all derivative instruments be recorded on the balance sheet at fair value. However, the accounting for changes in fair value of the derivative instrument depends on whether the derivative instrument qualifies as a hedge. If the derivative instrument qualifies as a hedge, the accounting treatment varies based on the type of risk being hedged. If the derivative instrument does not qualify as a hedge, changes in fair value are reported in earnings when they occur. Under SFAS 133, an entity that elects to apply hedge accounting is required to establish, at the inception of the hedge, the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. Upon the adoption of SFAS 133 on April 1, 2001 the Bank transferred $45.7 million of securities from held-to-maturity to available-for-sale. SFAS 133 did not have a material impact on the consolidated financial statements, however, future volatility of earnings and other comprehensive income may result due to management's use of derivatives in connection with potential hedging strategies and changes in market values of derivatives and hedged items. F-35 ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 140"), a replacement of Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS 140 revised the standards of accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS 125's provisions without reconsideration. SFAS 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes the financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS 140 applies generally to transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Requirements for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral apply to fiscal years ending after December 15, 2000. The adoption of SFAS 140 did not have a material impact on the financial condition or results of operations. BUSINESS COMBINATIONS In June 2001, the FASB issued SFAS No. 141 "Business Combinations" ("SFAS 141") effective June 30, 2001. SFAS 141 addresses the financial accounting and reporting for business combinations and requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method of accounting and prohibits the use of pooling-of-interests method of accounting. Pooling transactions initiated prior to that date were not affected. SFAS 141 also establishes guidelines as to how the purchase method is to be applied. This guidance is similar to that previously contained in APB Opinion No. 16, however, SFAS 141 establishes additional disclosure requirements for transactions occurring after the effective date. SFAS 141 also requires identifiable intangible assets acquired in a business combination to be recognized as an asset apart from goodwill if they meet certain criteria. The requirements of SFAS 141 did not have a material impact on the financial condition or results of operations. GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses the initial recognition and measurement of intangible assets acquired individually or with a group of other assets not constituting a business combination. In accordance with the provisions of SFAS 142, all goodwill and identifiable intangible assets identified as having an indefinite useful life, including those acquired before its effective date, will no longer be amortized but will be assessed for impairment at least annually by applying a fair-value based test as defined in the Statement. SFAS 142 requires that on acquired intangible assets having an estimated useful life, be separately recognized and amortized over their estimated useful lives. Intangible assets that remain subject to amortization shall continue to be reviewed for impairment in accordance with previous pronouncements. Additionally, SFAS 142 requires that an initial impairment assessment on all goodwill recognized in the consolidated financial statements be completed within six months of the statements adoption to determine if a transition impairment charge needs to be recognized. Management has performed the initial impairment assessment as of March 31, 2002, and determined that no impairment charge is warranted. The consolidated balance sheets and consolidated statements of income, presented herein disclose the identifiable intangible assets that were originally recognized separate from goodwill. Effective April 1, 2002, goodwill will no longer be amortized, however, identifiable intangible assets will continue to be amortized over the estimated useful lives. Amortization of identifiable intangible assets is estimated to be $212 thousand in fiscal 2003. F-36 ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Management does not anticipate that the adoption of this statement will have a significant effect on the Company's earnings or financial position. ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and resolves accounting and implementation issues related to previous pronouncements. More specifically, it: (a) eliminates the allocation of goodwill to long-lived assets to be tested for impairment; and (b) details both a probability - weighted and primary asset approach to estimate cash flows in testing for impairment of a long-lived asset. