-----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, Tc7WElKuNbeZJ8/5WKjWvftHFVoxf5AIeH1HrJZfYD+Lv/VtD4WiAjpKVIuCJIi2 n4s/USui8vyHGlNfKp3W8Q== /in/edgar/work/0000950123-00-006564/0000950123-00-006564.txt : 20000718 0000950123-00-006564.hdr.sgml : 20000718 ACCESSION NUMBER: 0000950123-00-006564 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000714 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARVER BANCORP INC CENTRAL INDEX KEY: 0001016178 STANDARD INDUSTRIAL CLASSIFICATION: [6035 ] IRS NUMBER: 133904174 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13007 FILM NUMBER: 673547 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 e10-k.txt CARVER BANCORP, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-21487 CARVER BANCORP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3904174 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 75 WEST 125TH STREET, NEW YORK, NEW YORK 10027 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 876-4747 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE AMERICAN STOCK EXCHANGE (TITLE OF CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of May 31, 2000, there were 2,314,275 shares of Common Stock of the registrant issued and outstanding. The aggregate market value of the Registrant's common stock held by non-affiliates (based on the closing sales price of $8.75 per share of the registrant's Common Stock on May 31, 2000) was approximately $16.1 million. DOCUMENTS INCORPORATED BY REFERENCE NONE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company (as defined below) that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include changes in general, economic and market, legislative and regulatory conditions, the development of an adverse interest rate environment that adversely affects the interest rate spread or other income anticipated from the Company's operations and investments, the ability of the Company to originate and purchase loans with attractive terms and acceptable credit quality and the ability of the Company to realize cost efficiencies. ITEM 1. BUSINESS. GENERAL CARVER BANCORP, INC. Carver Bancorp, Inc., a Delaware corporation (the "Holding Company"), is the holding company for Carver Federal Savings Bank, a federally chartered savings bank (the "Bank" or "Carver Federal"). Collectively, the Holding Company and the Bank are referred to herein as the "Company" or "Carver." On October 17, 1996, the Bank completed its reorganization into a holding company structure (the "Reorganization") and became the wholly owned subsidiary of the Holding Company. Pursuant to an Agreement and Plan of Reorganization, dated May 21, 1996, each share of the Bank's outstanding common stock was exchanged for one share of common stock of the Holding Company. At this time, the Holding Company conducts business as a unitary savings and loan holding company and the principal business of the Holding Company consists of the operation of its wholly owned subsidiaries, the Bank and Alhambra Holding Corp., a Delaware corporation ("Alhambra"). The Company formed Alhambra to hold the Company's investment in a commercial office building. See "Asset Quality -- Non-performing Assets." The Holding Company's executive offices are located at the home office of the Bank at 75 West 125th Street, New York, New York 10027. The Holding Company's telephone number is (212) 876-4747. CARVER FEDERAL SAVINGS BANK The Bank was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally chartered mutual savings and loan association, at which time the Bank obtained federal deposit insurance and became a member of the Federal Home Loan Bank of New York ("FHLB"). The Bank converted to a federal savings bank in 1986 and changed its name at that time to Carver Federal Savings Bank. On October 24, 1994, the Bank converted from mutual to stock form and issued 2,314,275 shares of its common stock, par value $0.01 per share. Carver Federal was founded to provide an African-American operated institution where residents of under-served communities could invest their savings and obtain credit. Carver Federal's principal business consists of attracting passbook and other savings accounts through its branch offices and investing those funds in mortgage loans and other investments permitted to federal savings banks. During fiscal year 1997 ("fiscal 1997"), Carver adopted a business plan to shift its emphasis to direct lending and restructure its balance sheet to shift from mortgaged-backed and other investment securities to higher yielding whole loans. In the fourth quarter of fiscal 1997 and the first quarter of fiscal year 1998 ("fiscal 1998"), Carver restructured its balance sheet by purchasing whole loans and decreasing its investment in mortgage-backed and other investment securities. During fiscal 1998, Carver continued following this strategy and expanded its origination of multi-family and commercial real estate mortgage loans. As a result of this effort, Carver's loan portfolio substantially increased as a percentage of total assets, and Carver's earnings are derived more from direct lending and loan purchase activities than from investing in securities. Based on asset size as of March 31, 2000, Carver Federal is the largest African-American-operated financial institution in the United States. 1 3 CHANGE IN EXECUTIVE MANAGEMENT Deborah C. Wright was appointed President, Chief Executive Officer and Director of the Holding Company and the Bank as of June 1, 1999. For a description of Ms. Wright's business experience, see "Executive Officers of the Holding Company -- Deborah C. Wright." Ms. Wright succeeded Thomas L. Clark, Jr., who was removed from his positions as President and Chief Executive Officer of the Holding Company, and President, Chief Executive Officer and Director of the Bank on January 25, 1999. Mr. Clark subsequently resigned from his position as Director of the Holding Company as of June 1, 1999. During the period from January 25, 1999 to June 1, 1999, the duties of the President and Chief Executive Officer were performed by an Operating Committee comprised of directors and officers of Carver. Judith Taylor was appointed Acting Senior Vice President and Chief of Retail Banking in November 1999, Margaret D. Peterson was appointed Senior Vice President and Chief Administrative Officer in November 1999, James Boyle was appointed Senior Vice President and Chief Financial Officer in January 2000 and J. Kevin Ryan was appointed Senior Vice President and Chief Lending Officer in June 2000, replacing Benny A. Joseph who had served in such position since November 1999. Mr. Boyle succeeded Walter Bond who had served as Acting Chief Financial Officer since September 1997. In January 2000, Mr. Bond was appointed Senior Vice President and Special Assistant to the President and Chief Executive Officer. For a description of the business experience of the executive officers, see "Executive Officers of the Holding Company." LENDING ACTIVITIES General. Carver's principal lending activity is the origination of mortgage loans for the purpose of purchasing or refinancing multi-family residential and commercial real estate properties and one- to four-family residential property. Carver also originates or participates in loans for the construction or renovation of commercial property and residential housing developments and occasionally originates permanent financing upon completion. In addition, Carver originates consumer loans secured by deposits, education loans and second mortgages on residential property. Carver has continued to originate one- to four-family mortgage loans to service its retail customers. To compliment this activity and as part of Carver's overall strategy to increase its loan portfolio as a percentage of total assets, Carver continued to engage in loan purchases during the past fiscal year. At the close of the twelve month period ended March 31, 2000 ("fiscal 2000"), one- to four-family mortgage loans totaled $152.5 million, or 55.54%, of Carver's total gross loan portfolio, multi-family loans totaled $86.2 million, or 31.40%, of the total gross loans, non-residential real estate loans totaled $22.7 million, or 8.28%, of total gross loans and construction loans totaled $6.4 million, or 2.33%, of total gross loans. Consumer and commercial loans totaled $6.7 million, or 2.45%, of total gross loans. Gross loans receivable decreased by $2.8 million, or 1.00%, to $274.5 million at March 31, 2000, compared to $277.3 million at March 31, 1999. Carver's net loan portfolio as a percentage of total assets decreased to 64.30% at March 31, 2000, compared to 64.95% at March 31, 1999. Loan Portfolio Composition. One- to four-family mortgage loans decreased by $28.9 million, or 15.92%, to $152.5 million, compared to $181.3 million at March 31, 1999. Due to turnover in the lending department, both originations and purchases of one- to four-family mortgage loans declined during fiscal 2000. During fiscal 2000, multi-family real estate loans increased by $33.8 million, or 64.58%, to $86.2 million at March 31, 2000, compared to $52.4 million at March 31, 1999. The increase is primarily due to purchases of multi-family real estate loans. Non-residential real estate loans decreased by $400,000, or 1.61%, to $22.7 million at March 31, 2000, compared to $23.1 million at March 31, 1999. Construction loans decreased by $4.7 million, or 42.13%, to $6.4 million at March 31, 2000, compared to $11.0 million at March 31, 1999, primarily reflecting a reduction in the origination of construction loans coupled with repayments on outstanding construction loans. All other loans consisting primarily of consumer loans decreased by $2.7 million, or 28.84%, to $6.7 million compared to $9.4 million at March 31, 1999. The decrease reflects the Company's continued de-emphasis of consumer lending resulting from its decision during the fiscal year ended March 31, 1999 ("fiscal 1999") to discontinue the origination of unsecured consumer loans. 2 4 Premium on loans decreased by $432,000, or 42.61%, to $582,000 at March 31, 2000, compared to $1.0 million at March 31, 1999 primarily reflecting the repayment of loans purchased at a premium. Loans in process decreased by $1.6 million, or 59.71%, to $1.1 million at March 31, 2000, compared to $2.6 million at March 31, 1999 reflecting the decrease in construction loans. Allowance for loan losses decreased by $1.1 million, or 27.00%, to $2.9 million at March 31, 2000, compared to $4.0 million at March 31, 1999 reflecting charge-offs and a decreased provision for loan losses during fiscal 2000. See "Asset Quality -- Asset Classification and Allowance for Losses." The following table sets forth selected data relating to the composition of Carver's loan portfolio by type of loan at the dates indicated.
AT MARCH 31, ----------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------ ------------------ ------------------ ------------------ ----------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT -------- ------- -------- ------- -------- ------- -------- ------- ------- ------- (DOLLARS IN THOUSANDS) Real estate loans: One- to four-family..... $152,458 55.54% $181,320 65.39% $188,761 66.85% $139,961 67.94% $58,547 69.23% Multi-family............ 86,184 31.40 52,365 18.89 49,289 17.46 19,936 9.68 2,490 2.94 Nonresidential.......... 22,721 8.28 23,092 8.33 12,789 4.53 22,415 10.88 11,138 13.18 Construction.............. 6,393 2.33 11,047 3.98 15,993 5.66 14,386 6.98 6,971 8.24 Consumer and commercial business loans(1)....... 6,725 2.45 9,450 3.41 15,536 5.50 9,310 4.52 5,417 6.41 -------- ------ -------- ------ -------- ------ -------- ------ ------- ------ $274,481 100.00% $277,274 100.00% $282,368 100.00% $206,008 100.00% $84,563 100.00% ======== ====== ======== ====== ======== ====== ======== ====== ======= ====== Add: Premium on loans........ $ 582 $ 1,014 $ 1,555 $ 1,805 $ 882 Less: Loans in process(2)..... (1,062) (2,636) (4,752) (6,854) (1,406) Deferred fees and loan discounts............. (918) (1,110) (1,080) (795) (225) Allowance for loan losses................ (2,935) (4,020) (3,137) (2,246) (1,206) -------- -------- -------- -------- ------- Total............. $270,148 $270,522 $274,954 $197,918 $82,608 ======== ======== ======== ======== =======
- --------------- (1) Includes second mortgage, home equity, personal, auto, credit cards and commercial business loans. (2) Represents undisbursed portion of outstanding construction loans. One- to Four-Family Residential Lending. Traditionally, Carver's lending activity has been the origination of loans secured by first mortgages on existing one- to four-family residences in Carver's market area. During fiscal 2000, the Company increased the purchase of portfolios of first mortgages on existing one-to four-family residences to augment originations. See "-- Consumer and Commercial Business Loans -- Purchases of Loans." Carver originates and purchases one- to four-family residential mortgage loans in amounts that typically range between $28,000 and $750,000. At March 31, 2000, $152.5 million, or 55.54%, of Carver's total gross loans were secured by one- to four-family residences. Approximately 82.0% of Carver's one-to-four-family residential mortgage loans had adjustable rates and approximately 18.0% had fixed rates. Carver's one- to four-family residential mortgage loans are generally for terms of 30 years, amortized on a monthly basis, with principal and interest due each month. Residential mortgage loans often remain outstanding for significantly shorter periods than their contractual terms. These loans customarily contain "due-on-sale" clauses which permit the Bank to accelerate repayment of a loan upon transfer of ownership of the mortgaged property. Also, borrowers may refinance or prepay loans at their option without penalty. The Bank's lending policies generally limit the maximum loan-to-value ratio ("LTV") on one- to four-family residential mortgage loans secured by owner-occupied properties to 95% of the lesser of the appraised 3 5 value or purchase price, with private mortgage insurance required on loans with LTV ratios in excess of 80%. The maximum LTV ratio on mortgage loans secured by non-owner-occupied properties is limited to 80%. Under a special loan program, the LTV ratio may go to 100%. This special loan program consists of loans originated and sold to the State of New York Mortgage Agency ("SONYMA") secured by detached single family homes purchased by first time home buyers. Carver's fixed-rate, one- to four-family residential mortgage loans are underwritten in accordance with applicable guidelines and requirements for sale to Federal National Mortgage Association ("Fannie Mae") or SONYMA in the secondary market. The Bank originates fixed-rate loans that qualify for sale, and from time to time has sold such loans to Fannie Mae since 1993 and to SONYMA since 1984. The Bank also originates, to a limited extent, loans underwritten according to Federal Home Loan Mortgage Corporation ("FHLMC") standards. Loans are sold with limited recourse, on a servicing retained basis to Fannie Mae and on a servicing released basis to SONYMA. Carver uses an outside firm to service mortgage loans, whether held in portfolio or sold servicing retained. At March 31, 2000, the Company, through its sub-servicer, was servicing approximately $2.8 million of loans for Fannie Mae and FHLMC. Carver offers one-year, three-year, five/one-year and five/three-year adjustable-rate, one- to four-family residential mortgage loans. These loans are indexed to the weekly average rate on the one-year, three-year and five-year U.S. Treasury securities, respectively, adjusted to a constant maturity (usually, one year), plus a margin of 275 basis points. The rates at which interest accrues on these loans are adjustable every one or three years, generally with limitations on adjustments of two percentage points per adjustment period and six percentage points over the life of the one-year adjustable-rate mortgage and five percentage points over the life of a three-year adjustable-rate mortgage. The retention of adjustable-rate loans in the Company's portfolio helps reduce the Bank's exposure to increases in prevailing market interest rates. However, there are unquantifiable credit risks resulting from potential increases in costs to borrowers in the event of upward repricing of adjustable-rate loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate loans may increase due to increases in interest costs to borrowers. Further, adjustable-rate loans which provide for initial rates of interest below the fully indexed rates may be subject to increased risk of delinquency or default as the higher, fully indexed rate of interest subsequently replaces the lower, initial rate. In order to mitigate such risk, the Bank qualifies borrowers at a rate equal to two percentage points above any discounted introductory rate on one-year adjustable rate mortgage loans ("ARMs"), one percentage point above any discounted introductory rate on three-year ARMs and at the discounted introductory rate on five/three-year ARMs. In addition, although adjustable-rate loans allow the Bank to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest rate sensitivity is limited by the periodic and lifetime interest rate adjustment limitations and the ability of borrowers to convert the adjustable-rate loans to fixed-rate loans. Accordingly, there can be no assurance that yields on the Bank's adjustable-rate loans will fully adjust to compensate for increases in the Bank's cost of funds. Finally, adjustable-rate loans increase the Bank's exposure to decreases in prevailing market interest rates, although decreases in the Bank's cost of funds would tend to offset this effect. Multi-Family Real Estate Lending. During fiscal 2000, multi-family real estate loans increased by $33.8 million, or 64.58%, to $86.2 million at March 31, 2000, compared to $52.4 million at March 31, 1999. See "-- Lending Activities -- Loan Portfolio Composition." At March 31, 2000, multi-family loans comprised 31.40% of Carver's gross loan portfolio. The largest of permanent loans outstanding was a $1.3 million loan on a 40 unit, multi-family apartment building located in the New York City borough of Brooklyn. This loan was performing at March 31, 2000. During fiscal 2000, Carver purchased approximately $37.7 million of multi-family loans to augment originations. These loans are located in the New York City area and were underwritten to similar guidelines with similar terms and conditions as multi-family loans that Carver originates. The Bank intends to continue to emphasize its highly competitive multi-family mortgage loan product, which has enabled the Bank to expand its presence in the multi-family lending market in the New York City area. Carver offers competitive rates with flexible terms which make the product attractive to borrowers. Multi-family property lending, however, entails additional risks compared with one- to four-family residential lending. For example, such loans typically involve large loan balances to single borrowers or groups 4 6 of related borrowers, the payment experience on such loans typically is dependent on the successful operation of the real estate project, and these risks can be significantly impacted by supply and demand conditions in the market for multi-family residential units. To obtain the highest asset quality in its multi-family lending activities, Carver has established conservative underwriting guidelines. Carver originates the bulk of its multi-family residential mortgage loans for apartment buildings of 15 units or more and 5-10 unit owner occupied residential properties. Carver originates multi-family mortgage loans for smaller buildings on a case by case basis. In many cases, on five to ten unit properties, the Bank requires that the borrower reside in the subject property. Carver's multi-family product guidelines generally require that the maximum LTV not exceed 80%, and in the case of 5-10 unit properties, that the maximum LTV does not exceed 75%. The Bank requires a debt coverage ratio ("DCR") of at least 1.3, which requires the properties to generate cash flow after expenses and allowances in excess of the principal and interest payment. Carver's underwriting guidelines stipulate a minimum DCR of 1.3 for all multi-family loans. The product is designed for, and the Bank seeks to lend to borrowers that are experienced in real estate management. On a case by case basis, the Bank will consider loan requests from inexperienced borrowers who are purchasing a multi-family property as their primary residence. In these instances, the borrowers are required to take a Bank approved property management course prior to the closing of the loan. Pursuant to regulation, Carver's maximum loan amount for an individual loan is $4.3 million. Currently, the Bank limits its maximum amount for an individual loan to $2.0 million. See "Regulation and Supervision -- Regulation of Federal Savings Associations -- Loans to One Borrower." Carver originates multi-family mortgage loans that generally amortize on the basis of a 15-, 20-, 25- or 30-year period but require a balloon payment after the first five years, or the borrower may have an option to extend the loan for two additional five year periods for a fee of 0.5% of the outstanding loan balance, payable upon exercising each option. If a ballooning multi-family mortgage has performed according to the loan agreement and the property value has not decreased, Carver's practice is to extend an opportunity for the borrower to roll-over the outstanding balance at the current rate then in effect for another five-year period. The Bank on a case by case basis originates fifteen-year fixed rate loans. Commercial Real Estate Lending (Non-residential). At March 31, 2000, non-residential real estate mortgage loans (including loans to churches) totaled $22.7 million, or 8.28%, of the gross loan portfolio. At March 31, 2000, the largest non-residential loan outstanding was a $3.0 million loan secured by a retail shopping center located in the New York City borough of Brooklyn. This loan was performing at March 31, 2000. Carver's non-residential real estate lending activity consists predominantly of loans for the purpose of refinancing commercial office, retail space and churches in its immediate service area. Commercial (non-residential) lending, however, entails additional risks compared with one- to four-family residential lending. For example, such loans typically involve large loan balances to single borrowers or groups of related borrowers, and the payment experience on such loans typically is dependent on the successful operation of the real estate project. To help ensure continued collateral protection and asset quality for the term of the commercial real estate loans, Carver employs (with the assistance of an independent consulting firm) a risk-rating system. Under the risk-rating system, all commercial real estate loans are risk rated by management prior to granting the loan, and separate loan portfolio reviews are performed semi-annually resulting in written management summary reports. Furthermore, under this system, property inspections on commercial real estate loans with balances of $500,000 or greater are performed annually, and all other commercial loans are inspected on a two-year cycle. Any loan that becomes sixty days delinquent is required to be inspected promptly. Written reports on all properties inspected, along with photographs, are provided to document the collateral status of each loan. Carver originates commercial (non-residential) real estate first mortgage loans in its service area. These mortgages are predominantly on well established larger office buildings and retail properties in the communities in which the Bank's offices are located. In certain instances, Carver originates loans which are secured by mixed use real estate. In some, Carver typically requires that the borrower maintain some form of occupancy at the subject property, either in the form of operating its primary business from the subject property or residing in the subject property. Carver's maximum LTV on commercial real estate mortgage loans is 80%. 