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. Management does not anticipate that the adoption of this statement will have a significant effect on the Company's earnings or financial position. F-37 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 3.1 Certificate of Incorporation of Carver Bancorp, Inc. (1) 3.2 Bylaws of Carver Bancorp, Inc. (1) 4.1 Stock Certificate of Carver Bancorp, Inc. (1) 4.2 Federal Stock Charter of Carver Federal Savings Bank 4.3 Bylaws of Carver Federal Savings Bank 4.4 Amendments to Bylaws of Carver Federal Savings Bank (3) 4.5 Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock (5) 4.6 Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock (5) 10.1 Carver Bancorp, Inc. 1995 Stock Option Plan, effective as of September 12, 1995 (1) 10.2 Carver Federal Savings Bank Retirement Income Plan, as amended and restated effective as of January 1, 1989 (1) 10.3 Carver Federal Savings Bank 401(k) Savings Plan in RSI Retirement Trust, as amended and restated effective as of May 1, 1993 (1) 10.4 Carver Bancorp, Inc. Employee Stock Ownership Plan, effective as of January 1, 1993 (1) 10.5 Carver Federal Savings Bank Deferred Compensation Plan, effective as of August 10, 1993 (1) 10.6 Carver Federal Savings Bank Retirement Plan for Nonemployee Directors, effective as of October 24, 1994 (1) 10.7 Carver Bancorp, Inc. Management Recognition Plan, effective as of September 12, 1995 (1) 10.8 Carver Bancorp, Inc. Incentive Compensative Plan, effective as of September 12, 1995 (1) 10.9 Employment Agreement by and between Carver Federal Savings Bank and Thomas L. Clark, entered into as of April 1, 1997 (2) 10.10 Employment Agreement by and between Carver Bancorp, Inc. and Thomas L. Clark, entered into as of April 1, 1997 (2) 10.11 Employment Agreement by and between Carver Federal Savings Bank and Deborah C. Wright, entered into as of June 1, 1999 (4) E-1 Exhibit Number Description - -------------- ----------- 10.12 Employment Agreement by and between Carver Bancorp, Inc. and Deborah C. Wright, entered into as of June 1, 1999 (4) 10.13 Securities Purchase Agreement by and among Carver Bancorp, Inc., Morgan Stanley & Co. Incorporated and Provender Opportunities Fund L.P. (6) 10.14 Registration Rights Agreement by and among Carver Bancorp, Inc., Morgan Stanley & Co. Incorporated and Provender Opportunities Fund L.P. (6) 10.15 Settlement Agreement and Mutual Release by and among BBC Capital Market, Inc., The Boston Bank of Commerce, Kevin Cohee and Teri Williams; Carver Bancorp, Inc., Deborah C. Wright, David N. Dinkins, Linda H. Dunham, Robert J. Franz, Pazel G. Jackson, Jr., Herman Johnson and David R. Jones; Morgan Stanley & Co., Incorporated; and Provender Opportunities Fund, L.P. and Frederick O. Terrell (6) 10.16 Amendment to the Carver Bancorp, Inc. 1995 Stock Option Plan (7) 10.17 Amended and Restated Employment Agreement by and between Carver Federal Savings Bank and Deborah C. Wright, entered into as of June 1, 1999 (8) 10.18 Amended and Restated Employment Agreement by and between Carver Bancorp, Inc. and Deborah C. Wright, entered into as of June 1, 1999 (8) 10.19 Form of Letter Employment Agreement between Executive Officers and Carver Bancorp, Inc. (8) 10.20 Employment Agreement by and between Carver Federal Savings Bank and Catherine A. Papayiannis, entered into as of April 22, 2002 21.1 Subsidiaries of the Registrant (6) 23.2 Consent of KPMG LLP - -------------------------- (1) Incorporated herein by reference to Registration Statement No. 333-5559 on Form S-4 of Carver Bancorp, Inc., filed with the Securities and Exchange Commission on June 7, 1996. (2) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997. (3) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1998. (4) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1999. (5) Incorporated herein by reference to the Exhibits to the Registrant's Current Report on Form 8-K, dated January 14, 2000. (6) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2000. E-2 (7) Incorporated herein by reference to the Registrant's Proxy Statement, dated January 25, 2001. (8) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2001. E-3 EX-10.20 3 d50953_ex10-20.txt EMPLOYMENT AGREEMENT Exhibit 10.20 BANK EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of April 22, 2002, by and between CARVER FEDERAL SAVINGS BANK, a savings bank organized and operating under the federal laws of the United States and having an office at 75 West 125th Street, New York, New York 10027 ("Bank") and Catherine A. Papayiannis, an individual residing at 204 Battery Avenue, Brooklyn New York 11209 ("Executive"). WITNESSETH: WHEREAS, for purposes of securing the Executive's services for the Bank, the Board of Directors of the Bank has approved and authorized the execution of this Agreement with the Executive; WHEREAS, Executive is willing to serve the Bank on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions hereinafter set forth, the Bank and Executive hereby agree as follows: Section 1. Employment. The Bank agrees to employ Executive and Executive hereby agrees to such employment, during the period and upon the terms and conditions set forth in this Agreement. Section 2. Employment Period. (a) The terms and conditions of this Agreement shall be and remain in effect during the period of employment established under this Section 2 ("Employment Period") unless otherwise specified in this Agreement. The Employment Period shall be for an initial term of two years beginning on June 3, 2002 (the "Effective Date") and ending on the second anniversary date of this Agreement, plus such extensions, if any, as are provided pursuant to Section 2(b). The President and Chief Executive Officer of the Bank shall review the Executive's performance of services under this Agreement on an annual basis. (b) Prior to the first anniversary of the date of this Agreement and on each anniversary date thereafter (each, an "Anniversary Date"), the President and Chief Executive Officer shall advise the Board as to the Executive's performance of services hereunder and the Board shall review the terms of this Agreement and such advice and may, in the absence of objection from the Executive, approve a one-year extension of the Employment Agreement. In such event, the Employment Agreement shall be extended to the second anniversary of the relevant Anniversary Date. (c) Nothing in this Agreement shall be deemed to prohibit the President and Chief Executive Officer at any time from terminating Executive's employment during the Employment Period with or without prior notice for any reason; provided, however, that the Page 1 of 15 relative rights and obligations of the Bank and Executive in the event of any such termination shall be determined under this Agreement. Section 3. Duties. Executive shall serve as Executive Vice President and Chief Operating Officer of the Bank, having such power, authority and responsibility, and performing such duties as are reasonably prescribed by the President and Chief Executive Officer. Executive shall devote her full business time and attention (other than during weekends, holidays, approved vacation periods, and periods of illness or approved leaves of absence) to the business and affairs of the Bank and shall use her best efforts to advance the interests of the Bank. Section 4. Base Salary. In consideration for the services to be rendered by Executive hereunder, the Bank shall pay to her a base salary at an initial annual rate of Two Hundred and Ten Thousand Dollars ($210,000.00), payable in approximately equal installments in accordance with the Bank's customary payroll practices for senior officers. Increases in annual base salary will be considered and discussed with the Executive upon annual assessment of performance. Section 5. Incentive Compensation. (a) Upon the Effective Date of this Agreement, the Executive shall be granted incentive stock options under the Bank's 1995 Stock Option Plan to purchase up to Five Thousand (5,000) shares of the Bank's common stock, par value $.01 per share ("Options"), at an exercise price equal to the "Market Value" (as such term is defined in the 1995 Stock Option Plan) of a share of Carver Bancorp, Inc.'s common stock on the date of grant, which shall be vested 33 1/3% on the first anniversary date of this Agreement, 66 2/3% on the second anniversary date of this Agreement and fully vested on the third anniversary date of this Agreement, so long as the Executive is employed by the Bank on each such anniversary on which vesting occurs. The foregoing grant of Options to the Executive (and all rights and privileges relating to such Options) shall be memorialized in a written stock option agreement to be entered into by and between the Carver Bancorp, Inc. and the Executive which shall be governed by, and incorporate by reference, the terms and provisions of the Carver Bancorp, Inc.'s 1995 Stock Option Plan and the terms of this Agreement, as applicable. (b) The Executive shall also be granted annual incentive stock options under the Bank's 1995 Stock Option Plan in the amount of (i) Ten Thousand (10,000) shares on the Effective Date of this Agreement, which shall be vested 33 1/3% on the first anniversary date of this Agreement, 66 2/3% on the second anniversary date of this Agreement and fully vested on the third anniversary date of this Agreement, so long as the Executive is employed by the Bank on each such anniversary on which vesting occurs and (ii) Ten Thousand (10,000) shares on the first anniversary of the Effective Date of this Agreement, which shall be vested 33 1/3% on the second anniversary date of this Agreement, 66 2/3% on the third anniversary date of this Agreement and fully vested on the fourth anniversary date of this Agreement, so long as the Executive is employed by the Bank on each such anniversary on which vesting occurs. The foregoing grants of Options to the Executive (and all rights and privileges relating to such Options) shall be memorialized in a written stock option agreement to be entered into by and between the Carver Bancorp, Inc. and the Executive which shall be governed by, and incorporate by reference, the Page 2 of 15 terms and provisions of the Carver Bancorp, Inc.'s 1995 Stock Option Plan and the terms of this Agreement, as applicable. (c) The Executive shall also be eligible to receive an annual bonus payment ("Incentive Compensation Award") in the amount of 30% of her annual base salary for each full fiscal year while she is employed by the Bank during the Employment Period. The Incentive Compensation Award shall be paid to the Executive (less all applicable tax withholding) in a single sum cash payment as soon as practicable after the last day of the fiscal year if Executive is employed on the last day of such fiscal year. The Incentive Compensation Award shall be based on the Executive's attainment of performance goals as determined by the Board of Directors with the advice of the President and Chief Executive Officer, as illustrated in Appendix A; provided, however, that the Executive shall receive an Incentive Compensation Award of no less that 15% of her base salary for the portion of the fiscal year beginning on the Effective Date regardless of whether such performance goals are met for such period so long as Executive is employed on the last day of such fiscal year, and such payment shall be made as soon as practicable after the end of such fiscal year. (d) Upon the Effective Date of this Agreement, the Executive shall also be granted a restricted stock award ("Restricted Stock Award") under the Carver Bancorp, Inc.'s Management Recognition Plan with respect to Three Thousand (3,000) shares of the Bank's common stock which shall be vested 33 1/3% on the first anniversary date of this Agreement, 66 2/3% on the second anniversary date of this Agreement and fully vested on the third anniversary date of this Agreement, so long as the Executive is employed by the Bank on each such anniversary on which vesting occurs. The Restricted Stock Award (and all rights and privileges relating to such Award) shall be memorialized in a written Restricted Stock Award Notice and Agreement to be entered into between Carver Bancorp, Inc. and the Executive which shall be governed by, and incorporate by reference, the terms and provisions of Carver Bancorp, Inc.'s Management Recognition Plan and the terms of this Agreement, as applicable. (e) The Bank shall make a one-time payment to the Executive equal to $50,000. Such amount shall be payable with her first paycheck. This payment is expressly conditioned upon the Executive's agreement to repay this amount to the Bank in the event that the Executive