5 7 The minimum DCR is 1.30. The Bank requires that properties be managed by an established professional commercial real estate property manager. In addition, Carver requires the assignment of rents of all tenants leasing in the subject property. Historically, Carver has been a New York City area leader in the origination of loans to churches. At March 31, 2000, loans to churches totaled $14.0 million, or approximately 5% of the Bank's gross loan portfolio. These loans generally have 5-, 7- or 10-year terms with 15-, 20- or 25-year amortization periods and a balloon payment due at the end of the term, and generally have no greater than a 60% LTV ratio. The largest permanent church loan was a $2.0 million loan to a church located in Manhattan, New York City. The second largest loan to a church was a $1.6 million permanent loan to a church located in Mount Vernon, NY. These loans were performing according to their respective terms at March 31, 2000. The Bank provides construction financing for churches and generally provides permanent financing upon completion. Under the Bank's current loan policy, the maximum loan amount for such lending is $1.0 million, but larger loan amounts are considered on a case by case basis. Loans to churches generally average approximately $638,000. Loans secured by real estate owned by religious organizations generally are larger and involve greater risks than one- to four-family residential mortgage loans. Because payments on loans secured by such properties are often dependent on voluntary contributions by members of the church's congregation, repayment of such loans may be subject to a greater extent to adverse conditions in the economy. The Bank seeks to minimize these risks in a variety of ways, including reviewing the church's financial condition, limiting the size of such loans and establishing the quality of the collateral securing such loans. The Bank determines the appropriate amount and type of security for such loans based in part upon the governance structure of the particular organization, the length of time the church has been established in the community and a cash flow analysis of the church to determine its ability to service the proposed loan. As a general matter, Carver will obtain a first mortgage on the underlying real property and personal guarantees of key members of the congregation and/or key person life insurance on the pastor of the congregation and may also require the church to obtain key person life insurance on specific members of the church's leadership. Asset quality in the church loan category has been exceptional throughout Carver's history. Management believes that Carver remains a leading lender to churches in its market area. Construction Lending. The Bank currently originates construction loans primarily for the new construction and renovation of churches, multi-family buildings, planned residential developments, community service facilities and affordable housing programs. Carver also offers construction loans to qualified individuals and developers for new construction and renovation of one- to four-family residences in the Bank's market area. The Bank does not lend to private developers for speculative single-family housing construction. The Bank's construction loans generally have adjustable interest rates and are underwritten in accordance with the same standards as the Bank's mortgages on existing commercial properties, except the loans generally provide for disbursement in stages during a construction period from 12 to 24 months, during which period the borrower is required to make monthly payments of accrued interest on the outstanding loan balance. Construction loans generally have a maximum LTV of 70%. Borrowers must satisfy all credit requirements that apply to the Bank's permanent mortgage loan financing for the subject property. While the Bank's construction loans generally require repayment in full upon the completion of construction, the Bank typically makes construction loans with the intent to convert to permanent loans following completion of construction. Carver has established additional criteria for construction loans to include an engineer's review on all construction budgets in excess of $500,000, appropriate interest reserves for loans in excess of $250,000, and advances are made in installments as construction progresses. Construction financing generally is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. The ability of 6 8 a developer to sell developed lots or completed dwelling units will depend on, among other things, demand, pricing, availability of comparable properties and economic conditions. The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers in the Bank's market areas, limiting the aggregate amount of outstanding construction loans and imposing a stricter LTV ratio requirement than required for one- to four-family mortgage loans. At March 31, 2000, the Bank had $6.4 million (including $1.1 million of undisbursed funds) in construction loans outstanding, comprising 2.33% of the Bank's total gross loan portfolio. The largest construction loan was on a retail building for $2.0 million located in the New York City borough of Manhattan. The second largest of such loans outstanding was a $1.8 million loan to a church also located in Manhattan. At March 31, 2000, both loans were performing according to their terms. CONSUMER AND COMMERCIAL BUSINESS LOANS Consumer Lending. During fiscal 1999, Carver ceased consumer lending through its wholly owned subsidiary, CFSB Credit Corp., and deactivated the subsidiary. At March 31, 2000, the Bank had approximately $5.8 million in consumer loans, or 2.10% of the Bank's gross loan portfolio. The Bank's consumer loans primarily consist of $2.4 million in credit card loans, $1.6 million in automobile loans and $1.6 million in personal loans. The Bank had $252,000 in home equity loans and second mortgages on single-family residences. At March 31, 2000, Carver carried $2.4 million in credit card lines consisting of $2.3 million of unsecured lines and $100,000 of secured lines. During fiscal 1999, the Company discontinued the issuance of unsecured credit card lines. The Company continues to issue secured credit card lines to its existing customers. At March 31, 2000, the Company had approximately 2,850 credit card lines outstanding. At March 31, 2000, Carver carried $1.6 million in automobile loans. During fiscal 1999, the Company discontinued the origination of automobile loans. At March 31, 2000, Carver carried $1.6 million in personal loans consisting of $1.3 million unsecured personal loans and $294,000 in secured personal loans. During fiscal 1999, the Company discontinued the issuance of unsecured personal loans. Carver continues to grant loans secured by deposits for up to 90% of the amount of the deposits. These loans are payable based on terms from 12 to 60 months and funds on deposit with Carver must be pledged as collateral to secure such loans. At March 31, 2000, Carver carried $252,000 in home equity loans and second mortgages on single-family residences. These loans, when combined with any loan having priority over such loans, are generally limited to 75% of the appraised value of the property. At March 31, 2000, Carver carried $67,000 in student loans. Carver has participated in the Federal Family Education Loan Program since 1964. The Bank's student loans are guaranteed by the New York Higher Education Service Corporation, an independent agency of the State of New York. During fiscal 1999, the Bank sold approximately $107,000 in student loans. There were no sales of such loans during fiscal 2000. Consumer loans generally involve more risk than first mortgage loans. In addition, loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Further, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered. These loans may also give rise to claims and defenses by a borrower against Carver, and a borrower may be able to assert claims and defenses against Carver which it has against the seller of the underlying collateral. In underwriting consumer loans, Carver considers the borrower's credit history, an analysis of the borrower's income, expenses and ability to repay the loan and the value of the collateral. In addition, with respect to defaulted automobile loans, repossessed collateral may not provide an adequate source of repayment of the outstanding loan balance as a result of damage, loss or depreciation, and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. See "Asset Quality -- Non-performing Assets." 7 9 Commercial Business Loans. At March 31, 2000, secured and unsecured commercial business loans outstanding totaled $700,000. During the fourth quarter of fiscal 1999, the Bank discontinued the origination of unsecured commercial business loans. The Bank continues to make a limited number of commercial business loans, which are secured in full by passbook and/or certificate of deposit accounts. Loan Processing and Approval. Carver loan originations are derived from a number of sources, including referrals by realtors, builders, depositors, borrowers and mortgage brokers, as well as walk-in customers. Loans are originated by the Bank's personnel who receive either salary, salary plus commission or commissions. Loan application forms are available at each of the Bank's offices. All applications are forwarded to the processing department located in the main office. Applications for all fixed-rate one- to four-family real estate loans are underwritten in accordance with Fannie Mae and SONYMA guidelines. All loan applications for other types of loans are underwritten in accordance with the Bank's own comparable guidelines. For commercial real estate loans, Carver has established underwriting standards that require the broker or applicant to initially submit an itemized income and expense statement (loan set-up). If acceptable, a letter of intent is issued by Carver expressing an interest in the request, and such letter outlines the conditions under which Carver will process the loan request. If the applicant accepts the letter of intent, a commercial real estate loan application is provided to the applicant. Prior to submission for loan approval, the property must be visited by a commercial loan officer, who will prepare an initial property inspection report. As part of the loan approval process, consideration is given to the appraisal, location, accessibility, stability of neighborhood, environmental assessment, personal credit history of the applicant(s), and financial capacity. Upon receipt of a completed loan application from a prospective borrower, a credit report and verifications are ordered to verify specific information relating to the loan applicant's employment, income and credit standing. It is the Bank's policy to obtain an appraisal of the real estate intended to secure a proposed mortgage loan from a fee appraiser approved by the Bank. It is Carver's policy to record a lien on the real estate securing the loan and to obtain a title insurance policy which insures that the property is free of prior encumbrances. Borrowers must also obtain hazard insurance policies prior to closing and, when the property is in a flood plain as designated by the Department of Housing and Urban Development, paid flood insurance policies. Most borrowers are also required to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes and hazard insurance. The Board of Directors (the "Board") has the overall responsibility and authority for general supervision of Carver's loan policies. The Board has established written lending policies for the Bank. The Bank's Chief Lending Officer has authority to approve all consumer loans below $50,000, the President has authority to approve such loans below $100,000, and the executive committee of the Board must approve loans at or above $100,000. All mortgage loans that conform to Fannie Mae standards and limits can be approved by the Chief Lending Officer. The Management Loan Committee, composed of the President, the Chief Lending Officer, the Chief Financial Officer and the Controller, approves non-conforming loans up to $750,000. Loans above $750,000 must be approved by the executive committee of the Board, and loans above $1.0 million must be approved by the full Board. It has been management's experience that substantially all approved loans are funded. During the period from January 25, 1999 to June 1, 1999, the Company's Operating Committee assumed the responsibilities of the President and certain responsibilities of the executive committee. Originations and Sales of Loans. Originations of one- to four-family real estate loans are generally within the New York City metropolitan area, although Carver does occasionally fund loans in other areas. All such loans, however, satisfy the Company's underwriting criteria regardless of location. The Bank continues to offer one- to four-family fixed-rate mortgage loans in response to consumer demand but requires that such loans satisfy guidelines of either Fannie Mae or SONYMA to ensure subsequent sale in the secondary market as required to manage interest rate risk exposure. Under the loans-to-one-borrower limits of the Office of Thrift Supervision ("OTS"), with certain limited exceptions, loans and extensions of credit to a single or related group of borrowers outstanding at one time 8 10 generally shall not exceed 15% of the unimpaired capital and surplus of a savings bank. Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired capital and surplus. At March 31, 2000, the Bank had no lending relationships in excess of the OTS loans-to-one-borrower limits. Purchases of Loans. To supplement its origination of one- to four-family first mortgage loans and multi-family mortgage loans and consistent with its business strategy, during fiscal 2000, Carver purchased a total of $63.3 million of mortgage loans consisting of $25.6 million of performing one- to four-family adjustable rate mortgage loans and $37.7 million of multi-family mortgage loans, which represented 9.32% and 13.74%, respectively, of Carver's gross loan portfolio at March 31, 2000. The Company purchases loans in order to increase interest income and to manage its interest rate risk. The $25.6 million in performing one- to four-family adjustable rate mortgages purchased during the fiscal year consist of 3/1-year ARMs. The $37.7 million of multi-family mortgage loans consist of 10 year balloons. The Company plans to reduce its purchases of one- to four-family adjustable rate mortgages and increase its participation in multi-family and commercial real estate mortgage loans with New York area lenders. In addition, the Company is shifting its loan origination emphasis to take advantage of the higher yields and better interest rate risk characteristics available on multi-family and commercial real estate mortgage loans. The following table sets forth certain information with respect to Carver's loan originations, purchases and sales during the periods indicated.
YEAR ENDED MARCH 31, ----------------------------- 2000 1999 1998 ------- ------- ------- (DOLLARS IN THOUSANDS) Loans originated: One- to four-family....................................... $ 2,082 $11,487 $ 7,235 Multi-family.............................................. 319 12,013 31,248 Nonresidential............................................ 988 6,213 3,300 Construction.............................................. 1,000 6,016 4,226 Consumer.................................................. 232 3,801 8,999 ------- ------- ------- Total loans originated.................................... $ 4,621 $39,530 $55,008 ======= ======= ======= Loans purchased(1).......................................... $63,282 $55,842 $80,175 ======= ======= ======= Loans sold(2)............................................... $ -- $ 107 $ 1,459 ======= ======= =======
- --------------- (1) Comprised primarily of one- to four-family mortgage loans and multi-family mortgage loans, all purchased with servicing retained. (2) Comprised of one- to four-family loans and student loans, with loans sold with servicing released. The decline in total loan originations from approximately $39.5 million in fiscal 1999 to approximately $4.6 million in fiscal 2000 was primarily caused by turnover in the lending department. Loans purchased by the Company entail certain risks not necessarily associated with loans the Company originates. The Company's purchased loans are generally acquired without recourse and in accordance with the Company's underwriting criteria for originations. In addition, the purchased loans have a variety of terms, including maturities, interest rate caps and indices for adjustment of interest rates that may differ from those offered at the time by the Company in connection with the loans the Company originates. Finally, the market areas in which the properties which secure the purchased loans are located are subject to economic and real estate market conditions that may significantly differ from those experienced in Carver's market area. There can be no assurance that economic conditions in these out of state areas will not deteriorate in the future resulting in increased loan delinquencies and loan losses among the loans secured by property in these areas. In an effort to reduce these risks, with its existing personnel and through the use of a quality control/loan review firm, the Bank has sought to ensure that purchased loans satisfy the Bank's underwriting standards and 9 11 do not otherwise have a higher risk of collection or loss than loans originated by the Bank although specific rates and terms may differ from those offered by the Bank. A Company officer monitors the inspection and confirms the review of each purchased loan. The Company is dependent on the seller or originator of the loans for ongoing collection efforts and collateral review. Carver also requires appropriate documentation and further seeks to reduce its risk by requiring, in each buy/sell agreement, a series of warranties and representations as to the underwriting standards and the enforceability of the related legal documents. These warranties and representations remain in effect for the life of the loan. Any misrepresentation must be cured within ninety (90) days of discovery or trigger certain repurchase provisions in the buy/sell agreement. Interest Rates and Loan Fees. Interest rates charged by Carver on mortgage loans are primarily determined by competitive loan rates offered in its market area and minimum yield requirements for loans purchased by Fannie Mae and SONYMA. Mortgage loan rates reflect factors such as prevailing market interest rate levels, the supply of money available to the savings industry and the demand for such loans. These factors are in turn affected by general economic conditions, the monetary policies of the federal government, including the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the general supply of money in the economy, tax policies and governmental budget matters. Carver charges fees in connection with loan commitments and originations, rate lock-ins, loan modifications, late payments and changes of property ownership and for miscellaneous services related to its loans. Loan origination fees are calculated as a percentage of the loan principal. The Company typically receives fees of between zero and three points (one point being equivalent to 1% of the principal amount of the loan) in connection with the origination of fixed-rate and adjustable-rate residential mortgage loans. The loan origination fee, net of certain direct loan origination expenses, is deferred and accreted into income over the contractual life of the loan using the interest method. If a loan is prepaid, refinanced or sold, all remaining deferred fees with respect to such loan are taken into income at such time. In addition to the foregoing fees, Carver receives fees for servicing loans for others, which in turn generally are subserviced for Carver by a third party servicer. Servicing activities include the collection and processing of mortgage payments, accounting for loan repayment funds and paying real estate taxes, hazard insurance and other loan-related expenses out of escrowed funds. Loan servicing fees usually are charged as a percentage (usually, between 1/4% and 3/8%) of the outstanding balance of the loans being serviced. Income from these activities varies from period to period with the volume and type of loans originated, sold and purchased, which in turn is dependent on prevailing market interest rates and their effect on the demand for loans in the Company's market area. Loan Maturity Schedule. The following table sets forth information at March 31, 2000 regarding the dollar amount of loans maturing in Carver's portfolio, including scheduled repayments of principal, based on contractual terms to maturity. Demand loans, loans having no schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. The table below does not include any estimate of prepayments, which significantly shorten the average life of all mortgage loans and may cause Carver's actual repayment experience to differ from that shown below.
DUE DURING THE YEAR ENDING DUE AFTER DUE AFTER DUE AFTER MARCH 31, 3 THROUGH 5 THROUGH 10 THROUGH DUE AFTER 20 --------------------------- 5 YEARS AFTER 10 YEARS AFTER 20 YEARS AFTER YEARS AFTER 2001 2002 2003 MARCH 31, 2000 MARCH 31, 2000 MARCH 31, 2000 MARCH 31, 2000 TOTAL -------- -------- ----- -------------- -------------- -------------- -------------- -------- (DOLLARS IN THOUSANDS) Real Estate loans: One- to four- family........... $19,654 $49,574 $597 $19,576 $ 614 $1,634 $60,809 $152,458 Multi-family....... 16 464 -- -- 79,891 259 5,554 86,184 Nonresidential..... 1 -- -- -- 15,968 -- 6,752 22,721 Construction....... 6,393 -- -- -- -- -- -- 6,393 Consumer and commercial business loans.............. 213 -- -- 6,512 -- -- -- 6,725 ------- ------- ---- ------- ------- ------ ------- -------- Total....... $26,277 $50,038 $597 $26,088 $96,473 $1,893 $73,115 $274,481 ======= ======= ==== ======= ======= ====== ======= ========
10 12 The following table sets forth, at March 31, 2000, the dollar amount of loans maturing subsequent to the year ending March 31, 2001 which have predetermined interest rates and floating or adjustable interest rates.