is terminated within twelve months of the Executive's start date under circumstances described in section 10. (f) All amounts paid hereunder shall be subject to tax withholding by the Bank as required by law. Section 6. Employee Benefit Plans and Programs. During the Employment Period, Executive shall be treated as an employee of the Bank and shall be entitled to participate in and receive benefits under the Carver Federal Savings Bank Employee Stock Ownership Plan and the Bank's 401(k) Plan, any and all group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans, and any other employee benefit and compensation plans (including, but not limited to, any incentive compensation plans or programs, stock option and appreciation rights plans and restricted stock plans) (collectively, "Benefit Plans") as may from time to time be maintained by, or cover employees of, the Bank, in accordance with the terms and conditions of such employee benefit plans and programs and compensation plans and programs and consistent with the Bank's customary practices. The Executive shall be eligible for 20 paid vacation days Page 3 of 15 during each 12 month period, in accordance with the Bank's policies, and the Bank and the Executive agree that the Executive shall use 13 of her vacation days in July 2002. Section 7. Indemnification. (a) To the maximum extent permitted under Section 545.121 of regulations issued by the Office of Thrift Supervision ("OTS") during the Employment Period and for a period of six (6) years thereafter, the Bank shall cause Executive to be covered by and named as an insured under any policy or contract of insurance obtained by it to insure its directors and officers against personal liability for acts or omissions in connection with service as an officer or director of the Bank or service in other capacities at the request of the Bank. The coverage provided to Executive pursuant to this Section 7 shall be of the same scope and on the same terms and conditions as the coverage (if any) provided to other officers or directors of the Bank. (b) To the maximum extent permitted under Section 545.121 of the regulations issued by the OTS, during the Employment Period and for a period of six (6) years thereafter, the Bank shall indemnify Executive against and hold her harmless from any costs, liabilities, losses and exposures to the fullest extent and on the most favorable terms and conditions that similar indemnification is offered to any director or officer of the Bank or any subsidiary or affiliate thereof. Section 8. Outside Activities. Executive may serve as a member of the boards of directors of such business, community and charitable organizations as she may disclose to and as may be approved by the President and Chief Executive Officer, which approval shall not be unreasonably withheld or delayed; provided, however, that such service shall not materially interfere with the performance of her duties under this Agreement. Executive may also engage in personal business and investment activities which do not materially interfere with the performance of her duties hereunder; provided, however, that such activities are not prohibited under any code of conduct or investment or securities trading policy established by the Bank and generally applicable to all similarly situated executives. Executive may also serve as an officer of Carver Bancorp, Inc., parent of the Bank, on such terms and conditions as the Bank and Carver Bancorp, Inc. may mutually agree upon, and such service shall not be deemed to materially interfere with Executive's performance of her duties hereunder or otherwise result in a material breach of this Agreement. Section 9. Working Facilities and Expenses. Executive's principal place of employment shall be at the Bank's executive offices at the address first above written, or at such other location as the Bank may designate. The Bank shall provide Executive at her principal place of employment with a private office, secretarial services, reimbursement or direct payment for business-related parking expenses, as required, in an amount up to Two Hundred Dollars ($200.00) per month and other support services and facilities suitable to her position with the Bank and necessary or appropriate in connection with the performance of her assigned duties under this Agreement. For purposes of fulfilling her duties hereunder, the Bank shall provide the Executive with the use of a laptop computer for home use, cellular telephone and reimbursement for telephone service, handheld internet device and reimbursement for service and reimbursement for internet access for home use; provided, Page 4 of 15 however, that the Executive shall return any equipment to the Bank on termination of her employment. The Bank shall reimburse Executive for her ordinary and necessary business, travel and entertainment expenses incurred in connection with the performance of her duties under this Agreement, in accordance with its reimbursement policies. Section 10. Termination of Employment. Executive shall be entitled to the severance benefits described in Section 11 hereof in the event that her employment with the Bank terminates during the Employment Period under any of the following circumstances: (a) the termination by the Bank of Executive's employment hereunder for any reason other than Disability, as defined in Section 12 hereof, Retirement, as defined in Section 13(d) hereof, or Cause, as defined in Section 13(a) hereof; (b) Executive's voluntary resignation from employment with the Bank upon forty-five (45) days written notice given within six full calendar months following one of the following events: (A) the failure of the President and Chief Executive Officer to recommend that the Board appoint or reappoint Executive to the office of Chief Operating Officer of the Bank or failure of the Board to make such appointment or re-appointment; (B) the Bank materially reduces the Executive's functions, duties, or responsibilities prescribed in Section 3 of this Agreement, and the Executive gives thirty (30) days written notice to the Bank specifying such material reduction, unless, during such thirty (30) day period, the Bank restores the functions, duties or responsibilities to the Executive; or (C) the Bank materially breaches any term, condition or covenant contained in this Agreement (including, without limitation, any reduction of Executive's rate of base salary in effect from time to time), and the Executive gives thirty (30) days written notice to the Bank specifying such material breach unless, during such thirty (30) day period, the Bank cures such failure and, if the breach is a failure to make payment, makes any payments due; or (D) the relocation of Executive's principal place of employment from its location as of the Effective Date such that the Executive's commuting distance is more than fifty (50) miles from her home at the address hereinabove written. Section 11. Severance Benefits. Upon the termination of Executive's employment with the Bank under circumstances described in Section 10 of this Agreement, the Bank shall pay and provide to Executive (or, in the event of her death, to her estate): (a) her earned but unpaid compensation (including, without limitation, all items which constitute wages under Section 190.1 of the New York Labor Law and the payment Page 5 of 15 of which is not otherwise provided for under this Section 11) as of the date of the termination of her employment with the Bank, such payment to be made at the time and in the manner prescribed by law applicable to the payment of wages but in no event later than thirty (30) days after termination of employment; (b) the benefits, if any, to which she is entitled as a former employee under the Benefit Plans maintained for the benefit of the Bank's officers and employees; (c) continued group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance benefits and after taking into account the coverage provided by any subsequent employer, if and to the extent necessary to provide coverage for Executive and her family for a period of one year; and (d) within thirty (30) days following her termination of employment with the Bank, a lump sum payment in an amount equal to one year's base salary as in effect at that time; provided, however, that if the termination occurs before the first anniversary of the Effective Date, such amount shall be reduced by a portion of the $50,000 payment under section 5(e), which is $50,000 multiplied by a fraction, the numerator of which is twelve minus the number of full months employed by the Bank and the denominator of which is 12; (e) if the termination occurs more than one year after the Effective Date or occurs following a Change of Control, an amount equal to the Incentive Compensation Award during any full fiscal years remaining in the term of the Agreement, such payment to be made within thirty (30) days following Executive's termination of employment; (f) if the termination occurs more than one year after the Effective Date or occurs following a Change of Control, at the election of Executive made within thirty (30) days following her termination of employment, upon the surrender of options or appreciation rights issued to Executive under any stock option and appreciation rights plan or program maintained by, or covering employees of, the Bank, a lump sum payment in an amount equal to the product of: (i) the excess of (A) the fair market value of a share of stock (as determined under the stock option plan under which it was granted) of the same class as the stock subject to the option or appreciation right on the date of termination of employment, determined as of the date of termination of employment, over (B) the exercise price per share for such option or appreciation right, as specified in or under the relevant plan or program; multiplied by (ii) the number of shares with respect to which options or appreciation rights are being surrendered. For purposes of section 11(f)(i), the term "exercise price" means the average of the highest and lowest selling price per share on the date on which such options or appreciation rights were granted (or, if none, the mean between the bid and the ask price on such date). For purposes of this Section 11(f) and for purposes of determining Executive's right following her termination of employment with the Bank to exercise any options or appreciation rights not surrendered pursuant hereto, Executive shall be deemed fully vested in all options and appreciation rights under any stock option or appreciation rights plan or program maintained by, or covering employees of, the Bank, even if Executive is not vested under such plan or program; and Page 6 of 15 (g) if the termination occurs more than one year after the Effective Date or occurs following a Change of Control, at the election of the Executive made within thirty (30) days following Executive's termination of employment, upon the surrender of any shares awarded to Executive under any restricted stock plan maintained by, or covering employees of, the Bank or the Bank, a lump sum payment in an amount equal to the product of: (i) the fair market value of a share of stock (as determined under the plan under which it was granted) of the same class of stock granted under such plan on the date of termination of employment, determined as of the date of Executive's termination of employment; multiplied by (ii) the number of shares which are being surrendered. For purposes of this Section 11(g) and for purposes of determining Executive's right following her termination of employment with the Bank to any stock not surrendered pursuant hereto, Executive shall be deemed fully vested in all shares awarded under any restricted stock plan maintained by, or covering employees of, the Bank, even if she is not vested under such