PREDETERMINED FLOATING OR RATE ADJUSTABLE RATES TOTAL ------------- ---------------- -------- (DOLLARS IN THOUSANDS) Real estate loans: One-to four-family................................. $ 22,764 $110,039 $132,803 Multi-family....................................... 81,279 4,889 86,168 Nonresidential..................................... 20,815 1,905 22,720 Consumer and commercial business loans:.............. 67 6,446 6,513 -------- -------- -------- Total...................................... $124,925 $123,279 $248,204 ======== ======== ========
Scheduled contractual principal repayments of loans do not necessarily reflect the actual life of such assets. The average life of long-term loans is substantially less than their contractual terms due to prepayments. In addition, due-on-sale clauses in mortgage loans generally give Carver the right to declare a conventional loan due and payable in the event, among other things, that a borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and tends to decrease when current mortgage loan market rates are substantially lower than rates on existing mortgage loans. ASSET QUALITY Non-performing Assets. When a borrower fails to make a payment on a mortgage loan, immediate steps are taken by Carver's sub-servicers to have the delinquency cured and the loan restored to current status. With respect to mortgage loans, once the payment grace period has expired (in most instances 15 days after the due date), a late notice is mailed to the borrower within two business days, and a late charge is imposed, if applicable. If payment is not promptly received, the borrower is contacted by telephone, and efforts are made to formulate an affirmative plan to cure the delinquency. Additional calls are made by the 20th and 25th day of the delinquency. If a mortgage loan becomes 30 days delinquent, a letter is mailed to the borrower requesting payment by a specified date. If a mortgage loan becomes 60 days delinquent, Carver seeks to make personal contact with the borrower and also has the property inspected. If a mortgage becomes 90 days delinquent, a letter is sent to the borrower demanding payment by a certain date and indicating that a foreclosure suit will be filed if the deadline is not met. If payment is still not made, management may pursue foreclosure or other appropriate action. When a borrower fails to make a payment on a consumer loan, immediate steps are taken by Carver's loan servicing department to have the delinquency cured and the loan restored to current status. With the exception for automobile loans, once the payment grace period has expired (10 days after the due date), a late notice is mailed to the borrower immediately and a late charge is imposed if applicable. If payment is not promptly received, the borrower is contacted by telephone, and efforts are made to formulate an affirmative plan to cure the delinquency. If payment still has not been received, additional telephone calls are made by the 20th and 25th day of the delinquency. If a consumer loan becomes 30 days delinquent, a letter is mailed to the borrower requesting payment by a specified date. If the loan becomes 60 days delinquent, a second letter goes to the borrower and the co-borrower (if any) demanding payment by a specified date and outlining the seriousness of the problem. If the loan becomes 90 days delinquent, a final warning letter is sent to the borrower and the co-borrower. If the loan remains delinquent, it is reviewed for charge-off and/or placed for collection. If an automobile loan borrower fails to make a payment on a loan, immediate steps are taken by Carver's loan servicing department to have the delinquency cured and the loan restored to current status. Once the payment grace period has expired (10 days after the due date), a late notice is mailed to the borrower immediately and a late charge is imposed if applicable. If payment is not promptly received the borrower is 11 13 contacted by telephone, with a follow-up letter requesting payment. By the 45th day of the delinquency, if payment is not received, repossession efforts begin. Once the vehicle is repossessed, the borrower has a 30 day right of redemption. In order for the borrower to exercise this right, one of the following must occur: 1. The borrower must make all delinquent payments plus two additional monthly payments, coupled with repossession and storage charges. In addition, the borrower must show proof that the vehicle is fully insured and that Carver is the loss payee. 2. If Carver reasonably believes that something seriously affects the collectability of the monies owed under the installment loan note and the security agreement or the value of the collateral, the full unpaid balance plus accrued interest, late charges and other fees become immediately payable in order for the vehicle to be released to the borrower. The following table sets forth information with respect to Carver's non-performing assets at the dates indicated. Loans generally are placed on non-accrual status when they become 90 days delinquent.
AT MARCH 31, ---------------------------------------------- 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Loans accounted for on a non-accrual basis(1) Real estate One- to four-family...................... $ 966 $ 392 $1,134 $1,791 $ 672 Multi-family............................. 870 1,051 258 -- 478 Nonresidential........................... -- -- -- 284 284 Construction............................. 122 560 3,089 954 521 Consumer and commercial....................... 168 414 1,087 256 79 ------ ------ ------ ------ ------ Total............................... $2,126 $2,417 $5,568 $3,285 $2,034 ====== ====== ====== ====== ====== Accruing loans contractually past due 90 days or more: Real Estate One- to four-family...................... $ -- $ 568 $1,049 $ 279 $ 4 Multi-family............................. -- 804 -- 373 55 Nonresidential........................... -- -- -- -- 217 Construction............................. -- 530 -- 2,069 611 Consumer and commercial....................... -- 183 226 400 334 ------ ------ ------ ------ ------ Total............................... $ -- $2,085 $1,275 $3,121 $1,221 ====== ====== ====== ====== ====== Total of non-accrual and accruing 90 day past due loans................................... $2,126 $4,502 $6,843 $6,406 $3,255 ====== ====== ====== ====== ====== Other non-performing assets(2): Real estate: One- to four-family...................... $ 127 $ 185 $ 82 $ 82 $ 285 Multi-family............................. 27 -- -- -- -- Nonresidential........................... 768 -- -- -- 29 Consumer.................................... 16 99 -- -- -- ------ ------ ------ ------ ------ Total other non-performing assets... $ 938 $ 284 $ 82 $ 82 $ 314 ====== ====== ====== ====== ====== Total non-performing assets......... $3,064 $4,786 $6,925 $6,488 $3,569 ====== ====== ====== ====== ======
12 14
AT MARCH 31, ---------------------------------------------- 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Non-performing loans to total loans........... 0.79% 1.66% 2.47% 3.28% 4.32% Non-performing assets to total assets(3)...... 0.73% 1.15% 1.58% 1.53% 0.97% Troubled debt restructurings(4): Real estate Multi-family and commercial.............. $ -- $ -- $ 807 $ 413 $ -- ====== ====== ====== ====== ======
- --------------- (1) Non-accrual status denotes any loan where the delinquency exceeds 90 days past due and in the opinion of management the collection of additional interest is doubtful. After a careful review of individual loan history and related collateral by management, the loan may be designated as an accruing loan that is contractually past due 90 days or more or if in the opinion of management, the collection of additional interest is doubtful, the loan will remain in non-accrual status. Payments received on a non-accrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on assessment of the ability to collect on the loan. During the year ended March 31, 2000, gross interest income of $345,000 would have been recorded on loans accounted for on a non-accrual basis at the end of the year if the loans had been current throughout the year. Instead, interest on such loans included in income during the period amounted to $0. (2) Other non-performing assets represents property acquired by the Company in settlement of loans (i.e., through foreclosure or repossession or as an in-substance foreclosure). These assets are recorded at the lower of their fair value or the unpaid principal balance plus unpaid accrued interest of the related loans. (3) Non-performing assets consist of non-accrual loans, accruing loans 90 days or more past due and property acquired in settlement of loans. (4) Troubled debt restructurings, as defined under Statement of Financial Accounting Standards ("SFAS") No. 15, are loans where the creditor has, for economic or legal reasons, granted concessions to the debtor that the creditor would not otherwise consider. At March 31, 2000 and 1999, Carver had no restructured loans. At March 31, 2000, non-performing assets decreased by $1.7 million, or 36.11%, to $3.1 million compared to $4.8 million at March 31, 1999. The decrease in non-performing assets reflects a decrease in accruing loans past due 90 days or more and in loans accounted for on a non-accrual basis, offset in part by an increase in other non-performing assets. Loans accounted for on a non-accrual basis decreased $291,000, or 12.04%, to $2.1 million at March 31, 2000, compared to $2.4 million at March 31, 1999. The decrease primarily reflects a decrease in non-performing multi-family, construction and consumer and commercial loans, offset in part by an increase in one- to four-family non-performing loans. Accruing loans contractually past due 90 days or more decreased $2.1 million to $0 at March 31, 2000, compared to $2.1 million at March 31, 1999. The decrease reflects the practice adopted by the Bank during fiscal 2000 to either write off or place on non-accrual status all loans contractually past due 90 days or more. Other non-performing assets increased $654,000, or 230.28%, to $938,000 at March 31, 2000, compared to $284,000 at March 31, 1999. The increase primarily reflects 2 non-residential properties added to the Bank's Real Estate Owned since March 31, 1999. Alhambra Holding Corp. In 1991, Carver purchased an $893,000 participation in a $2.4 million loan to finance the first construction phase of a project to renovate a historic theater located in the New York City borough of Manhattan, Alhambra Building, into office space. The first phase of the project went into receivership with the Federal Deposit Insurance Corporation ("FDIC"), the borrower declared bankruptcy and the rents were being paid into the bankruptcy court. These events contributed to Carver writing down the outstanding loan balance of the participation to $413,000. During fiscal 1997, Carver negotiated the purchase of the FDIC's interest in the loan for $395,000. At March 31, 1998, the Bank held a 100% interest in the 13 15 original loan of $2.4 million carried on the books at $807,000, and the Company was involved in legal action to vacate the stay placed by the bankruptcy court on the collateral in order to proceed with legal recourse. In December 1998, in connection with a court approved bankruptcy plan, the loan asset was transferred by the Bank to the Holding Company. The Holding Company contributed $600,000 in cash and the loan asset into a newly formed wholly owned subsidiary, Alhambra. Alhambra used the cash and the loan to acquire 80% of the common stock and approximately $1.4 million or 100% of the preferred stock of Alhambra Realty Corp. ("Alhambra Realty") pursuant to the borrower's confirmed plan of reorganization (the "Plan"). Pursuant to the Plan, title to the Alhambra Building was transferred to Alhambra Realty thereby allowing Alhambra Realty to receive rental payments. In March 2000, the Alhambra Building was sold. Pre-tax income of $728,000 resulting from the sale is reflected in other non-interest income for fiscal 2000. Asset Classification and Allowances for Losses. Federal regulations require savings institutions to classify their assets on the basis of quality on a regular basis. An asset is classified as "substandard" if it is determined to be inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. An asset is classified as "doubtful" if full collection is highly questionable or improbable. An asset is classified as "loss" if it is considered uncollectible, even if a partial recovery could be expected in the future. The regulations also provide for a "special mention" designation, described as assets which do not currently expose a savings institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention. Assets classified as substandard or doubtful require a savings institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, a savings institution must either establish specific allowances for loan losses in the amount of the portion of the asset classified loss, or charge off such amount. Federal examiners may disagree with a savings institution's classifications. If a savings institution does not agree with an examiner's classification of an asset, it may appeal this determination to the OTS Regional Director. At March 31, 2000, Carver Federal had $2.4 million of potential problem loans which represented 0.57% of the Bank's total assets and 8.24% of the Bank's tangible regulatory capital at March 31, 2000. The OTS, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management has analyzed all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary. Federal examiners may disagree with the savings institution as to the appropriate level of the institution's allowance for loan losses. While management believes Carver has established its existing loss allowances in accordance with generally accepted accounting principles, there can be no assurance that regulators, in reviewing Carver's assets, will not require Carver to increase its loss allowance, thereby negatively affecting Carver's reported financial condition and results of operations. Carver's methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific loans as well as losses that have not been identified but can be expected to occur. Further, management reviews the ratio of allowances to total loans (including projected growth) and recommends adjustments to the level of allowances accordingly. Management conducts quarterly reviews of the Bank's loans and evaluates the need to establish general and specific allowances on the basis of this review. In addition, management actively monitors Carver's asset quality and charges off loans and properties acquired in settlement of loans against the allowances for losses on loans and such properties when appropriate and provides specific loss reserves when necessary. Although management believes it uses the best information available to make determinations with respect to the allowances for losses, future 14 16 adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations. Carver reviews its assets on a quarterly basis to determine whether any assets require classification or re-classification. The Bank has a centralized loan processing structure that relies upon an outside servicer, which generates a monthly report of delinquent loans. The Bank's Board has designated the Internal Auditor and the Internal Asset Review Committee to perform quarterly reviews of the Bank's asset quality, and their report is submitted to the Board for review and approval prior to implementation of any classification. In originating loans, Carver recognizes that credit losses will occur and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. It is management's policy to maintain a general allowance for loan losses based on, among other things, regular reviews of delinquencies and loan portfolio quality, character and size, the Company's and the industry's historical and projected loss experience and current and forecasted economic conditions. In addition, considerable uncertainty exists as to the future improvement or deterioration of the real estate markets in various states, or of their ultimate impact on Carver as a result of its purchased loans in such states. See "-- Consumer and Commercial Business Loans -- Purchases of Loans." Carver increases its allowance for loan losses by charging provisions for possible losses against the Company's income. General allowances are established by the Board on at least a quarterly basis based on an assessment of risk in the Bank's loans taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, the state of the real estate market and economic conditions generally. Specific allowances are provided for individual loans, or portions of loans, when ultimate collection is considered improbable by management based on the current payment status of the loan and the fair value or net realizable value of the security for the loan. At the date of foreclosure or other repossession or at the date the Company determines a property is an impaired property, the Company transfers the property to real estate acquired in settlement of loans at the lower of cost or fair value, less estimated selling costs. Fair value is defined as the amount in cash or cash-equivalent value of other consideration that a real estate parcel would yield in a current sale between a willing buyer and a willing seller. At March 31, 2000, the Bank held $922,000, net of loss allowance, in real estate acquired in settlement of loans. Any amount of cost in excess of fair value is charged-off against the allowance for loan losses. Carver records an allowance for estimated selling costs of the property immediately after foreclosure. Subsequent to acquisition, the property is periodically evaluated by management and an allowance is established if the estimated fair value of the property, less estimated costs to sell, declines. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of real estate is recorded. See Note 1 of Notes to Consolidated Financial Statements. 15 17 The following table sets forth an analysis of Carver's allowance for loan losses for the periods indicated.
YEAR ENDED MARCH 31, ---------------------------------------------- 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Balance at beginning of period................ $4,020 $3,138 $2,246 $1,206 $1,075 ------ ------ ------ ------ ------ Loans charged-off(1) Real estate One- to four-family......................... 138 -- -- -- -- Multi-family................................ -- -- -- -- -- Commercial.................................. 171 -- -- 624 -- Consumer.................................... 2,260 3,230 367 75 -- ------ ------ ------ ------ ------ Total charge-offs................... 2,569 3,230 367 699 -- ====== ====== ====== ====== ====== Recoveries: Construction................................ -- 45 -- 50 19 One-to-four family.......................... 31 -- -- -- -- Multi-family................................ 40 -- -- -- -- Commercial.................................. 22 -- -- -- -- Consumer loans.............................. 292 37 -- -- -- ------ ------ ------ ------ ------ Total Recoveries............................ 385 82 -- 50 19 ====== ====== ====== ====== ====== Net loans charged-off/(Recoveries)............ 2,184 3,148 367 649 (19) Provision for losses........................ 1,099 4,030 1,259 1,689 150 ------ ------ ------ ------ ------ Balance at end of period.................... $2,935 $4,020 $3,138 $2,246 $1,206 ====== ====== ====== ====== ====== Ratio of net charge-offs to average loans outstanding.............................. 0.84% 1.17% 0.15% 0.69% --% Ratio of allowance to total loans........... 1.07% 1.48% 1.11% 1.09% 1.42% Ratio of allowance to non-performing assets(2)................................ 95.79% 85.60% 45.30% 35.06% 37.05%
- --------------- (1) Loans are charged-off when management determines that they are uncollectible. (2) Non-performing assets consist of non-accrual loans, accruing loans 90 days or more past due and property acquired in settlement of loans. 16 18 The following table allocates the allowance for loan losses by asset category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
AT MARCH 31, ----------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------- ------------------- ------------------- ------------------- ------------------- PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN EACH EACH EACH EACH EACH CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- (DOLLARS IN THOUSANDS) Loans: Real estate One-to four- family......... $1,050 55.54% $ 957 23.81% $1,691 53.91% $1,065 47.40% $ 165 69.23% Multi-family..... 764 31.40% 902 22.44 400 12.75 264 11.76 75 2.94 Nonresidential... 202 8.28% 251 6.24 111 3.53 414 18.44 616 13.18 Construction..... 272 2.33% 424 10.55 340 10.84 212 9.44 15 8.24 Consumer, commercial and other.......... 647 2.45% 1,486 36.96 596 18.97 291 12.96 335 6.41 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total allowance for loan losses........ $2,935 100.00% $4,020 100.00% $3,138 100.00% $2,246 100.00% $1,206 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
MORTGAGE-BACKED AND RELATED SECURITIES Carver maintains a significant portfolio of mortgage-backed securities in the form of Government National Mortgage Association ("GNMA") pass-through certificates, Fannie Mae and FHLMC participation certificates and collateralized mortgage obligations ("CMOs"). GNMA pass-through certificates are guaranteed as to the payment of principal and interest by the full faith and credit of the U.S. Government, while Fannie Mae and FHLMC certificates are each guaranteed by their respective agencies as to principal and interest. Mortgage-backed securities generally entitle Carver to receive a pro rata portion of the cash flows from an identified pool of mortgages. CMOs are securities issued by special purpose entities generally collateralized by pools of mortgage-backed securities. The cash flows from such pools are segmented and paid in accordance with a predetermined priority to various classes of securities issued by the entity. Carver's CMOs are primarily adjustable-rate CMOs issued by the Resolution Trust Corporation ("RTC"). Carver also invests in pools of loans guaranteed as to principal and interest by the Small Business Administration ("SBA"). Although mortgage-backed securities generally yield from 60 to 100 basis points less than whole loans, they present substantially lower credit risk and are more liquid than individual mortgage loans and may be used to collateralize obligations of the Company. Because Carver receives regular payments of principal and interest from its mortgage-backed securities, these investments provide more consistent cash flows than investments in other debt securities which generally only pay principal at maturity. Mortgage-backed securities also help the Bank meet certain definitional tests for favorable treatment under federal banking and tax laws. See "Regulation and Supervision -- Regulation of Federal Savings Associations -- QTL Test" and "Federal and State Taxation." The Bank seeks to avoid interest rate risk by investing in adjustable-rate mortgage-backed securities, which at March 31, 2000 constituted $31.6 million or 58.62% of the mortgage-backed securities portfolio. Mortgage-backed securities, however, expose Carver to certain unique risks. In a declining rate environment, accelerated prepayments of loans underlying these securities expose Carver to the risk that it will be unable to obtain comparable yields upon reinvestment of the proceeds. In the event the mortgage-backed security has been funded with an interest-bearing liability with a maturity comparable to the original estimated life of the mortgage-backed security, the Bank's interest rate spread could be adversely affected. Conversely, in a rising 17 19 interest rate environment, the Bank may experience a lower than estimated rate of repayment on the underlying mortgages, effectively extending the estimated life of the mortgage-backed security and exposing the Bank to the risk that it may be required to fund the asset with a liability bearing a higher rate of interest. The increased effort by Carver, since fiscal 1997, to originate and purchase loans has shifted the emphasis away from the use of mortgage-backed securities as the Company's primary interest earning asset. Over the last fiscal year repayments received from mortgage-backed securities have primarily been reinvested in residential mortgage loans. This has resulted in a decrease in Carver's investment in mortgage-backed securities and a reduction in the percentage of mortgage-backed securities to total assets. At March 31, 2000, mortgage-backed securities constituted 12.91% of total assets, as compared to 15.99% at March 31, 1999. The following table sets forth the carrying value of Carver's mortgage-backed securities at the dates indicated.
YEAR ENDED MARCH 31, ------------------------------ 2000 1999 1998 ------- ------- -------- (DOLLARS IN THOUSANDS) Held to Maturity GNMA...................................................... $ 6,516 $ 7,631 $ 8,855 FANNIE MAE................................................ 26,222 29,718 36,685 FHLMC..................................................... 18,780 24,636 35,901 SBA....................................................... 760 1,325 1,770 CMO: RTC.................................................... 1,708 2,282 6,565 FHLMC.................................................. -- 647 1,340 Other.................................................. 243 345 -- ------- ------- -------- Total CMOs........................................ 1,951 3,274 7,905 ------- ------- -------- Total Held to Maturity............................ 54,229 66,584 91,116 ------- ------- -------- Available-for-Sale: GNMA...................................................... $ -- $ -- $ 15,192 FANNIE MAE................................................ -- -- 8,541 FHLMC..................................................... -- -- 4,674 ------- ------- -------- Total Available-for-Sale.......................... -- -- 28,407 ------- ------- -------- Total Mortgage-Backed Securities.................. $54,229 $66,584 $119,523 ======= ======= ========
The following table sets forth the scheduled maturities, carrying values, market values and average yields for Carver's mortgage-backed securities at March 31, 2000. Expected maturities will differ from contractual maturities due to scheduled repayments and because borrowers may have the right to call or prepay 18 20 obligations with or without prepayment penalties. The following table does not take into consideration the effects of scheduled repayments or the effects of possible prepayments.
ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS TOTAL MORTGAGE-BACKED SECURITIES ------------------ ------------------ -------------------- ---------------------------------- CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE VALUE YIELD VALUE YIELD VALUE YIELD VALUE VALUE YIELD -------- ------- -------- ------- --------- -------- ---------- --------- --------- (DOLLARS IN THOUSANDS) GMNA................. $ -- --% $ -- --% $ 6,516 6.74% $ 6,516 $ 6,244 6.74% Fannie Mae........... -- -- 4,097 6.61 22,125 6.10 26,222 25,004 6.18 FHLMC................ 525 7.28 1,097 6.95 17,158 6.01 18,780 17,992 6.10 SBA.................. -- -- -- -- 760 6.41 760 766 6.41 CMO RTC................ -- -- -- -- 1,708 5.18 1,708 1,696 5.14 Other.............. -- -- -- -- 243 7.29 243 237 7.29 ---- ------ ------- ------- ------- TOTAL...... $525 $5,194 $48,510 $54,229 $51,939 ==== ====== ======= ======= =======
INVESTMENT ACTIVITIES Carver is permitted under federal law to make certain investments, including investments in securities issued by various federal agencies and state and municipal governments, deposits at the FHLB, certificates of deposit in federally insured institutions, certain bankers' acceptances and federal funds. The Bank may also invest, subject to certain limitations, in commercial paper having one of the two highest investment ratings of a nationally recognized credit rating agency, and certain other types of corporate debt securities and mutual funds. Federal regulations require the Bank to maintain an investment in FHLB stock and a minimum amount of liquid assets which may be invested in cash and specified securities. From time to time, the OTS adjusts the percentage of liquid assets which savings banks are required to maintain. For additional information, see "Regulation and Supervision -- Regulation of Federal Savings Associations -- Liquidity." The following table sets forth the carrying value of Carver's investment securities held to maturity and available for sale at the date indicated.
AT MARCH 31, -------------------------- 2000 1999 1998 ------- ------- ---- (IN THOUSANDS) HELD TO MATURITY: U.S. Government and Agency securities..................... $24,996 $ -- $-- ------- ------- -- Total held to maturity................................. $24,996 $ -- $-- AVAILABLE FOR SALE: U.S. Government and Agency securities..................... $24,952 $29,918 $-- ------- ------- -- Total available for sale............................... $24,952 $29,918 $-- ------- ------- -- Total investment securities....................... $49,948 $29,918 $-- ======= ======= ==
The following table sets forth the carrying value of Carver's investment in FHLB stock and liquid assets at the date indicated.
AT MARCH 31, -------------------------- 2000 1999 1998 ------ ------ ------ (IN THOUSANDS) FHLB Stock.................................................. $5,755 $5,755 $5,755 Federal Funds Sold.......................................... 11,300 10,200 3,000
19 21 The following table sets forth the scheduled maturities, carrying values, market values and average yields for Carver's investments at March 31, 2000.
ONE YEAR OR LESS ONE TO FIVE YEARS TOTAL OTHER INVESTMENTS ------------------ ------------------ ---------------------------- CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE VALUE YIELD VALUE YIELD VALUE VALUE YIELD -------- ------- -------- ------- -------- ------- ------- (DOLLARS IN THOUSANDS) U.S. Government and Agency securities... $24,952 5.97% $24,996 6.41% $49,948 $49,261 6.19% Federal funds sold...................... 11,300 5.75 -- -- 11,300 11,300 5.75 FHLB stock.............................. 5,755 7.05 -- -- 5,755 5,755 7.05 ------- ------- ------- ------- Total investments....................... $42,007 $24,996 $67,003 $66,316 ======= ======= ======= =======
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS General. Deposits are the primary source of Carver's funds for lending and other investment purposes. In addition to deposits, Carver derives funds from loan principal repayments, interest payments and maturing investments. Loan repayments and interest payments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by prevailing market interest rates and money market conditions. Borrowing may be used to supplement the Company's available funds, and from time to time the Company has borrowed funds from the FHLB and through reverse repurchase agreements. Deposits. Carver attracts deposits principally from within its market area by offering a variety of deposit instruments, including passbook and statement accounts and certificates of deposit which range in term from 91 days to seven years. Deposit terms vary, principally on the basis of the minimum balance required, the length of time the funds must remain on deposit and the interest rate. Carver also offers Individual Retirement Accounts. Carver's policies are designed primarily to attract deposits from local residents through the Company's branch network rather than from outside the Company's market area. Carver also holds deposits from various governmental agencies or authorities. Carver does not accept deposits from brokers. The Bank's interest rates, maturities, service fees and withdrawal penalties on deposits are established by management on a periodic basis. Management determines deposit interest rates and maturities based on the Company's funds acquisition and liquidity requirements, the rates paid by the Company's competitors, the Company's growth goals and applicable regulatory restrictions and requirements. 20 22 The following table sets forth deposit categories, weighted average interest rate, minimum terms, minimum balance, aggregate balance and percentage of total deposits for Carver's deposits at March 31, 2000.
WEIGHTED AGGREGATE PERCENTAGE AVERAGE MINIMUM MINIMUM BALANCE OF TOTAL INTEREST RATE TERM CATEGORY BALANCE (IN THOUSANDS) DEPOSITS - ------------- ------------ ----------------------------- ------- -------------- ---------- 1.83% None NOW accounts $1,000 $ 18,873 6.69% 2.50 None Savings and club 300 145,277 51.52 3.17 None Money market savings accounts 500 19,418 6.89 -- None Other demand accounts 500 12,337 4.38 -------- ------ Total Savings accounts $195,905 69.48 ======== ====== Certificates of Deposit 3.85 91 days Fixed-term, fixed rate 2,500 $ 5,129 1.82 4.05 182-365 days Fixed-term, fixed rate 2,500 12,564 4.46 4.68 1-2 years Fixed-term, fixed rate 1,000 26,105 9.27 4.32 2-3 years Fixed-term, fixed rate 1,000 3,594 1.27 5.17 3-4 years Fixed-term, fixed rate 1,000 8,410 2.98 4.87 4-5 years Fixed-term, fixed rate 1,000 2,574 0.91 5.10 5-7 years Fixed-term, fixed rate 500 22,493 7.98 5.77 30 days Negotiable 80,000 5,167 1.83 -------- ------ Total Certificates of Deposit $ 86,036 30.52 -------- ------ Total Deposits $281,941 100.00% ======== ======
The following table sets forth the change in dollar amount of deposits in the various types of accounts offered by Carver between the dates indicated.
BALANCE AT PERCENTAGE BALANCE AT PERCENTAGE BALANCE AT PERCENTAGE MARCH 31, OF TOTAL INCREASE MARCH 31, OF TOTAL INCREASE MARCH 31, OF TOTAL 2000 DEPOSITS (DECREASE) 1999 DEPOSITS (DECREASE) 1998 DEPOSITS ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Savings and club.......... $145,277 51.52% $ 1,482 $143,795 51.91% $(1,653) $145,448 52.91% Money market savings...... 19,418 6.89 (1,514) 20,932 7.56 (564) 21,496 7.82 NOW and demand accounts... 31,210 11.07 4,499 26,711 9.64 (2,206) 28,917 10.52 Certificates of deposit... 86,036 30.52 475 85,561 30.89 6,528 79,033 28.75 -------- ------ ------- -------- ------ ------- -------- ------ Total deposits... $281,941 100.00% $ 4,942 $276,999 100.00% $ 2,105 $274,894 100.00% ======== ====== ======= ======== ====== ======= ======== ======
The following table sets forth the average balances and interest rates based on month end balances for certificates of deposit and non-certificate accounts as of the dates indicated.
YEAR ENDED MARCH 31, ----------------------------------------------------------------- 2000 1999 1998 ------------------- ------------------- ------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE -------- ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Non-interest-bearing demand.... $ 11,388 0.00% $ 9,670 0.00% $ 8,625 0.00% Savings and club............... 143,908 2.54 144,990 2.49 144,466 2.49 Certificates................... 86,316 4.65 80,897 4.81 76,990 5.13 Money market savings accounts..................... 19,578 3.22 21,541 2.85 21,514 3.22 NOW accounts................... 18,032 1.74 18,789 1.67 18,725 1.89 -------- -------- -------- Total................ $279,222 $275,887 $270,320 ======== ======== ========
21 23 The following table sets forth time deposits in specified weighted average interest rate categories as of the dates indicated.
AT MARCH 31, ---------------------------------- 2000 1999 1998 ------- ------------ ------- (IN THOUSANDS) 2%-3.99%........................................... $ 5,129 $18,034 $ -- 4%-5.99%........................................... 80,907 67,527 78,958 6%-7.99%........................................... -- -- 75 ------- ------- ------- Total.................................... $86,036 $85,561 $79,033 ======= ======= =======
The following table sets forth the amount and maturities of time deposits in specified weighted average interest rate categories at March 31, 2000.
AMOUNT DUE ---------------------------------------------------------- LESS THAN AFTER RATE ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL - ---- --------- --------- ---------- ------- ------- (IN THOUSANDS) 2%-3.99%...................... $ 5,129 $ -- $ -- $ -- $ 5,129 6%-7.99%...................... 12,564 26,105 3,594 38,644 80,907 ------- ------- ------ ------- ------- Total............... $17,693 $26,105 $3,594 $38,644 $86,036 ======= ======= ====== ======= =======
The following table indicates the amount of Carver's certificates of deposit of $100,000 or more by time remaining until maturity as of March 31, 2000.
CERTIFICATES OF MATURITY PERIOD DEPOSITS - --------------- --------------- (IN THOUSANDS) Three months or less........................................ $ 2,430 Three through six months.................................... 3,099 Six through 12 months....................................... 3,281 Over 12 months.............................................. 8,704 ------- Total............................................. $17,514 =======
The following table sets forth Carver's deposit reconciliation for the periods indicated.
YEAR ENDED MARCH 31, -------------------------------- 2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Deposits at beginning of year...................... $276,999 $274,894 $266,471 Net decrease before Interest credited.............. (3,670) (6,315) (173) Interest credited.................................. 8,612 8,420 8,596 -------- -------- -------- Deposits at end of year............................ $281,941 $276,999 $274,894 ======== ======== ========
Borrowing. Savings deposits historically have been the primary source of funds for Carver's lending, investment and general operating activities. Carver is authorized, however, to use advances and securities sold under agreement to repurchase ("Repos") from the FHLB and approved primary dealers to supplement its supply of funds and to meet deposit withdrawal requirements. The FHLB functions as a central bank providing credit for savings institutions and certain other member financial institutions. As a member of the FHLB system, Carver is required to own stock in the FHLB and is authorized to apply for advances. Advances are made pursuant to several different programs, each of which has its own interest rate and range of maturities. Advances from the FHLB are secured by Carver's stock in the FHLB and a blanket pledge of Carver's mortgage loan and mortgage-backed securities portfolios. 22 24 One of the elements of Carver's investment strategy is to leverage the balance sheet by increasing liabilities with advances and Repos and investing borrowed funds into adjustable rate mortgage loans. The Bank seeks to match as closely as possible the term of borrowing with the repricing cycle of the mortgage loans on the balance sheet. At March 31, 2000, Carver had $66.7 million in FHLB Advances and $31.3 million in securities sold under agreements to repurchase outstanding. The following table sets forth certain information regarding Carver's short-term borrowing at the dates and for the periods indicated:
AT OR FOR THE YEAR ENDED MARCH 31, ----------------------------- 2000 1999 1998 ------- ------- ------- (DOLLARS IN THOUSANDS) Amounts outstanding at end of period: FHLB advances............................................. $66,688 $65,708 $36,742 Securities sold under agreements to repurchase............ 31,337 35,337 87,020 Weighted average rate paid at period end: FHLB advances............................................. 5.60% 5.46% 5.82% Securities sold under agreements to repurchase............ 5.49% 5.52% 5.85% Maximum amount of borrowing outstanding at any month end: FHLB advances............................................. $66,688 $65,723 $39,744 Securities sold under agreements to repurchase............ 35,337 85,720 87,020 Approximate average amounts outstanding for period: FHLB advances............................................. $65,031 $47,393 $31,273 Securities sold under agreements to repurchase............ 32,670 59,296 78,310 Approximate weighted average rate paid during period(1): FHLB advances............................................. 5.47% 5.66% 5.96% Securities sold under agreements to repurchase............ 5.46% 5.74% 5.79%
- --------------- (1) The approximate weighted average rate paid during the period was computed by dividing the average amounts outstanding into the related interest expense for the period. SUBSIDIARY ACTIVITIES The Holding Company is the parent of two wholly owned subsidiaries, Carver Federal and Alhambra. For a description of Alhambra, see "Asset Quality -- Non-performing Assets." As a federally chartered savings institution, Carver Federal is permitted to invest up to 2% of its assets in subsidiary service corporations plus an additional 1% in subsidiaries engaged in specified community purposes. At March 31, 2000, the net book value of the Bank's service corporations investments was $445,237. Carver Federal is also authorized to make investments of any amount in operating subsidiaries that engage solely in activities that federal savings institutions may conduct directly. On March 8, 1995, the Bank formed CFSB Realty Corp. as a wholly owned subsidiary which holds real estate acquired through foreclosure pending eventual disposition. At March 31, 2000, this subsidiary had $281,922 in total capital and net operating expenses of $10,174. On September 19, 1996, the Bank formed CFSB Credit Corp. ("CCC") as a wholly owned subsidiary to undertake Carver's credit card issuance. During the fourth quarter of fiscal 1998, in response to delinquencies in the credit card portfolio, the Board resolved to discontinue the direct issuance of unsecured credit cards and limited the issuance of secured credit cards to existing Bank customers. CCC is currently inactive, and its operations have been consolidated into the Bank's activities. MARKET AREA AND COMPETITION General. The Company's primary market area for deposits consists of the areas served by its six branches, and the Bank considers its lending market to include Bronx, Kings, New York, Queens and Richmond counties, together comprising New York City, and Lower Westchester County, New York. 23 25 Although Carver's branches are located in areas that have been historically underserved by other financial institutions, Carver is facing increasing competition for deposits and residential mortgage lending in its immediate market areas. Management believes that this competition has become more intense as a result of an increased examination emphasis by federal banking regulators on financial institutions' fulfillment of their responsibilities under the Community Reinvestment Act ("CRA"). Many of Carver's competitors have substantially greater resources than Carver and offer a wider array of financial services and products than Carver. At times, these larger commercial banks and thrifts may offer below market interest rates on mortgage loans and above market interest rates for deposits. These pricing concessions combined with a larger presence in the New York market add to the challenges Carver faces in expanding its current market share. The Bank believes that it can compete with these institutions by offering a competitive range of services as well as through the personalized attention and community commitment which has always been Carver's hallmark. Branch Sale Agreement. On January 28, 1998, the Company announced that it had entered into a definitive agreement to sell the Bank's branch office located in Roosevelt, New York to City National Bank of New Jersey ("City National Bank"). However, the sale was delayed because of certain regulatory issues. The Roosevelt branch office is located in Nassau County and had deposits of approximately $8.6 million at March 31, 2000. During May, 1999, the Company and City National Bank reopened the discussion of the transaction under similar terms and conditions as the sale agreement. In May, 2000, the Company completed the sale of the Roosevelt branch office to City National Bank. City National Bank assumed the deposit liabilities and acquired the related branch assets consisting of cash, fixed assets and loans secured by deposits. City National Bank paid to the Company a premium of approximately $255,000 or approximately 3% of the deposit liabilities assumed. EMPLOYEES As of March 31, 2000, Carver had 110 full-time equivalent employees, none of whom was represented by a collective bargaining agreement. REGULATION AND SUPERVISION GENERAL The Bank is subject to extensive regulation, examination, and supervision by the OTS, as its chartering agency, and the FDIC, as its deposit insurer. The Bank's deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") administered by the FDIC, and it is a member of the FHLB. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, and it must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The OTS and the FDIC conduct periodic examinations to assess the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings association can engage and is intended primarily for the protection of the insurance fund and depositors. The Holding Company, as a savings association holding company, is required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and of the Securities and Exchange Commission (the "SEC") under the federal securities laws. The OTS and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC, or the Congress, could have a material adverse impact on the Holding Company, the Bank, and the operations of both. The following discussion is intended to be a summary of the material statutes and regulations applicable to savings associations, and it does not purport to be a comprehensive description of all such statutes and regulations. 24 26 IMPACT OF ENACTMENT OF THE GRAMM-LEACH-BLILEY ACT On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act ("Gramm-Leach"), which among other things, establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies and securities firms. Generally, the new law (1) repeals the historical restrictions and eliminates many federal and state law barriers to affiliations among banks and securities firms, insurance companies and other financial service providers, (2) provides a uniform framework for the activities of banks, savings institutions and their holding companies, (3) broadens the activities that may be conducted by subsidiaries of national banks and state banks, (4) provides an enhanced framework for protecting the privacy of information gathered by financial institutions regarding their customers and consumers, (5) adopts a number of provisions related to the capitalization, membership, corporate governance and other measures designed to modernize the FHLB System, (6) requires public disclosure of certain agreements relating to funds expended in connection with an institution's compliance with the CRA, and (7) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions, including the functional regulation of bank securities and insurance activities. Gramm-Leach also restricts the powers of new unitary savings and loan association holding companies. Unitary savings and loan holding companies that are "grandfathered," i.e., unitary savings and loan holding companies in existence or with applications filed with the OTS on or before May 4, 1999, such as the Holding Company, retain their authority under the prior law. All other unitary savings and loan holding companies are limited to financially related activities permissible for bank holding companies, as defined under Gramm- Leach. Gramm-Leach also prohibits non-financial companies from acquiring grandfathered unitary savings and loan association holding companies. Gramm-Leach also requires financial institutions to disclose, on ATM machines, any non-customer fees and to disclose to their customers upon the issuance of an ATM card any fees that may be imposed by the institutions on ATM users. For older ATMs, financial institutions will have until December 31, 2004 to provide such notices. Bank holding companies are permitted to engage in a wider variety of financial activities than permitted under the prior law, particularly with respect to insurance and securities activities. In addition, in a change from the prior law, bank holding companies are in a position to be owned, controlled or acquired by any company engaged in financially related activities. The Bank does not believe that the new law will have a material adverse affect upon its operations in the near term. However, to the extent the new law permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This type of consolidation could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Bank currently offers and that can more aggressively compete in the markets we currently serve. REGULATION OF FEDERAL SAVINGS ASSOCIATIONS Business Activities. The Bank derives its lending and investment powers from the Home Owner's Loan Act, as amended ("HOLA"), and the regulations of the OTS thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. These investment powers are subject to various limitations, including (a) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four highest rating categories; (b) a limit of 400% of an association's capital on the aggregate amount of loans secured by non-residential real estate property; (c) a limit of 20% of an association's assets on commercial loans, with the amount of commercial loans in excess of 10% of assets being limited to small business loans; (d) a limit of 35% of an association's assets on the aggregate amount of consumer loans and acquisitions of certain debt securities; (e) a limit of 5% of assets on nonconforming loans (loans in excess of the specific limitations of HOLA); and (f) a limit of the greater of 5% of assets or an association's capital on 25 27 certain construction loans made for the purpose of financing what is or is expected to become residential property. Loans to One Borrower. Under HOLA, savings associations are generally subject to the same limits on loans to one borrower as are imposed on national banks. Generally, under these limits, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral. Such collateral is defined to include certain debt and equity securities and bullion, but generally does not include real estate. At March 31, 2000, the Bank's limit on loans to one borrower based on its unimpaired capital and surplus was $4.3 million. During fiscal 1999, the Bank was directed by the OTS to abstain from originating new loans which individually, or in the aggregate exceed $2.0 million to one borrower. Since such notice, the Bank has not originated loans which individually, or in the aggregate exceed $2.0 million. QTL Test. HOLA requires a savings association to meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" in at least nine months of the most recent twelve-month period. "Portfolio assets" means, in general, an association's total assets less the sum of (a) specified liquid assets up to 20% of total assets, (b) certain intangibles, including goodwill and credit card rights, and (c) the value of property used to conduct the association's business. "Qualified thrift investments" includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and consumer loans. At March 31, 2000, the Bank maintained approximately 84.85% of its portfolio assets in qualified thrift investments. The Bank had also met the QTL test in each of the prior 12 months and was, therefore, a qualified thrift lender. A savings association that fails the QTL test must either operate under certain restrictions on its activities or convert to a bank charter. The initial restrictions include prohibitions against (a) engaging in any new activity not permissible for a national bank, (b) paying dividends not permissible under national bank regulations, (c) obtaining new advances from any FHLB, and (d) establishing any new branch office in a location not permissible for a national bank in the association's home state. In addition, within one year of the date a savings association ceases to meet the QTL test, any company controlling the association would have to register under, and become subject to the requirements of, the Bank Holding Company Act of 1956 ("BHC Act"), as amended. If the savings association does not re-qualify under the QTL test within the three-year period after it failed the QTL test, it would be required to terminate any activity and to dispose of any investment not permissible for a national bank and would have to repay as promptly as possible any outstanding advances from an FHLB. A savings association that has failed the QTL test may re-qualify under the QTL test and be free of such limitations, but it may do so only once. Capital Requirements. The OTS capital regulations require federally chartered savings banks to meet three capital ratios: a 1.5% tangible capital ratio, a 4% leverage (core capital) ratio and an 8% risk-based capital ratio. In assessing an institution's capital adequacy, the OTS takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where necessary. The Bank, as a matter of prudent management, targets as its goal the maintenance of capital ratios which exceed these minimum requirements and that are consistent with the Bank's risk profile. At March 31, 2000, the Bank exceeded each of its capital requirements with tangible and leverage capital ratios of 6.85% and a risk-based capital ratio of 15.38%. The Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), requires that the OTS and other federal banking agencies revise their risk-based capital standards, with appropriate transition rules, to ensure that they take into account interest rate risk ("IRR"), concentration of risk and the risks of non-traditional activities. The OTS adopted regulations, effective January 1, 1994, that set forth the methodology for calculating an IRR component to be incorporated into the OTS risk-based capital regulations. The OTS has indefinitely deferred its requirements of the IRR component in the calculation of an institution's risk-based capital calculation. The OTS continues to monitor the IRR of individual institutions through analysis of 26 28 the change in net portfolio value ("NPV"). The OTS has also used this NPV analysis as part of its evaluation of certain applications submitted by thrift institutions. For a more complete discussion of NPV analysis, see "Executive Officers of the Holding Company -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Discussion of Market Rate Sensitivity Analysis." The OTS, through its general oversight of the safety and soundness of savings associations, retains the right to impose minimum capital requirements on individual institutions to the extent the institution is not in compliance with certain written guidelines established by the OTS regarding NPV analysis. The OTS has not imposed any such requirements on the Bank. Limitation on Capital Distributions. The OTS regulations impose limitations upon capital distributions by savings associations, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cashout merger, and other distributions charged against capital. Effective April 1, 1999, the OTS amended its capital distribution regulations to reduce regulatory burdens on savings associations. Under the OTS regulations, certain savings associations are permitted to pay capital distributions during a calendar year that do not exceed the association's net income for that year plus its retained net income for the prior two years, without notice to, or the approval of, the OTS. However, a savings association subsidiary of a savings and loan holding company, such as the Bank, must file a notice unless the specific capital distribution requires an application. In addition, the OTS can prohibit a proposed capital distribution, otherwise permissible under the regulation, if the OTS has determined that the association is in need of more than normal supervision or if it determines that a proposed distribution by an association would constitute an unsafe or unsound practice. Furthermore, under the OTS prompt corrective action regulations, the Bank would be prohibited from making any capital distribution if, after the distribution, the Bank failed to meet its minimum capital requirements, as described above. See "-- Prompt Corrective Regulatory Action." Liquidity. The Bank is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, specified United States Government, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to a specified percentage of the average daily balance of its net withdrawal deposit accounts plus short-term borrowing for the preceding calendar quarter or the balance of such items at the end of the preceding calendar quarter. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions, and is currently 4%. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Bank's liquidity ratio for the year ended March 31, 2000 was 20.43%, which exceeded the applicable requirements. Assessments. Savings associations are required by OTS regulation to pay assessments to the OTS to fund the operations of the OTS. The assessment for an individual savings association is based on three components: the size of the association, on which the basic assessment would be based; the association's supervisory condition, which would result in an additional assessment based on a percentage of the basic assessment for any savings institution with a composite rating of 3, 4 or 5 in its most recent safety and soundness examination; and the complexity of the association's operations, which would result in an additional assessment based on a percentage of the basic assessment for any savings association that managed over $1.0 billion in trust assets, serviced for others loans aggregating more than $1.0 billion, or had certain off-balance sheet assets aggregating more than $1.0 billion. In order to avoid a disproportionate impact on the smaller savings institutions, which are those whose total assets never exceeded $100.0 million, the regulations provide that the portion of the assessment based on asset size will be the lesser of the assessment under the amended regulations or the regulations before the amendment. Branching. Subject to certain limitations, HOLA and the OTS regulations permit federally chartered savings associations to establish branches in any state of the United States. The authority to establish such a branch is available (a) in states that expressly authorize branches of savings associations located in another state and (b) to an association that qualifies as a "domestic building and loan association" under the Internal Revenue Code of 1986 (the "Code"), which imposes qualification requirements similar to those for a "qualified thrift lender" under HOLA. See "-- QTL Test." The authority for a federal savings association to establish an interstate branch network would facilitate a geographic diversification of the association's 27 29 activities. This authority under HOLA and the OTS regulations preempts any state law purporting to regulate branching by federal savings associations. Community Reinvestment. Under the CRA, as implemented by OTS regulations, a federally chartered savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings association, to assess the association's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA regulations establish an assessment system that bases an association's rating on its actual performance in meeting community needs. In particular, the assessment system focuses on three tests: (a) a lending test, to evaluate the institution's record of making loans in its assessment areas; (b) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and (c) a service test, to evaluate the institution's delivery of services through its branches, ATMs, and other offices. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating in its most recent examination conducted in 1998. Transactions with Related Parties. The Bank's authority to engage in transactions with its "affiliates" is limited by the OTS regulations and by Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an affiliate of the Bank is any company that controls the Bank or any other company that is controlled by a company that controls the Bank, excluding the Bank's subsidiaries other than those that are insured depository institutions. The OTS regulations prohibit a savings association (a) from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies under Section 4(c) of the BHC Act and (b) from purchasing the securities of any affiliate other than a subsidiary. Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings association and also limits the aggregate amount of transactions with all affiliates to 20% of the savings association's capital and surplus. Extensions of credit to affiliates are required to be secured by collateral in an amount and of a type described in Section 23A, and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the association as those prevailing at the time for comparable transactions with nonaffiliated companies. In the absence of comparable transactions, such transactions may only occur under terms and circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies. The Bank's authority to extend credit to its directors, executive officers, and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board thereunder. Among other things, these provisions require that extensions of credit to insiders (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the association's capital. In addition, extensions of credit in excess of certain limits must be approved by the association's board of directors. Enforcement. Under the Federal Deposit Insurance Act ("FDI Act"), the OTS has primary enforcement responsibility over savings associations and has the authority to bring enforcement action against all "institution affiliated parties," including any controlling stockholder or any shareholder, attorney, appraiser and accountant who knowingly or recklessly participates in any violation of applicable law or regulation or breach of fiduciary duty or certain other wrongful actions that causes or is likely to cause a more than a minimal loss or other significant adverse effect on an insured savings association. Civil penalties cover a wide 28 30 range of violations and actions and range from $5,000 for each day during which violations of law, regulations, orders, and certain written agreements and conditions continue, up to $1.0 million per day for such violations if the person obtained a substantial pecuniary gain as a result of such violation or knowingly or recklessly caused a substantial loss to the institution. Criminal penalties for certain financial institution crimes include fines of up to $1.0 million and imprisonment for up to 30 years. In addition, regulators have substantial discretion to take enforcement action against an institution that fails to comply with its regulatory requirements, particularly with respect to its capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to receivership, conservatorship, or the termination of deposit insurance. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS that enforcement action be taken with respect to a particular savings association. If action is not taken by the Director of the OTS, the FDIC has authority to take such action under certain circumstances. Standards for Safety and Soundness. Pursuant to the FDI Act, as amended by FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994, the OTS and the federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the OTS adopted regulations pursuant to FDICIA that authorize, but do not require, the OTS to order an institution that has been given notice by the OTS that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the "prompt corrective action" provisions of FDICIA. If an institution fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties. Prompt Corrective Regulatory Action. FDICIA established a system of prompt corrective action to resolve the problems of undercapitalized depository institutions. Under this system, the federal banking regulators are required to take certain supervisory actions against undercapitalized institutions, the severity of which depends on the institution's degree of capitalization. For this purpose, a savings association would be placed in one of five categories based on the association's capital. Generally, a savings association is treated as "well capitalized" if its ratio of total capital to risk-weighted assets is at least 10.0%, its ratio of core capital to risk weighted assets is at least 6.0%, its ratio of core capital to total assets is at least 5.0%, and it is not subject to any order or directive by the OTS to meet a specific capital level. A savings association will be treated as "adequately capitalized" if its ratio of total capital to risk-weighted assets is at least 8.0%, its ratio of core capital to risk weighted assets is at least 4.0%, and its ratio of core capital to total assets is at least 4.0% (3.0% if the association receives the highest rating on the Uniform Financial Institutions Rating System). A savings association that has a total risk based capital of less than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if the association receives the highest rating on the Uniform Financial Institutions Rating System) is considered to be "undercapitalized." A savings association that has a total risk based capital of less than 6.0% or a Tier 1 risk based capital ratio or a leverage ratio of less than 3.0% is considered to be "significantly undercapitalized." A savings association that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." The elements of an association's capital for purposes of the prompt corrective action regulations are defined generally as they are under the regulations for minimum capital requirements. As of March 31, 2000, the Bank was considered well-capitalized by the OTS. See "-- Regulation of Federal Savings Associations -- Capital Requirements." When appropriate, the OTS can require corrective action by a savings association holding company under the "prompt corrective action" provisions of FDICIA. 29 31 Insurance of Deposit Accounts. The Bank is a member of the SAIF of the FDIC, and the Bank pays its deposit insurance assessments to the SAIF of the FDIC. The FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures the deposits of banks and state chartered savings banks. Pursuant to FDICIA, the FDIC established a risk based assessment system for determining the deposit insurance assessments to be paid by insured depository institutions. Under the assessment system, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of the reporting period ending seven months before the assessment period. The three capital categories consist of (a) well capitalized, (b) adequately capitalized, or (c) undercapitalized. The FDIC also assigns an institution to one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the regulation, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Assessment rates currently range from 0.0% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.27% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern). The Bank's annual assessment rate for the first half of 2000 was 0.17% of deposits. The FDIC is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of 1.25%. As a result of the Deposit Insurance Funds Act of 1996 (the "Funds Act"), both the BIF and the SAIF currently satisfy the reserve ratio requirement. If the FDIC determines that assessment rates should be increased, institutions in all risk categories could be affected. The FDIC has exercised this authority several times in the past and could raise insurance assessment rates in the future. If such action is taken by the FDIC, it could have an adverse effect on the earnings of the Bank. In addition, the Funds Act expanded the assessment base for the payments on the bonds ("FICO bonds") issued in the late 1980s by the Financing Corporation to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. Beginning January 1, 1997, the deposits of both BIF- and SAIF-insured institutions were assessed for the payments on the FICO bonds. The Bank's total expense in fiscal 2000 for the assessment of deposit insurance and the FICO payments was $609,000. Privacy Protection. On June 1, 2000, the OTS published final privacy rules implementing the privacy protection provisions of Section 504 of Gramm-Leach. The proposed regulations would require each financial institution to adopt procedures to protect customers' and consumers' "nonpublic personal information" by November 13, 2000; however, compliance will be optional until July 1, 2001. The Bank would be required to disclose its privacy policy, including identifying with whom it shares "nonpublic personal information," to customers at the time of establishing the customer relationship and annually thereafter. In addition, the Bank would be required to provide its customers with the ability to "opt-out" of having the Bank share its personal information with unaffiliated third parties. Gramm-Leach also provides for the ability of each state to enact legislation that is more protective of consumers' personal information. Currently, there are a number of privacy bills pending in the New York legislature. No action has been taken on any of these bills, and the Bank cannot predict what impact, if any, these bills would have. Federal Home Loan Bank System. The Bank is a member of the FHLB-NY, which is one of the regional FHLBs composing the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. The Bank, as a member of the FHLB-NY, is required to acquire and hold shares of capital stock in the FHLB-NY in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, 0.390 of total assets, or 5%, of its advances (borrowing) from the FHLB, whichever is greater. The Bank was in compliance with this requirement with an investment in the capital stock of the FHLB at March 31, 2000 of 30 32 $5.8 million. Any advances from a FHLB must be secured by specified types of collateral, and all long term advances may be obtained only for the purpose of providing funds for residential housing finance. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. The FHLB paid dividends to the Bank of $393,000 for the twelve months ended March 31, 2000 and dividends of $407,000 for the prior fiscal year. If dividends were reduced, or interest on future FHLB advances increased, the Bank's net interest income would likely also be reduced. Pursuant to Gramm-Leach, the foregoing minimum share ownership requirements will be replaced by regulations to be promulgated by the Federal Housing Finance Board. Gramm-Leach specifically provides that the minimum requirements in existence immediately prior to adoption of Gramm-Leach shall remain in effect until such regulations are adopted. Formerly, federal saving associations were required to be members of the FHLB System. The new law removed the mandatory membership requirement and authorized voluntary membership for federal savings associations, as is the case for all other eligible institutions. Federal Reserve System. The Bank is subject to provisions of the FRA and the Federal Reserve Board's regulations pursuant to which depositary institutions may be required to maintain noninterest-earning reserves against their deposit accounts and certain other liabilities. Currently, reserves must be maintained against transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained in the amount of 3% of the aggregate of transaction accounts up to $44.3 million. The amount of aggregate transaction accounts in excess of $44.3 million are currently subject to a reserve ratio of 10%, which ratio the Federal Reserve Board may adjust between 8% and 14%. The Federal Reserve Board regulations currently exempt $5.0 million of otherwise reservable balances from the reserve requirements, which exemption is adjusted by the Federal Reserve Board at the end of each year. The Bank is in compliance with the foregoing reserve requirements. Because required reserves must be maintained in the form of either vault cash, a noninterest bearing account at a Federal Reserve Bank, or a passthrough account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the OTS. FHLB System members are also authorized to borrow from the Federal Reserve "discount window," but Federal Reserve Board regulations require such institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. Holding Company Regulation. The Holding Company is a unitary savings and loan holding company within the meaning of the HOLA. As such, it is registered with the OTS and is subject to the OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Holding Company and savings association subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. The Bank must notify the OTS at least 30 days before declaring any dividend to the Holding Company. No dividends were paid from the Bank to the Holding Company in fiscal 2000. The HOLA prohibits a savings and loan holding company (directly or indirectly, or through one or more subsidiaries) from acquiring another savings association or holding company thereof without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings associations, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. Federal Securities Laws. The Holding Company is subject to the periodic reporting, proxy solicitation, tender offer, insider trading restrictions and other requirements under the Securities Exchange Act of 1934, as amended, ("Exchange Act"). 31 33 Delaware Corporation Law. The Holding Company is incorporated under the laws of the State of Delaware. Thus, we are subject to regulation by the State of Delaware and the rights of our shareholders are governed by the General Corporation Law of the State of Delaware. New York State Banking Regulations. The New York State Banking Department has proposed regulations that would impose restrictions and limitations on certain high cost home loans made by any individual or entity, including a federally-chartered savings association, that originates more than one high cost home loan in New York State in a 12-month period. The regulations, among other things, prohibit certain mortgage loan provisions and certain acts and practices by originators and impose certain disclosure and reporting requirements. It is unclear whether these provisions, if enacted, would be preempted by Section 5(a) of HOLA, as implemented by the lending and investment regulations of the OTS. The OTS has not yet adopted regulations regarding high-cost mortgage loans and is currently considering whether it will do so. Although the Bank does not originate loans that meet the definition of "high cost" under the proposed regulations, in the event the Bank determines to originate such loans in the future, the Bank may be subject to such regulation, if adopted as proposed. FEDERAL AND STATE TAXATION FEDERAL TAXATION General. The Holding Company and the Bank currently file consolidated federal income tax returns, report their income for tax return purposes on the basis of a taxable-year ending March 31st, using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's tax reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Holding Company. Bad Debt Reserves. The Bank, as a "small bank" (one with assets having an adjusted tax basis of $500 million or less) is permitted to maintain a reserve for bad debts with respect to "qualifying loans," which, in general, are loans secured by certain interests in real property, and to make, within specified formula limits, annual additions to the reserve which are deductible for purposes of computing the Bank's taxable income. Pursuant to the Small Business Job Protection Act of 1996, the Bank is now recapturing (taking into income) over a multi-year period a portion of the balance of its bad debt reserve as of March 31, 1996. Distributions. To the extent that the Bank makes "nondividend distributions" to shareholders, such distributions will be considered to result in distributions from the Bank's "base year reserve" i.e., its reserve as of March 31, 1988, to the extent thereof and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in the Bank's taxable income. Nondividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not constitute nondividend distributions and, therefore, will not be included in the Bank's income. The amount of additional taxable income created from a nondividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately one and one-half times the nondividend distribution would be includable in gross income for federal income tax purposes, assuming a 34% federal corporate income tax rate. Corporate Alternative Minimum Tax. The Code imposes a tax ("AMT") on alternative minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased by certain preference items. Only 90% of AMTI can be offset by net operating loss carryovers. AMTI is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Thus, the Company's AMTI is increased by an amount equal to 75% of the amount by which the 32 34 Company's adjusted current earnings exceeds its AMTI (determined without regard to this adjustment and prior to reduction for net operating losses). Dividends-Received Deduction and Other Matters. The Holding Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Holding Company and the Bank will not file a consolidated tax return, except that if the Holding Company or the Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted. STATE AND LOCAL TAXATION State of New York. The Bank and the Holding Company are subject to New York State franchise tax on net income or one of several alternative bases, whichever results in the highest tax. "Net income" means federal taxable income with adjustments. The Bank and the Holding Company file combined returns and are subject to taxation in the same manner as other corporations with some exceptions, including the Bank's deductions for additions to its reserve for bad debts. The New York State tax rate for each of fiscal 1998 and fiscal 1999 was 10.53% (including Metropolitan Commuter Transportation District Surcharge) of net income. In general, the Holding Company is not required to pay New York State tax on dividends and interest received from the Bank or on gains realized on the sale of Bank stock. New York State has enacted legislation that enabled the Bank to avoid the recapture of the New York State tax bad debt reserves that otherwise would have occurred as a result of the changes in federal law and to continue to utilize either the federal method or a method based on a percentage of its taxable income for computing additions to its bad debt reserve. New York City. The Bank and the Holding Company are also subject to a similarly calculated New York City banking corporation tax of 9% on income allocated to New York City. In this connection, legislation was recently enacted regarding the use and treatment of tax bad debt reserves that is substantially similar to the New York State legislation described above. Delaware Taxation. As a Delaware holding company not earning income in Delaware, the Holding Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. EXECUTIVE OFFICERS OF THE HOLDING COMPANY The name, position, term of office as officer and period during which he or she has served as an officer is provided below for each executive officer of the Holding Company. Each of the persons listed below is an executive officer of the Holding Company and the Bank.