plan. (h) The Bank and Executive hereby stipulate that the damages which may be incurred by Executive following any such termination of employment under the circumstances described in Section 10 of this Agreement are not capable of accurate measurement as of the date first above written and that the payments and benefits contemplated by this Section 11 constitute reasonable damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to Executive's efforts, if any, to mitigate damages. The Bank and the Executive further agree that payment hereunder shall be reduced to the extent necessary so that no such payment or any other payment to the Executive is subject to the excise tax under Section 4999 of the Code. Section 12. Termination for Disability. (a) If, as a result of Executive's incapacity due to physical or mental illness, she shall have been substantially absent from her duties with the Bank for six (6) of any 12 consecutive month period, the Bank may terminate Executive's employment for "Disability" and Executive shall be entitled to the payments and benefits, if any, provided under any disability plan for which he is eligible on the effective date of this Agreement. "Disability" shall mean a condition of total incapacity, mental or physical, for the performance of Executive's stated duties hereunder, which incapacity, is likely to be permanent. Section 13. Termination without Additional Bank Liability. In the event that Executive's employment with the Bank shall terminate during the Employment Period on account of: (a) the discharge of Executive for "Cause," which, for purposes of this Agreement shall mean personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses), or final cease and desist order, or any material breach of this Agreement; or (b) Executive's voluntary resignation from employment with the Bank for reasons other than those specified in Section 10; or Page 7 of 15 (c) Executive's death; or (d) Executive's "Retirement," which, for purposes of this Agreement shall mean her voluntary termination at a time when she is eligible for a normal retirement benefit under the qualified defined benefit pension plan or plans of the Bank, or if no such plan is currently maintained, Executive's voluntary termination at or after the attainment of age 65; then the Bank shall have no further obligations under this Agreement, other than the payment to Executive (or, in the event of her death, to her estate) of her earned but unpaid salary and, in the event of the Executive's death or Retirement, her earned but unpaid Incentive Compensation Award, if any, as of the date of the termination of her employment, and the provision of such other benefits, if any, to which she is entitled as a former employee under the employee benefit plans and programs and compensation plans and programs maintained by, or covering employees of, the Bank. Section 14. Termination of Employment after Termination of Agreement In the event that the Bank does not approve an extension to the Agreement under section 2(b) and the Executive's employment terminates after the end of the term of the Agreement for the reasons specified in section 10, the Bank shall pay to the Executive the amounts listed in section 11(a), (b), (c) and (d) as soon as practicable after her termination of employment. Section 15. Change in Control. A Change in Control of the Bank ("Change in Control") shall be deemed to have occurred upon the happening of any of the following events: (a) approval by the stockholders of the Bank of a transaction that would result in the reorganization, merger or consolidation of the Bank, respectively, with one or more other persons, other than a transaction following which: (i) at least fifty-one percent (51%) of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least fifty-one percent (51%) of the outstanding equity ownership interests in the Bank; and (ii) at least fifty-one percent (51%) of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least fifty-one percent (51%) of the securities entitled to vote generally in the election of directors of the Bank; (b) the acquisition of all or substantially all of the assets of the Bank or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of the outstanding securities of the Bank entitled to vote generally in the election of directors by any person or by any persons acting in concert, or Page 8 of 15 approval by the stockholders of the Bank of any transaction which would result in such an acquisition; (c) a complete liquidation or dissolution of the Bank, or approval by the stockholders of the Bank of a plan for such liquidation or dissolution; (d) the occurrence of any event if, immediately following such event, at least fifty percent (50%) of the members of the Board do not belong to any of the following groups: (i) individuals who were members of the Board on the date of this Agreement; or (ii) individuals who first became members of the Board after the date of this Agreement either: (A) upon election to serve as a member of the Board by affirmative vote of three-quarters of the members of such Board, or of a nominating committee thereof, in office at the time of such first election; or (B) upon election by the stockholders of the Bank to serve as a member of the Board, but only if nominated for election by affirmative vote of three-quarters of the members of the Board, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board; or (e) any event which would be described in Section 14(a), (b), (c) or (d) if the term "Carver Bancorp, Inc." were substituted for the term "Bank" therein. In no event, however, shall a Change in Control be deemed to have occurred as a result of any acquisition of securities or assets of the Bank, Carver Bancorp, Inc., or a subsidiary of either of them, by the Bank, Carver Bancorp, Inc., or a subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this Section 15, the term "person" shall have the meaning assigned to it under Section 13(d)(3) or 14(d)(2) of the Exchange Act. Section 16. Covenant Not To Compete. Executive hereby covenants and agrees that, in the event of her termination of employment with the Bank prior to the expiration of the Employment Period for any reason other than the circumstances provided under Section 10 hereof, for a period of six months following the date of her termination of employment with the Bank (or, if less, for the remaining term of the Agreement), she shall not, without the written consent of the Bank which shall not be unreasonably withheld if it will not materially injure the Bank, become an officer, employee, consultant, director or trustee of any entity or any direct or indirect subsidiary or affiliate of any such entity, that directly competes with the Bank or any of its subsidiaries or affiliates (as reasonably determined by Page 9 of 15 the Bank) at the time of such termination of employment with the business of the Bank in any city, town or county in which the Bank has an office or has filed an application for regulatory approval to establish an office as of the date of Executive's termination of employment; provided, however, that if Executive's employment shall be terminated on account of Disability as provided in Section 12 of this Agreement, this Section 16 shall not prevent Executive from accepting any position or performing any services if (a) she first offers, by written notice, to accept a similar position with, or perform similar services for, the Bank on substantially the same terms and conditions and (b) the Bank declines to accept such offer within ten (10) days after such notice is given. Section 17. Confidentiality. Unless she obtains the prior written consent of the Bank, during the term of this Agreement and thereafter, Executive shall keep confidential and shall refrain from using for the benefit of herself, or any person or entity other than the Bank or any entity which is a subsidiary of the Bank or of which the Bank is a subsidiary, any material document or information (including, but not limited to, plans, customer lists and business proposals) obtained from the Bank, or from its parent or subsidiaries, in the course of her employment with any of them concerning their properties, operations, business or proposed business plans (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of her own) until the same ceases to be material (or becomes so ascertainable or available); provided, however, that nothing in this Section 17 shall prevent Executive, with or without the Bank's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, examination, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. Section 18. No Effect on Employee Benefit Plans or Programs. The termination of Executive's employment during the term of this Agreement or thereafter, whether by the Bank or by Executive, shall have no effect on the rights and obligations of the parties hereto under the Bank's qualified or non-qualified retirement, pension, savings, thrift, profit-sharing or stock bonus plans, group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Bank from time to time, except that in the event of Executive's termination for Cause, Executive's rights under any such plans shall be subject to Section 563.39 of regulations issued by the OTS. Section 19. Successors and Assigns. This Agreement will inure to the benefit of and be binding upon Executive, her legal representatives and testate or intestate distributees, and the Bank and its successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Bank may be sold or otherwise transferred. Failure of the Bank to obtain from any successor its express written assumption of the Bank's obligations hereunder at least sixty (60) days in advance of the scheduled effective date of any such succession shall be deemed a material breach of this Agreement. Page 10 of 15 Section 20. Notices. Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to Executive: Catherine A. Papayiannis 204 Battery Avenue Brooklyn, New York 11209 If to the Bank: Carver Federal Savings Bank 75 West 125th Street New York, New York 10027 Attention: President and Chief Executive Officer with a copy to: Thacher Proffitt & Wood 11 West 42nd Street New York, New York 10036 Attention: Kofi Appenteng, Esq. Section 21. Severability. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. Section 22. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. Section 23. Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. Page 11 of 15 Section 24. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the federal laws of the United States and, to the extent that federal law is inapplicable, in accordance with the laws of the State of New York applicable to contracts entered into and to be performed entirely within the State of New York. Section 25. Headings and Construction. The headings of Sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any Section. Any reference to a Section number shall refer to a Section of this Agreement, unless otherwise stated. Section 26. Entire Agreement, Modifications. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. Section 27. Required Regulatory Provisions. The following provisions are included for the purpose of complying with various laws, rules and regulations applicable to the Bank: (a) Notwithstanding anything herein contained to the contrary, in no event shall the aggregate amount of compensation payable to the Executive under Section 11 hereof exceed three times the Executive's average annual total compensation for the last five consecutive calendar years to end prior to her termination of employment with the Bank (or for her entire period of employment with the Bank if less than five calendar years) as determined in accordance with OTS RB27a, as such may be amended from time to time. (b) Notwithstanding anything herein contained to the contrary, any payments to the Executive by the Bank, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. ss.1828(k), and any regulations promulgated thereunder. (c) Notwithstanding anything herein contained to the contrary, if the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the affairs of the Bank pursuant to a notice served under Section 8(e)(3) or 8(g)(1) of the FDI Act, 12 U.S.C. ss.1818(e)(3) or 1818(g)(1), the Bank's obligations under this Agreement shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in such notice are dismissed, the Bank, in its discretion, may (i) pay to the Executive all or part of the compensation withheld while the Bank's obligations hereunder were suspended and (ii) reinstate, in whole or in part, any of the obligations which were suspended. (d) Notwithstanding anything herein contained to the contrary, if the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the FDI Act, 12 U.S.C. ss.1818(e)(4) or (g)(1), all prospective obligations of the Bank under this Agreement shall Page 12 of 15 terminate as of the effective date of the order, but vested rights and obligations of the Bank and the Executive shall not be affected. (e) Notwithstanding anything herein contained to the contrary, if the Bank is in default (within the meaning of Section 3(x)(1) of the FDI Act, 12 U.S.C. ss.1813(x)(1), all prospective obligations of the Bank under this Agreement shall terminate as of the date of default, but vested rights and obligations of the Bank and the Executive shall not be affected. (f) Notwithstanding anything herein contained to the contrary, all prospective obligations of the Bank hereunder shall be terminated, except to the extent that a continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Director of the Office of Thrift Supervision ("OTS") or the Director's designee or the Federal Deposit Insurance Corporation ("FDIC"), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the FDI Act, 12 U.S.C. ss.1823(c); (ii) by the Director of the OTS or the Director's designee at the time such Director or designee approves a supervisory merger to resolve problems related to the operation of the Bank or when the Bank is determined by such Director to be in an unsafe or unsound condition. The vested rights and obligations of the parties shall not be affected. Section 28. Non-duplication. In the event that Executive shall perform services for Carver Bancorp, Inc. or any other direct or indirect subsidiary of the Bank or Carver Bancorp, Inc., any compensation or benefits provided to Executive by such other employer for services rendered to it shall be applied to offset the obligations of the Bank hereunder, it being intended that this Agreement set forth the aggregate compensation and benefits payable to Executive for all services to the Bank and all of its direct or indirect affiliates. The Executive shall provide to the Bank a reasonable accounting of her services provided to Carver Bancorp, Inc. The expenses for such services shall be charged to Carver Bancorp, Inc., and the Bank shall be reimbursed by Carver Bancorp, Inc. for any payment it may make for such services. Section 29. No Legal Restrictions. The Executive is not a party to any contract or subject to any other legal restriction that would prevent or restrict the Executive's employment by the Bank or Carver Bancorp, Inc. or prevent or restrict fulfillment of the terms and conditions of this Agreement. Page 13 of 15 IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed and Executive has hereunto set her hand, all as of the day and year first above written. /s/ Catherine A. Papayiannis ----------------------------- CATHERINE A. PAPAYIANNIS ATTEST: CARVER FEDERAL SAVINGS BANK By /s/ Linda J. Dunn By Deborah C. Wright --------------------------- -------------------------------- Secretary Name: Deborah C. Wright Title: President & CEO [Seal] Page 14 of 15 STATE OF NEW YORK ) :ss.: COUNTY OF NEW YORK ) On this 24th day of April, 2002, before me personally came Catherine A. Papayiannis, to me known, and known to me to be the individual described in the foregoing instrument, who, being by me duly sworn, did depose and say that she resides at the address set forth in said instrument, and that she signed her name to the foregoing instrument. /s/ Robert Paul Rich -------------------------------- Notary Public Robert Paul Rich Notary Public State of New York No. 02RI4746994 Qualified in Kings County Commission Expires April 30, 2003 [SEAL] STATE OF NEW YORK ) :ss.: COUNTY OF NEW YORK ) On this 29th day of April, 2002, before me personally came Deborah C. Wright, to me known, who, being by me duly sworn, did depose and say that she resides at 31 East 12th Street, Apt. 6A, New York, NY 10003, that she is President and Chief Executive Officer of CARVER FEDERAL SAVINGS BANK, the savings bank described in and which executed the foregoing instrument; that she knows the seal of said corporation; that the seal affixed to said instrument is such seal; that it was so affixed by order of the Board of Directors of said savings bank; and that she signed her name thereto by like order. /s/ Margaret D. Peterson ---------------------------------- Notary Public Margaret D. Peterson Notary Public, State of New York Registration #01PE6044210 Qualified in Kings County Commission Expires July 3, 2002 Page 15 of 15 EX-23.2 4 d50953_ex23-2.txt CONSENT OF KPMG LLP Exhibit 23.2 LETTERHEAD OF KPMG LLP Independent Auditor's Report To the Board of Directors and Stockholders Carver Bancorp, Inc.: We consent to incorporation by reference in the Registration Statement on Form S-8 of Carver Bancorp, Inc. of our report dated May 10, 2002 relating to the consolidated statements of financial condition of Carver Bancorp, Inc. and subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2002, which report appears in the March 31, 2002 Annual Report on Form 10-K of Carver Bancorp, Inc. KPMG LLP June 28, 2002 -----END PRIVACY-ENHANCED MESSAGE-----