NAME AGE POSITION - ---- --- ------------------------------------------------------ Deborah C. Wright.................... 42 President and Chief Executive Officer, Director Walter T. Bond....................... 42 Senior Vice President and Special Assistant to the CEO James Boyle.......................... 50 Senior Vice President and Chief Financial Officer Anthony Galleno...................... 58 Vice President and Controller Margaret Peterson.................... 50 Senior Vice President and Chief Administrative Officer J. Kevin Ryan........................ 50 Senior Vice President and Chief Lending Officer Judith Taylor........................ 57 Acting Senior Vice President and Chief of Retail Banking
DEBORAH C. WRIGHT is currently President and Chief Executive Officer and a Director of Carver and Carver Federal, positions she assumed on June 1, 1999. Prior to assuming her current positions, Ms. Wright was President & CEO of the Upper Manhattan Empowerment Zone Development Corporation, a position she held since May 1996. She previously served as Commissioner of the Department of Housing Preservation and Development under Mayor Rudolph W. Giuliani from January 1994 through March 1996. Prior to that 33 35 appointment, Ms. Wright was named to the New York City Housing Authority Board, by Mayor David N. Dinkins, which manages New York City's 189,000 public housing units. She serves on the boards of the Initiative for a Competitive Inner City, Empire State Development Corporation, PENCIL, Inc., The Ministers and Missionaries Benefit Board of the American Baptist Churches, and the New York City Partnership, Inc. Ms. Wright earned A.B., J.D. and M.B.A. degrees from Harvard University. WALTER T. BOND is Senior Vice President and Special Assistant to the President and Chief Executive Officer. Mr. Bond is also a member of the Bank's Investment Committee. Mr. Bond joined the Bank in February 1993, as Assistant Vice President, Mortgage Lender. Mr. Bond is a member of the New York Society of Securities Analyst and the Financial Managers Society. JAMES BOYLE is Senior Vice President and Chief Financial Officer a position he assumed in January 2000. Mr. Boyle was formerly Senior Vice President and Chief Financial Officer of Broad National Bank, which was acquired by Independence Community Bank in 1999. Mr. Boyle also held senior level financial positions at National Westminister Bancorp NJ, formerly First Jersey National Bank. He began his career at KPMG. ANTHONY GALLENO is Vice President and Controller. After serving 35 years in the banking business, Mr. Galleno joined the Bank in September, 1998. During his previous 35 years of service in a thrift financial environment, he served in various capacities including Senior Vice President-District Manager Community Lending (Home Savings of America, FSB), Senior Vice President-Chief Financial Officer (The Bowery Savings Bank), Vice President-Controller (The Bowery Savings Bank) and Senior Vice President-Corporate Secretary of both Home Savings of America, FSB-NY and The Bowery Savings Bank. He has served as a Board member of Home Savings of America, FSB-NY, The Bowery Savings Bank, Long Island Housing Partnership, Queens Child Guidance Center and various other organizations. MARGARET D. PETERSON is Senior Vice President and Chief Administrative Officer, integrating Human Resources, Information Technology, Facilities, Vendor Management and other support activities. Ms. Peterson joined Carver Federal in November 1999. Ms. Peterson came to Carver from Deutsche Bank where she served as a Compensation Planning Consultant in Corporate Human Resources. Prior to joining Deutsche Bank, Ms. Peterson was a Vice President and Senior HR Generalist for Citibank Global Asset Management. Besides her 11 years in Human Resources, Ms. Peterson has 10 years of Systems and Technology experience from various positions held at JP Morgan and Chase. Ms. Peterson earned a B.S. from Pace University, a M.B.A. from Columbia University as a Citicorp Fellow, and has been designated a Certified Compensation Professional by the American Compensation Association. J. KEVIN RYAN is Senior Vice President and Chief Lending Officer. Mr. Ryan joined Carver Federal in June 2000 and has over 20 years' experience in real estate lending. Prior to joining Carver, Mr. Ryan served as Vice President-Team Leader for Commercial Real Estate at Greenpoint Mortgage Funding Co., where he was employed since 1996. From 1985 through 1996, Mr. Ryan served as President of a commercial and residential real estate appraisal company, which he founded in New York City. Mr. Ryan also served in various positions at Dime Savings Bank of NY from 1977 to 1985, including Vice President, and as an Adjunct Professor of Management & Economics at St. John's University from 1981-1984. He also is a member of the Queens County Board of Habitat for Humanity. Mr. Ryan received a BBA in Management from Hofstra University and an MBA in Finance from Fordham University. JUDITH TAYLOR is Acting Senior Vice President and Chief of Retail Banking. Ms. Taylor joined Carver Federal in June 1999. Ms. Taylor was most recently with The Resolution Trust Corporation, where she served as CEO of four savings and loan associations. Prior to joining the Resolution Trust Corporation, Ms. Taylor was a Vice President at Chemical Bank. She brings over 30 years of experience to Carver. 34 36 ITEM 2. PROPERTIES. The following table sets forth certain information regarding Carver's offices and other material properties at March 31, 2000.
LEASE NET BOOK OWNED OR EXPIRATION VALUE AT YEAR OPENED LEASED DATE MARCH 31, 2000 ----------- -------- ---------- -------------- (IN THOUSANDS) MAIN OFFICE: 75 West 125th Street...................... 1996 Owned -- $5,797 New York, New York BRANCH OFFICES: 2815 Atlantic Avenue...................... 1990 Owned -- 334 Brooklyn, New York (East New York Office) 1281 Fulton Street........................ 1989 Owned -- 1,313 Brooklyn, New York (Bedford-Stuyvesant Office) 1009-1015 Nostrand Avenue................. 1975 Owned -- 211 Brooklyn, New York (Crown Heights Office) 261 8th Avenue............................ 1964 Leased 10/31/04 228 New York, New York (Chelsea Office) 115-02 Merrick Boulevard.................. 1982 Leased 02/28/11 293 Jamaica, New York (St. Albans Office) 302 Nassau Road(1)........................ 1985 Leased 6/30/05 $ -- Roosevelt, New York (Roosevelt Office) ------ Total........................... $8,176 ======
- --------------- (1) On May 12, 2000 the Company completed the sale of the Roosevelt branch office to City National Bank of New Jersey. See "Asset Quality -- Market Area and Competition -- Branch Sale Agreement." The net book value of Carver's investment in premises and equipment totaled approximately $11.2 million at March 31, 2000. ITEM 3. LEGAL PROCEEDINGS From time to time, Carver Federal is a party to various legal proceedings incident to its business. At March 31, 2000, except as set forth below, there were no legal proceedings to which Carver Federal or its subsidiaries was a party, or to which any of their property was subject, which were expected by management to result in a material loss. On or about January 18, 2000, a complaint was filed in the Court of Chancery of the State of Delaware in and for New Castle County (the "Court") entitled BBC Capital Market, Inc. v. Carver Bancorp, Inc., et al., C.A. No. 17743, naming the Holding Company, all of the Holding Company's directors (the "individual defendants"), Morgan Stanley & Co., Inc. ("Morgan Stanley") and Provender Opportunities Fund, L.P. ("Provender") as defendants (the "Action"). The complaint alleged, among other things, that plaintiff BBC Capital Market, Inc. ("BBC" or "Plaintiff") is a 7.4% stockholder of the Holding Company and sought to challenge the Holding Company's issuance on January 11, 2000 of 40,000 shares of the Holding Company's Series A Preferred Stock to Morgan Stanley and 60,000 shares of the Holding Company's Series B Preferred Stock to Provender (the "Transactions"). The complaint further alleged, among other things, that: (i) the individual defendants approved the Transactions for the primary purpose of interfering with effective stockholder action at the Holding Company's annual meeting of stockholders on February 24, 2000 (the "Annual Meeting") at which two director-defendants were up for re-election; (ii) Morgan Stanley sought to 35 37 intimidate Plaintiff's representatives into dropping any challenge to the election of directors at the Holding Company and that the individual defendants conspired with Morgan Stanley in the alleged intimidation; and (iii) the Holding Company issued a false and misleading proxy statement in connection with the Annual Meeting by not disclosing, among other things, certain facts relating to Plaintiff's nomination of directors at the Annual Meeting and the circumstances surrounding the calling of the Annual Meeting. The complaint alleged four counts: (1) breach of fiduciary duty of loyalty against the individual defendants; (2) breach of fiduciary duty of disclosure against the individual defendants; (3) aiding and abetting breaches of fiduciary duty against Morgan Stanley and Provender; and (4) pursuant to 10 Del. C. sec. 6501, a determination that the individual defendants, Morgan Stanley and Provender, could not cast in excess of 10% of their collective vote at the Annual Meeting. The complaint sought, among other things: (1) an order preliminarily and permanently enjoining the Holding Company, the individual defendants and others from: (a) treating the stock issued to Morgan Stanley and Provender as validly issued for purposes of voting at the Annual Meeting; (b) taking any steps to solicit proxies in favor of the Holding Company's nominees at the Annual Meeting until such time that all alleged disclosure violations were cured; and (c) taking any action to obstruct a proxy solicitation by Plaintiff; (2) an order preliminarily and permanently enjoining Morgan Stanley, Provender and others from aiding and abetting the individual defendants' alleged breach of fiduciary duties and taking any action to obstruct a proxy solicitation by Plaintiff; (3) an order rescinding the Transactions; (4) a declaration that the defendants, Morgan Stanley and Provender, could not cast in excess of 10% of their collective vote at the Annual Meeting; and (5) an award to Plaintiff of the cost and disbursements of the action, including reasonable attorneys' fees and experts' fees. On or about January 29, 2000, defendants filed an answer denying the substantive allegations of the complaint and seeking, among other things, an order dismissing the complaint in its entirety, with prejudice. On or about January 31, 2000, Plaintiff filed an amended complaint repeating the allegations in the original complaint and adding a count pursuant to 8 Del. C. sec. 220 seeking an order requiring the Holding Company to immediately produce all information requested in Plaintiff's letter demanding that the Holding Company produce certain information relating to the Holding Company's Employee Stock Ownership Plan (the "ESOP") and 401(k) Savings Plan in RSI Retirement Trust. On or about February 22, 2000, defendants filed an answer denying the substantive allegations of the amended complaint and seeking, among other things, an order dismissing the complaint in its entirety, with prejudice. On or about January 18, 2000, Plaintiff also made a motion for a preliminary injunction to obtain the injunctive relief sought in the complaint and a motion for expedited proceedings to obtain discovery in support of its application for preliminary injunctive relief. The parties engaged in expedited discovery and the Court heard Plaintiff's motion for a preliminary injunction on February 16, 2000. On February 16, 2000, the Court denied Plaintiff's motion for a preliminary injunction in its entirety. On or about March 7, 2000, after the Holding Company's Inspector of Election declared that the Holding Company's nominees had defeated Plaintiff's nominees at the Annual Meeting, Plaintiff filed a second amended complaint which repeated the substantive allegations made in the complaint and the amended complaint and added certain additional allegations, including, among others: (i) further allegations that the Holding Company's proxy statement and related materials issued in connection with the Annual Meeting contained false and misleading statements; and (ii) allegations that the Inspector of Election improperly counted the votes of certain unallocated shares in the ESOP in favor of the Holding Company's nominees. The second amended complaint alleged five counts: (1) breach of fiduciary duty against the individual defendants; (2) breach of fiduciary duty of disclosure against the individual defendants; (3) aiding and abetting breaches of fiduciary duty against Morgan Stanley and Provender; (4) pursuant to 10 Del. C. sec. 6501, a determination that the individual defendants, Morgan Stanley and Provender, could not cast in excess of 10% of their collective vote at the Annual Meeting; and (5) pursuant to 8 Del. C. sec. 225, a determination that the Inspector of Election improperly counted the votes of certain unallocated shares in the ESOP in favor of the Holding Company's nominees. 36 38 The second amended complaint sought, among other things: (1) an order permanently enjoining the Holding Company, the individual defendants and others from treating any stock issued to Morgan Stanley and Provender as validly issued for purposes of voting; (2) an order rescinding the Transactions; (3) an order declaring that Plaintiff's nominees were elected as directors of the Holding Company at the Annual Meeting; (4) an award to Plaintiff of the cost and disbursements of the Action, including reasonable attorneys' fees and experts' fees; and (5) an award to Plaintiff of its costs and disbursements in the proxy contest, including legal fees, proxy solicitor fees, printing fees and the like. On or about March 27, 2000, defendants filed an answer denying the substantive allegations of the second amended complaint and seeking, among other things, an order dismissing the second amended complaint in its entirety, with prejudice. On or about March 2, 2000, Blaylock & Partners, L.P. ("Blaylock") filed an application in the Court pursuant to section 8 Del. C. sec. 231(c) (the "Application"). The Application alleged that Blaylock is a beneficial holder of approximately 100,000 shares of common stock of the Holding Company and that the Inspector of Election improperly declined to accept and count Blaylock's vote at the Annual Meeting. The Application sought, among other things, an order directing the Inspector of Election to accept and count Blaylock's votes at the Annual Meeting. On or about March 8, 2000, defendants filed an answer to the Application and took no position with respect to the relief sought in the Application. SUBSEQUENT EVENTS On or about April 6, 2000, Plaintiff filed a motion for partial summary judgment with respect to Count V in its second amended complaint seeking a determination that the Inspector of Election improperly counted the votes of certain unallocated shares in the ESOP in favor of the Holding Company's nominees and an order declaring that Plaintiff's nominees had won the election at the Annual Meeting (the "Partial Summary Judgment Motion"). On April 24, 2000, the Court granted the Partial Summary Judgment Motion and declared that the Inspector of Election improperly counted the votes attaching to the unallocated ESOP shares at the Annual Meeting. By order dated April 20, 2000, the Application was consolidated with the Action and entitled In Re the Carver Bancorp, Inc., Cons. C.A. No. 17743 (the "Consolidated Action"). The issues in the Consolidated Action were scheduled to be tried before the Court beginning on May 15, 2000. The trial was expected to last between 5 and 10 days. On or about April 26, 2000, certain defendants filed motions in the Court seeking: (1) an order directing the entry of a final judgment on the Court's decision and order on the Partial Summary Judgment Motion or, in the alternative, an order certifying an appeal from the Court's interlocutory order on the Partial Summary Judgment Motion; and (2) to stay the proceedings in the Consolidated Action pending appeal of the Partial Summary Judgment Motion. On or about May 4, 2000, the Court denied these motions. On or about May 2, 2000, Plaintiff filed a motion for summary judgment with respect to the Application seeking, among other things, to dismiss the Application. On or about May 19, 2000, with the exception of Blaylock, the parties to the Consolidated Action entered into a Settlement Agreement and Mutual Release (the "Settlement Agreement"). Pursuant to the terms of the Settlement Agreement, among other things, the parties agreed that: (a) BBC's nominees at the Annual Meeting were appointed to the Boards of the Holding Company and Carver Federal effective May 19, 2000 for a term expiring at the annual meeting of stockholders for the fiscal year ending March 31, 2002; (b) the Holding Company will hold its annual meeting of stockholders for the fiscal year ending March 31, 2000 (the "2000 Annual Meeting") on or before March 24, 2001; (c) in connection with the 2000 Annual Meeting, the Holding Company will ensure that a sufficient number of directors are made eligible for election to the Board of the Holding Company so that the sum of (i) the number two and (ii) the number of directorships up for election at the 2000 Annual Meeting will constitute a majority of the number of directors on the Board of the Holding Company as of the date of the 2000 Annual Meeting; (d) certain directors of the Holding Company agreed to pay and will cause their insurance carrier to pay $475,000 to BBC; (e) all claims concerning the subject matter of the Consolidated Action are mutually released and forever discharged; and (f) the parties would promptly execute and file a stipulation and order dismissing the Consolidated Action with respect to the parties to the Settlement Agreement. 37 39 On or about May 22, 2000, the parties to the Settlement Agreement executed and filed with the Court a Stipulation and Order of Dismissal With Prejudice (the "Stipulation") providing, among other things, that the Consolidated Action is dismissed with prejudice as to the parties to the Settlement Agreement. On May 24, 2000, the Stipulation was entered as an Order of the Court. In light of, among other things, the Settlement Agreement and Stipulation, Blaylock agreed to withdraw the Application with prejudice. Accordingly, by Order dated May 26, 2000, the Court dismissed the Application with prejudice. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS The Holding Company held its Annual Meeting on February 24, 2000. The purpose of the Annual Meeting was to vote on the following proposals: 1. The election of two directors for terms of three years each, which election was contested by BBC; 2. The ratification of the appointment of KPMG, LLP as independent auditors of the Holding Company for the fiscal year ending March 31, 2000; and 3. The consideration of a shareholder proposal requesting that the shareholders adopt a nonbinding resolution recommending that the Board immediately engage the services of an investment banker to explore alternatives to enhance shareholder value, opposed by the Board. The results of voting were as follows: Proposal 1: Election of Directors: Holding Company Nominees David R. Jones For 888,031 Withheld 21,634 David N. Dinkins For 887,934 Withheld 21,731 BBC's Nominees Kevin Cohee For 856,342 Withheld 8,902 Teri Williams For 857,264 Withheld 7,980 Proposal 2: Ratification of Appointment For 1,657,339 of Independent Auditors Against 111,942 Abstain 5,628 Broker Non-Votes 0 Proposal 3: Shareholder Proposal For 459,843 Against 1,271,540 Abstain 43,524 Broker Non-Votes 0
In addition to the nominees elected at the Annual Meeting, the following persons' terms of office as directors continued after the Annual Meeting: Deborah C. Wright, Linda H. Dunham, Robert J. Franz, Pazel G. Jackson, Jr., Herman Johnson and Frederick O. Terrell. Shortly after the Annual Meeting, the Holding Company's Inspector of Election declared that the Holding Company's nominees had defeated BBC's nominees at the Annual Meeting. On or about March 7, 2000, BBC filed a second amended complaint to the Action described in "Legal Proceedings" which, among other things, alleged that the Inspector of Election improperly counted the votes of certain unallocated shares in the ESOP in favor of the Holding Company's nominees and which, among other things, sought an order declaring that BBC's nominees had been elected as directors of the Holding Company at the Annual Meeting. 38 40 On or about March 2, 2000, Blaylock filed the Application in the Court which alleged that Blaylock is a beneficial owner of approximately 100,000 shares of common stock of the Holding Company and that the Inspector of Election improperly declined to accept and count Blaylock's vote at the Annual Meeting. The Application sought, among other things, an order directing the Inspector of Election to accept and count Blaylock's votes at the Annual Meeting. On or about April 6, 2000, BBC filed the Partial Summary Judgment Motion with respect to Count V in its second amended complaint seeking a determination that the Inspection of Election improperly counted the votes of certain unallocated shares in the ESOP in favor of the Holding Company's nominees and an order declaring that BBC's nominees had won the election at the Annual Meeting. On April 24, 2000, the Court granted the Partial Summary Judgment Motion and declared that the Inspector of Election improperly counted the votes attaching to the unallocated ESOP shares at the Annual Meeting. On or about May 19, 2000, with the exception of Blaylock, the parties to the Consolidated Action entered into the Settlement Agreement. Pursuant to the terms of the Settlement Agreement, among other things, the parties agreed that (i) BBC's nominees at the Annual Meeting were appointed to the Boards for a term expiring at the annual meeting of stockholders for the fiscal year ending March 31, 2002, (ii) the Holding Company will hold the 2000 Annual Meeting on or before March 24, 2001; and (iii) in connection with the 2000 Annual Meeting, the Holding Company will ensure that a sufficient number of directors are made eligible for election to the Board of the Holding Company so that the sum of (i) the number two and (ii) the number of directorships up for election at the 2000 Annual Meeting will constitute a majority of directors on the Board of the Holding Company as of the date of the 2000 Annual Meeting. Under the terms of the Settlement Agreement, Messrs. Dinkins and Jones were not required to relinquish their seats on the Boards; however, Mr. Dinkins and Mr. Jones resigned from each of the Boards of the Holding Company and Carver Federal effective May 25, 2000. See "-- Legal Proceedings." PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET FOR THE COMMON STOCK The Common Stock is listed on the American Stock Exchange under the symbol "CNY." Prior to May 21, 1997, the Common Stock traded on the National Market of The Nasdaq Stock Market under the symbol "CARV." As of June 1, 2000, there were 2,316,358 shares of the Common Stock outstanding, held by approximately 1,150 holders of record. The following table shows the high and low per share sales prices of the Common Stock.
CLOSING SALES PRICE QUARTER ENDED - ----------------------------------------------------------------------------------------------- HIGH LOW HIGH LOW ----- ---- ----- ----- Year Ended March 31, 2000 Year Ended March 31, 1999 First Quarter.............. $11 3/8 $7 1/2 First Quarter................ $13 3/4 $ 13 Second Quarter............. $ 10 $7 5/8 Second Quarter............... $10 3/8 $8 7/8 Third Quarter.............. $11 1/8 $ 7 Third Quarter................ $9 1/4 $7 7/8 Fourth Quarter............. $13 1/2 $8 1/4 Fourth Quarter............... $10 1/4 $ 7
The Board declared a cash dividend of $0.05 (five cents) per share on February 14, 2000 for stockholders of record on February 25, 2000. The Board has not determined to establish a regular dividend at this time, but will review the Company's position after each quarter for the possible declaration of additional dividends. The timing and amount of future dividends will be within the discretion of Carver's Board and will depend on the earnings of the Company and its subsidiaries, their financial condition, liquidity and capital requirements, applicable governmental regulations and policies and other factors deemed relevant by the Board. The Bank will not be permitted to pay dividends to the Holding Company on its capital stock if its stockholders' equity would be reduced below applicable regulatory capital requirements or the amount 39 41 required to be maintained for the liquidation account. The OTS capital distribution regulations applicable to savings institutions (such as the Bank) that meet their regulatory capital requirements permit capital distributions during a calendar year that do not exceed the association's net income for that year plus its retained net income for the prior two years. For information concerning the Bank's liquidation account, see Note 2 of the Notes to Financial Statements. Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the payment of dividends to its stockholders, although the source of such dividends will be dependent, in part, upon dividends from the Bank. The Holding Company is subject to the requirements of Delaware law, which generally limit dividends to an amount equal to the excess of the net assets of the Company (the amount by which total assets exceed total liabilities) over its statutory capital, or if there is no such excess, to its net profits for the current and/or immediately preceding fiscal year. ITEM 6. SELECTED FINANCIAL DATA.
AT MARCH 31 -------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) FINANCIAL CONDITION DATA: TOTAL AMOUNT OF: Assets.............................. $420,119 $416,483 $437,458 $423,614 $367,657 Loans, net.......................... 270,148 270,522 274,954 197,918 82,608 Mortgage-backed securities.......... 54,229 66,584 91,116 110,853 131,105 Investment securities............... 24,996 -- -- 1,675 8,937 Securities available for sale(1).... 24,952 29,918 28,408 83,863 114,328 Excess of cost over assets acquired.......................... 817 1,030 1,246 1,456 1,669 Cash and cash equivalents........... 22,202 21,321 15,120 4,231 10,026 Deposits............................ 281,941 276,999 274,894 266,471 256,952 Borrowed funds...................... 98,579 102,038 124,946 121,101 73,948 Stockholders' equity................ 32,641 31,175 35,534 33,984 34,765 NUMBER OF: Deposit accounts.................... 54,597 58,113 51,550 49,142 45,815 Offices............................. 7 7 7 7 8
40 42
YEAR ENDED MARCH 31 ------------------------------------------------------------------ 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) OPERATING DATA: Interest income.............. $27,367 $28,473 $27,828 $22,847 $23,529 Interest expense............. 14,009 14,815 15,019 12,483 13,594 ---------- ---------- ---------- ---------- ---------- Net interest income.......... 13,358 13,658 12,809 10,364 9,935 Provision for loan losses.... 1,099 4,029 1,260 1,690 131 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses..................... 12,259 9,629 11,549 8,674 9,804 ---------- ---------- ---------- ---------- ---------- Non-interest income: Gain (loss) on sales of asset...................... -- 4 188 (927) -- Other........................ 2,539 2,378 2,163 1,040 608 ---------- ---------- ---------- ---------- ---------- Total non-interest income.... 2,539 2,382 2,351 113 608 ---------- ---------- ---------- ---------- ---------- Non-interest expenses: Loss on sale of foreclosed real estate................ -- -- -- 38 77 Other........................ 15,823 17,963 11,651 11,764 8,976 ---------- ---------- ---------- ---------- ---------- Total non-interest expense... 15,823 17,963 11,651 11,802 9,053 ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes...................... (1,025) (5,952) 2,249 (3,015) 1,359 ---------- ---------- ---------- ---------- ---------- Income taxes (benefit)....... 110 (1,499) 1,203 (1,275) 606 ---------- ---------- ---------- ---------- ---------- Net income (loss)............ $(1,135) $(4,453) $1,046 $(1,740) $753 ========== ========== ========== ========== ========== Net (loss) income per common share...................... $ (0.53) $ (2.02) $ 0.48 $ (0.80) $ 0.35 Weighted average number of common shares outstanding................ 2,238,846 2,206,133 2,187,619 2,156,346 2,169,276
41 43
AT OR FOR THE YEAR ENDED MARCH 31, -------------------------------------------- 2000 1999 1998 1997 1996 ------ ------ ----- ------ ----- KEY OPERATING RATIOS: Return on average assets(1)(2).................. (0.27)% (1.05)% 0.25% (0.47)% 0.21% Return on average equity(2)(3).................. (3.29) (12.70) 3.00 (5.00) 2.16 Interest rate spread(4)......................... 3.38 3.29 3.14 2.90 2.57 Net interest margin(5).......................... 3.47 3.43 3.27 3.04 2.85 Operating expenses to average assets(2)(6)...... 3.82 4.22 2.80 3.22 2.48 Equity-to-assets(7)............................. 7.77 7.49 8.12 8.03 9.45 Efficiency Ratio(2)(8).......................... 99.54 111.98 76.85 112.65 85.87 Average interest-earning assets to average interest-bearing liabilities.................. 1.03x 1.04x 1.04x 1.04x 1.07x ASSET QUALITY RATIOS: Non performing assets to total assets(9)........ 0.73% 1.15% 1.58% 1.53% 0.97% Non performing assets to total loans(9)......... 1.12 1.66 2.47 3.28 4.32 Allowance for loan losses to total loans........ 1.07 1.48 1.11 1.09 1.42 Allowance for loan losses to non-performing loans(9)...................................... 138.07 85.60 45.30 35.06 37.05 Net loan charge-offs to average loans outstanding................................... 0.84 1.17 0.15 0.69 --
- --------------- (1) Net income divided by average total assets. (2) For fiscal 1999, excluding non-recurring items amounting to $7.8 million, the return on average assets, return on average equity, operating expenses to average assets and operating income to operating expenses were 0.24%, 2.85%, 2.98% and 78.94%, respectively. Excluding an assessment to recapitalize the SAIF of $1.6 million, the return on average assets, return on average equity, operating expenses to average assets and operating income to operating expenses for fiscal 1997 were (0.022%), (2.29%), 2.77% and 97.07%, respectively. (3) Net income divided by average total equity. (4) Combined weighted average interest rate earned less combined weighted average interest rate cost. (5) Net interest income divided by average interest-earning assets. (6) Non-interest expenses less loss on foreclosed real estate, divided by average total assets. (7) Total equity divided by assets at period end. (8) Efficiency ratio represents operating expenses divided by the sum of net interest income plus operating income. (9) Non-performing assets consist of non-accrual loans, accruing loans 90 days or more past due and property acquired in settlement of loans. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Carver's net income is dependent primarily on its net interest income, which is the difference between interest income earned on its loan, investment and mortgage-backed securities portfolios and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. In addition, net income is affected by the level of provision for loan losses, as well as non-interest income and operating expenses. The operations of the Bank are significantly affected by prevailing economic conditions, competition and the monetary and fiscal policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flow and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities, and the levels of personal income and savings. 42 44 During fiscal 2000, Carver made significant changes in its management, hiring a new President and Chief Executive Officer, Chief Financial Officer and Chief Lending Officer, and hired KPMG LLP as its new external auditor. In addition, Judith Taylor was appointed Acting Senior Vice President and Chief of Retail Banking in June 1999, Margaret D. Peterson was appointed Senior Vice President and Chief Administrative Officer in November 1999, James Boyle was appointed Senior Vice President and Chief Financial Officer in January 2000 and J. Kevin Ryan was appointed Senior Vice President and Chief Lending Officer in June 2000, replacing Benny A. Joseph who had served in such position since November 1999. Mr. Boyle succeeded Walter Bond who had served as Acting Chief Financial Officer since September 1997. In January 2000, Mr. Bond was appointed Senior Vice President and Special Assistant to the President and Chief Executive Officer. For a description of the business experience of the executive officers, see "Executive Officers of the Holding Company." There were also changes to the Boards of the Holding Company and the Bank. Ms. Linda Dunham resigned in March 2000. Messrs. David N. Dinkins and David R. Jones resigned in May 2000. Mr. Herman Johnson retired in May 2000. Mr. Frederick O. Terrell joined the Boards of the Holding Company and the Bank in January 2000 and became Chairman in May 2000. Pursuant to the terms of a Securities Purchase Agreement relating to the issuance of the Holding Company's Series B Preferred Stock to Provender Opportunities Fund, L.P. ("Provender"), Mr. Frederick O. Terrell was appointed to the Boards of the Holding Company and the Bank. Pursuant to the terms of the settlement agreement, Mr. Kevin Cohee and Ms. Teri Williams joined the Boards of the Holding Company and the Bank as of May 19, 2000. In addition, beginning with the July 2000 Board meetings, Messrs. Robert Holland, Jr. and Strauss Zelnick will join the Boards of the Holding Company and the Bank. The net loss of $1.1 million for fiscal 2000 is primarily attributable to the determination that certain assets were no longer recoverable and should be expensed, the costs associated with the proxy fight and the associated litigation and increased expenses associated with certain of the Company's benefit plans resulting from accounting adjustments. In addition, an incorrect accounting entry of $415,000 made during the second quarter of fiscal 2000 was reversed, resulting in restated net income for the three- and six-month periods ended September 30, 1999 and for the nine-month period ended December 31, 1999. DEPOSIT INSURANCE ASSESSMENT During the fourth quarter of fiscal 1999, the Bank incurred increased deposit insurance assessments as a result of the reduction in the Bank's supervisory rating by the OTS, Carver's primary regulator. These increased deposit insurance assessments continued into fiscal 2000. As a result, Carver's deposit insurance assessments increased by $318,000, or 109.28%, to $609,000 for the twelve month period ended March 31, 2000 compared to $291,000 for the twelve month period ended March 31, 1999. ASSET/LIABILITY MANAGEMENT Net interest income, the primary component of Carver's net income, is determined by the difference or "spread" between the yield earned on interest-earning assets and the rates paid on its interest-bearing liabilities and the relative amounts of such assets and liabilities. Because Carver's interest-bearing liabilities consist primarily of shorter term deposit accounts, Carver's interest rate spread can be adversely affected by changes in general interest rates if its interest-earning assets are not sufficiently sensitive to changes in interest rates. Management has sought to reduce Carver's exposure to changes in interest rates by more closely matching the effective maturities and repricing periods of its interest-earning assets and interest-bearing liabilities through a variety of strategies, including the origination and purchase of adjustable-rate loans for its portfolio, investment in adjustable-rate mortgage-backed securities and shorter-term investment securities and the sale of all long-term fixed-rate loans originated into the secondary market. Carver Federal has also reduced interest rate risk through its origination and purchase of primarily adjustable rate mortgage loans and extending the term of borrowings. 43 45 DISCUSSION OF MARKET RISK -- INTEREST RATE SENSITIVITY ANALYSIS As a financial institution, the Company's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company's assets and liabilities, and the market value of all interest-earning assets, other than those which possess a short term to maturity. Since all of the Company's interest-bearing liabilities and virtually all of the Company's interest-earning assets are located at the Bank, virtually all of the Company's interest rate risk exposure lies at the Bank level. As a result, all significant interest rate risk management procedures are performed at the Bank level. Based upon the Bank's nature of operations, the Bank is not subject to foreign currency exchange or commodity price risk. The Bank does not own any trading assets. The Company seeks to manage its interest rate risk by monitoring and controlling the variation in repricing intervals between its assets and liabilities. To a lesser extent, the Company also monitors its interest rate sensitivity by analyzing the estimated changes in market value of its assets and liabilities assuming various interest rate scenarios. As discussed more fully below, there are a variety of factors which influence the repricing characteristics of any given asset or liability. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate-sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific period of time and the amount of interest-bearing liabilities repricing within that same time period. A gap is considered positive when the amount of rate-sensitive assets exceeds the amount of rate-sensitive liabilities and is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of rate-sensitive assets. Generally, during a period of falling interest rates, a negative gap could result in an increase in net interest income, while a positive gap could adversely affect net interest income, and during a period of rising interest rates a negative gap could adversely affect net interest income, while a positive gap could result in an increase in net interest income. As illustrated below, Carver had a negative one-year gap equal to 14.69% of total rate-sensitive assets at March 31, 2000, as a result of which its net interest income could be negatively affected by rising interest rates, and positively affected by falling interest rates. The following table sets forth information regarding the projected maturities, prepayments and repricing of the major rate-sensitive asset and liability categories of Carver as of March 31, 2000. Maturity repricing dates have been projected by applying the assumptions set forth below to contractual maturity and repricing dates. The information presented in the following table is derived from data incorporated in "Schedule CMR: Consolidated Maturity and Rate," which is part of the Bank's quarterly reports filed with OTS. The repricing and other assumptions are not necessarily representative of the Bank's actual results. Classifications of items in the table below are different from those presented in other tables and the financial statements and accompanying notes included herein and do not reflect non-performing loans. 44 46
OVER ONE OVER FIVE THREE OR FOUR TO THROUGH OVER THREE THROUGH OVER LESS TWELVE THREE THROUGH TEN TEN MONTHS MONTHS MONTHS YEARS FIVE YEARS YEARS YEARS TOTAL - ------ -------- -------- -------- ---------- --------- ------- -------- (DOLLARS IN THOUSANDS) RATE-SENSITIVE ASSETS: Loans........................... $15,552 $ 26,115 $ 78,697 $ 26,354 $82,552 $45,211 $274,481 Federal Funds Sold.............. 11,300 -- -- -- -- -- 11,300 Investment Securities(1)........ 24,952 -- -- 24,996 -- -- 49,948 Mortgage-Backed Securities...... 25,202 9,530 4,449 3,870 5,662 5,515 54,228 ------- -------- -------- -------- ------- ------- -------- Total........................... $77,006 $ 35,645 $ 83,146 $ 55,220 $88,214 $50,726 $389,957 ======= ======== ======== ======== ======= ======= ======== RATE-SENSITIVE LIABILITIES: NOW Accounts.................... $ 2,809 $ 3,745 $ 8,114 $ 4,058 $ 6,242 6,242 31,210 Savings Accounts................ 5,811 7,336 12,515 23,238 45,670 50,707 145,277 Money Market Accounts........... 3,689 11,457 1,941 1,553 389 389 19,418 Certificate of Deposits......... 22,869 29,342 19,818 14,007 0 0 86,036 Borrowings...................... 19,953 62,937 15,000 689 0 0 98,579 ------- -------- -------- -------- ------- ------- -------- Total Interest-Bearing Liabilities................... $55,131 $114,817 $ 57,388 $ 43,545 $52,301 $57,338 $380,520 ======= ======== ======== ======== ======= ======= ======== Interest Sensitivity Gap........ 21,875 $(79,172) $ 25,758 $ 11,675 $35,913 $(6,612) $ 9,437 Cumulative Interest Sensitivity Gap........................... 21,875 $(57,297) $(31,539) $(19,864) $16,049 $ 9,437 $ -- Ratio of Cumulative Gap to Total Rate-Sensitive Assets......... 5.61% -14.69% -8.09% -5.09% 4.12% 2.42% --
- --------------- (1) Includes securities available-for-sale. The preceding table was prepared utilizing certain assumptions regarding prepayment and decay rates as determined by the OTS for savings associations nationwide. While management does not believe that these assumptions will be materially different from Carver's actual experience, the actual interest rate sensitivity of the Bank's assets and liabilities could vary significantly from the information set forth in the table due to market and other factors. The following assumptions were used: (i) adjustable-rate first mortgage loans will prepay at the rate of 6% per year; and (ii) fixed-rate first mortgage loans will prepay annually as follows:
ANNUAL PREPAYMENT RATE ----------------------------- 5-YEAR COUPON RATE 30-YEAR 15-YEAR BALLOON - ----------- ------- ------- ------- 6.50%.................................................. 7.00% 9.00% 16.00% 7.00................................................... 8.00 9.00 17.00 7.50................................................... 8.00 10.00 18.00 8.00................................................... 9.00 11.00 20.00 8.50................................................... 11.00 12.00 23.00 9.00................................................... 13.00 14.00 29.00 9.50................................................... 17.00 -- -- 10.00................................................... 23.00 -- --
In addition, it is assumed that fixed maturity deposits are not withdrawn prior to maturity, transaction accounts will decay at a rate of 37.00% in the first year, passbook accounts will decay at a rate of 17.00% in the first year, and money market accounts will reflect a 79.00% decay rate in year one. Certain shortcomings are inherent in the method of analysis presented in the table above. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in the market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, generally have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event 45 47 of a change in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Additionally, an increased credit risk may result as the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. Virtually all of the adjustable-rate loans in Carver's portfolio contain conditions which restrict the periodic change in interest rate. The ratio of cumulative gap to total rate sensitivity assets was negative 14.69% at March 31, 2000 compared to positive 0.79% at March 31, 1999. Adjustable rate assets represented 53.67% of the Bank's total interest sensitive assets at March 31, 2000. NPV Analysis. As part of its efforts to maximize net interest income and manage the risks associated with changing interest rates, management uses the net portfolio value ("NPV") methodology which the OTS has adopted as part of its capital regulations. Under this methodology, interest rate risk exposure is assessed by reviewing the estimated changes in net interest income ("NII") and NPV which would hypothetically occur if interest rates rapidly rise or fall all along the yield curve. Projected values of NII and NPV at both higher and lower regulatory defined rate scenarios are compared to base case values (no change in rates) to determine the sensitivity to changing interest rates. Presented below, as of March 31, 2000, is an analysis of the bank's interest rate risk ("IRR") as measured by changes in NPV and NII for instantaneous and sustained parallel shifts of 100 basis points in market interest rates. Such limits have been established with consideration of the impact of various rate changes and the Bank's current capital position. The information set forth below relates solely to the Bank; however, because virtually all of the Company's IRR exposure lies at the bank level, management believes the table below also accurately reflects an analysis of the Company's IRR.
NPV AS % OF PV NET PORTFOLIO VALUE OF ASSETS -------------------------------- -------------------- CHANGE IN RATE $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE - -------------- -------- -------- -------- --------- ------- (DOLLARS IN THOUSANDS) +300 bp............................... 27,230 -1,590 -30 6.64 -247 bp +200 bp............................... 32,033 -6,787 -17 7.70 -141 bp +100 bp............................... 36,012 -2,808 -7 8.54 -57 bp - -bp................................... 38,820 9.11 (100) bp.............................. 40,561 1,741 +4 9.45 +33 bp (200) bp.............................. 41,922 3,102 +8 9.69 +58 bp (300) bp.............................. 46,532 7,712 +20 10.60 +149 bp
3/31/00 12/31/99 3/31/99 ------- -------- ------- RISK MEASURES: 200 BP RATE SHOCK Pre-Shock NPV Ratio: NPV as % of PV of Assets............... 9.11% 8.22% 7.79% Post-Shock NPV Ratio........................................ 7.70 6.85 7.79 Sensitivity Measure; Decline in NPV Ratio................... 141 bp 137 bp 0 bp
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV Table presented assumes that the composition of the Company's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV Table provides an indication of the Company's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Company's net interest income and will differ from actual results. 46 48 AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES The following table sets forth certain information relating to Carver's average interest-earning assets and average interest-bearing liabilities and reflects the average yield on assets and the average cost of liabilities for the years indicated. Such yields and costs are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods shown. Average balances are derived from average month-end balances, except for federal funds which are derived from daily balances. Management does not believe that the use of average monthly balances instead of average daily balances on all other accounts has caused any material difference in the information presented. The table also presents information for the years indicated with respect to the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, or "interest rate spread," which savings institutions have traditionally used as an indicator of profitability. Another indicator of an institution's net interest income is its "net interest margin," which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate NII.
AT MARCH 31, YEAR ENDED MARCH 31, 2000 2000 ------------------ ----------------------------- AVERAGE AVERAGE YIELD AVERAGE 2000 YIELD BALANCE COST BALANCE INTEREST COST -------- ------- -------- -------- ------- (DOLLARS IN THOUSANDS) INTEREST EARNING ASSETS: Loans(1).......................................... $270,148 7.20% $259,408 $19,443 7.50% Investment securities(2).......................... 55,703 6.45 57,357 3,593 6.26 Mortgage-backed securities........................ 54,229 6.71 55,075 3,641 6.61 Federal funds sold................................ 11,300 6.11 13,000 690 5.31 -------- ---- -------- ------- ----- Total interest-earning assets........... 391,380 6.99% 384,840 27,367 7.12% Non-interest earning assets....................... 28,739 29,220 -------- -------- Total assets............................ $420,119 $414,060 ======== ======== INTEREST-BEARING LIABILITIES: Deposits DDA............................................. $ 12,337 0.00% $ 11,388 $ -- --% NOW............................................. 18,873 1.66 18,032 314 1.74 Savings and clubs............................... 145,277 2.51 143,908 3,650 2.54 Money market accounts........................... 19,418 3.25 19,578 631 3.22 Certificate of deposits......................... 86,036 4.67 86,316 4,017 4.65 -------- ---- -------- ------- ----- Total deposits.......................... 281,941 3.05 279,222 8,612 3.08 Borrowed money.................................... 98,579 5.47 95,769 5,397 5.64 -------- ---- -------- ------- ----- Total interest-bearing liabilities...... 380,520 3.68% 374,991 14,009 3.74% Non-interest-bearing liabilities.................. 6,958 4,596 -------- -------- Total liabilities....................... 387,478 379,587 Stockholders' equity.............................. 32,641 34,473 -------- -------- Total liabilities and stockholders' equity................................ $420,119 $414,060 ======== ======== Net interest income............................... $13,358 ======= Interest rate spread.............................. 3.31% 3.38% ==== ===== Net interest margin............................... 3.47% ===== Ratio of average interest-earning assets to average interest-bearing liabilities............ 1.03x =====
47 49
YEAR ENDED MARCH 31, ------------------------------------------------------------- 1999 1998 ----------------------------- ----------------------------- AVERAGE AVERAGE AVERAGE YIELD AVERAGE YIELD BALANCE INTEREST COST BALANCE INTEREST COST -------- -------- ------- -------- -------- ------- (DOLLARS IN THOUSANDS) INTEREST EARNING ASSETS: Loans(1)................................. $269,241 $20,575 7.64% $242,948 $18,311 7.54% Investment securities(2)................. 32,284 1,801 5.58 12,117 671 5.54 Mortgage-backed securities............... 85,236 5,431 6.37 130,927 8,523 6.51 Federal funds sold....................... 12,013 666 5.54 5,735 323 5.63 -------- ------- ----- -------- ------- ----- Total interest-earning assets............ 398,774 28,473 7.14% 391,727 27,828 7.10% Non-interest earning assets.............. 26,709 23,746 -------- -------- Total assets............................. $425,483 $415,473 ======== ======== INTEREST-BEARING LIABILITIES: Deposits DDA............................. $ 9,670 $ -- --% $ 8,625 $ -- --% NOW.................................... 18,789 314 1.67 18,725 354 1.89 Savings and clubs...................... 144,990 3,604 2.49 144,466 3,601 2.49 Money market accounts.................. 21,541 613 2.85 21,514 692 3.22 Certificate of deposits................ 80,897 3,890 4.81 76,990 3,949 5.13 -------- ------- ----- -------- ------- ----- Total deposits........................... 275,887 8,421 3.05 270,320 8,596 3.18 Borrowed money........................... 107,766 6,393 5.93 108,970 6,423 5.89 -------- ------- ----- -------- ------- ----- Total interest-bearing liabilities....... 383,653 14,814 3.85% 379,290 15,019 3.96% Non-interest-bearing liabilities......... 6,771 1,310 -------- -------- Total liabilities........................ 390,424 380,600 Stockholders' equity..................... 35,059 34,873 -------- -------- Total liabilities and stockholders' equity................................. $425,483 $415,473 ======== ======== Net interest income...................... $13,659 $12,809 ======= ======= Interest rate spread..................... 3.29% 3.14% ===== ===== Net interest margin...................... 3.43% 3.27% ===== ===== Ratio of average interest-earning assets to Average interest-bearing liabilities............................ 1.04x 1.04x ===== =====
- --------------- (1) Includes non-accrual loans. (2) Includes FHLB stock and fair value of investments available for sale of $30.7 million at March 31, 2000. 48 50 RATE/VOLUME ANALYSIS The following table sets forth information regarding the extent to which changes in interest rates and changes in volume of interest related assets and liabilities have affected Carver's interest income and expense during the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided for changes attributable to (i) changes in volume (changes in volume multiplied by new rate), (ii) changes in rates (change in rate multiplied by old volume), and (iii) total change. Changes in rate/volume (changes in rate multiplied by the changes in volume) are allocated proportionately between changes in rate and changes in volume.
YEAR ENDED MARCH 31, ----------------------------------------------------------- 2000 VS. 1999 1999 VS. 1998 INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO ---------------------------- ---------------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL -------- ------ -------- -------- ------ -------- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans.................................. $ (754) $(378) $(1,132) $ 2,021 $ 243 $ 2,264 Investment securities(1)............... 1,549 243 1,792 1,125 5 1,130 Mortgage-backed securities(1).......... (2,003) 213 (1,790) (2,909) (182) (3,091) Federal funds sold..................... 49 (25) 24 348 (6) 342 ------- ----- ------- ------- ----- ------- Total interest-earning assets..................... (1,159) 53 (1,106) 585 60 645 ------- ----- ------- ------- ----- ------- Interest-bearing liabilities: NOW.................................. (13) 13 -- -- (41) (41) Savings and clubs.................... (27) 73 46 3 -- 3 Money market accounts................ (42) 60 18 1 (80) (79) Certificate of deposits.............. 252 (125) 127 188 (246) (58) ------- ----- ------- ------- ----- ------- Total deposits............... 170 21 191 192 (367) (175) Borrowed money....................... (721) (275) (996) (30) -- (30) ------- ----- ------- ------- ----- ------- Total interest-bearing liabilities................ (551) (254) (805) (162) (367) (205) ------- ----- ------- ------- ----- ------- Net change in net interest income...... $ (608) $ 307 $ (301) $ 423 $(427) $ 850 ======= ===== ======= ======= ===== =======
- --------------- (1) Includes securities available for sale. COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2000 AND 1999 At March 31, 2000, total assets increased by 3.6 million, or 0.87%, to $420.1 million compared to $416.5 million at March 31, 1999. The increase in total assets was primarily attributable to increases in investment securities held to maturity and other interest-earning assets, offset in part by decreases in securities available for sale, mortgage-backed securities held to maturity and other assets. Investment securities held to maturity increased by $25 million at March 31, 2000 whereas at March 31, 1999 the Company did not carry any investment securities held to maturity. The investment in securities held to maturity reflects the reinvestment of principal and interest received on mortgage-backed securities and loans receivable. At March 31, 2000, total cash and cash equivalents increased by $882,000, or 4.14%, to $22.2 million compared to $21.3 million at March 31, 1999. Investment securities held as available for sale decreased by $5.0 million, or 16.6%, to $25.0 million at March 31, 2000, compared to $29.9 million at March 31, 1999. Mortgage-backed securities held to maturity decreased by $12.4 million, or 18.56%, to $54.2 million, compared to $66.6 million at March 31, 1999. Loans receivable decreased by $374,000, or 0.14%, to $270.1 million at March 31, 2000, compared to $270.5 at March 31, 1999. These decreases primarily reflect principal repayments on mortgage-backed securities held to maturity and loans receivable. At March 31, 2000, total liabilities increased by $2.2 million, or 0.56%, to $387.5 million compared to $385.3 million at March 31, 1999. 49 51 At March 31, 2000, total deposits increased by $4.9 million, or 1.78%, to $281.9 million compared to $277.0 million at March 31, 1999. The increase in total deposits was primarily attributable to increases of $4.5 million in NOW accounts, $1.6 million in passbook savings and $475,000 in certificates of deposit, offset in part by decreases of $1.5 million in money market accounts and $92,000 in club accounts. At March 31, 2000, total borrowings decreased by $3.5 million, or 3.39%, to $98.6 million compared to $102.0 million at March 31, 1999. The decrease in total borrowings reflects a decrease in reverse repurchase agreements ("reverse repos") of $4.0 million, or 11.32%, to $31.3 million, offset in part by an increase in FHLB advances of $980,000, or 1.49%, to $66.7 million. The Company shifted from reverse repos to take advantage of the more attractive terms available on FHLB advances. The overall decrease in total borrowings reflects a reduction in the need for borrowed funds. The Company was able to fund loan originations and loan purchases with repayments on mortgage-backed securities and loans receivable together with an increase in deposits. At March 31, 2000, stockholders' equity increased by $1.5 million, or 4.70%, to $32.6 million compared to $31.2 million at March 31, 1999. The increase in stockholders' equity primarily reflects an increase in additional paid-in capital resulting from the net proceeds of the preferred stock totaling $2.4 million issued in January 2000, offset by a reduction in retained earnings primarily attributable to the net loss of $1.1 million recorded for fiscal 2000. There were several extraordinary items that contributed to the net loss. First, in connection with the year-end audit, there were expenses of approximately $1.8 million relating to assets determined to be no longer recoverable as well as other accounting adjustments. Second, expenses associated with the Annual Meeting, which included a proxy contest, and subsequent litigation relating to the voting of shares at the Annual Meeting equaled approximately $870,000. Third, there were one-time increases of approximately $593,000 associated with certain of the Bank's benefit plans. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 NET INCOME (LOSS) The Company reported a net loss for the twelve month period ended March 31, 2000 of $1.1 million compared to a net loss of $4.5 million for the same period the prior year. The decrease in the net loss was primarily due to decreases in non-interest expenses and the provision for possible loan losses. INTEREST INCOME Interest income decreased by $1.1 million, or 3.89%, to $27.4 million for the twelve month period ended March 31, 2000 compared to $28.5 million for the twelve month period ended March 31, 1999. The decrease in interest income was primarily attributable to a $13.9 million, or 3.49%, decrease in average balance of interest earning assets to $384.8 million for the twelve months ended March 31, 2000, compared to $398.8 million for twelve months ended March 31, 1999. The yield on average interest earning assets declined to 7.12% for the twelve months ended March 31, 2000, compared to 7.14% for the prior year. Interest income on loans decreased by $1.1 million, or 5.50%, to $19.4 million for fiscal 2000 compared to $20.6 million for fiscal 1999. The decrease in interest income from loans reflects a decrease of $9.8 million, or 3.65%, in the average balance of loans to $259.4 million for fiscal 2000 compared to $269.2 million for fiscal 1999, coupled with a 14 basis point decrease in the average rate earned on loans to 7.50% for fiscal 2000 from 7.64% for the prior year. Interest income on investment securities increased by approximately $1.8 million, or 99.50%, to $3.6 million for the twelve months ended March 31, 2000, compared to $1.8 million for the prior year, reflecting an increase of $25 million in the average balance of investment securities to $57.4 million for fiscal 2000 compared to $32.3 million for fiscal 1999, coupled with a 68 basis point increase in the average rate earned on investment securities to 6.26% from 5.58%. Interest income on mortgage-backed securities decreased by $1.8 million, or 32.98%, to $3.6 million for the twelve months ended March 31, 2000 compared to $5.4 million for the prior year reflecting a decrease of $30.2 million in the average balance of mortgage- 50 52 backed securities to $55.1 million for fiscal 2000 compared to $85.2 million for fiscal 1999, offset in part by a 24 basis point increase in the average rate earned on mortgage-backed securities to 6.61% from 6.37%. The increase in the average balance of investment securities is primarily attributable to the reallocation that existed throughout most of fiscal 2000 of cash flows from loans and mortgage-backed securities into investment securities. Significant turnover of personnel in the Lending Department adversely affected the Bank's ability to originate and purchase loans during fiscal 2000, contributing to the decrease in the average balance of loans. INTEREST EXPENSE Interest expense decreased by $805,000, or 5.43%, to $14.0 million for fiscal 2000 compared to $14.8 million for the prior year. The decrease in interest expense is attributable to an $8.7 million decrease in the average balance of interest-bearing liabilities combined with an 11 basis point decrease in the average cost of interest bearing liabilities. Interest expense on deposits increased $191,000, or 2.27%, to $8.6 million for fiscal 2000 compared to $8.4 million for the prior year. This increase is attributable to a $3.3 million, or 1.21%, increase in the average balance of deposits to $279.2 million for fiscal 2000 compared to $275.9 million for fiscal 1999, and to a lesser extent, to a 3 basis point increase in the cost of average deposits. Interest expense on borrowed money decreased by $996,000, or 15.58%, to $5.4 million for fiscal 2000 compared to $6.4 million for the prior year. The average balance of borrowed money was $12.0 million, or 11.13%, lower during fiscal 2000 than during fiscal 1999, and the average cost of borrowed money for fiscal 2000 was 29 basis points lower than the average cost of borrowed money for fiscal 1999. NET INTEREST INCOME Net interest income before the provision for possible loan losses decreased $301,000, or 2.20%, to $13.4 million for fiscal 2000 compared to $13.7 million for the prior year. The 11 basis point decrease in the cost of interest-bearing liabilities used to fund interest earning assets contributed to an 8 basis point increase in the interest rate spread to 3.38% for fiscal 2000 compared to 3.29% for the prior year. The decrease in the cost of interest-bearing liabilities used to fund interest earning assets also contributed to a 4 basis point increase in the net interest margin to 3.47% for fiscal 2000 compared to 3.43% for fiscal 1999. However, the average balance on interest earning assets decreased to a greater degree that the average balance of interest-bearing liabilities, and the decrease in the average balance of interest earning assets was the most significant factor resulting in the $302,000 decrease in net interest income for fiscal 2000 as compared to fiscal 1999. PROVISION FOR LOAN LOSSES Provision for loan losses decreased by $2.9 million, or 72.72%, to $1.1 million, for the twelve month period ended March 31, 2000, compared to $4.0 million for the year ended March 31, 1999. When determining the provision for loan losses, management assesses the risk inherent in its loan portfolio based on the information available at such time relating to trends in the local and national economy, trends in the real estate market and the Company's level on non-performing loans and assets and net charge offs. The provision for possible loan losses for fiscal 2000 represents the amount required to maintain the allowance for possible loan losses at the level required by the Company's policy, and the reduced provision is primarily attributable to the decrease in non-performing loans during fiscal 2000. During fiscal 2000, the Bank charged off approximately $2.6 million of loans. At March 31, 2000, non-performing loans totaled $2.1 million, or 0.78%, of total loans compared to $4.5 million, or 1.64%, of total loans at March 31, 1999. At March 31, 2000, the Bank's allowance for possible loan losses was $2.9 million compared to $4.0 million at March 31, 1999, resulting in a ratio of the allowance to non-performing loans of 138.0% at March 31, 2000 compared to 89.3% at March 31, 1999 and a ratio of the allowance for possible loan losses to total loans of 1.07% and 1.46% at March 31, 2000 and March 31, 1999, respectively. 51 53 NON-INTEREST INCOME Non-interest income is composed of loan fees and service charges, gains or (losses) from the sale of securities, and fee income for banking services. Non-interest income increased $157,000, or 6.6%, to $2.5 million for fiscal 2000 compared to $2.4 million for fiscal 1999. The increase in non-interest income is primarily due to non-recurring income of $728,000 resulting from the sale of the Alhambra Building by the Company's subsidiary, Alhambra Realty. Excluding the income from the sale of the Alhambra Building, total non-interest income decreased by $571,000, or 23.97%, compared to fiscal 1999. Excluding the income from the sale of the Alhambra Building, the decrease in non-interest income is primarily attributable to a decrease in bank loan fees and service charges as well as the decrease in bank service charges on deposit accounts. NON-INTEREST EXPENSE Non-interest expense decreased by $2.1 million, or 11.91%, to $15.8 million for fiscal 2000 compared to $18.0 million for the prior fiscal year. The decrease in non-interest expense is primarily attributable to a decrease of $2.5 million in other non-interest expenses, offset by increases of $475,000 in salaries and employee benefits. The increase in salaries and employee benefits is the result of increased expenses associated with certain of the Bank's benefit plans. The decrease in other non-interest expenses is primarily attributable to reductions in consultant fees and reconciliation adjustments, which offset increases of approximately $318,000 in FDIC assessments, $229,000 in audit expenses and $335,000 in legal expenses. INCOME TAX EXPENSE In connection with the loss from operations incurred for fiscal 2000 and fiscal 1999, the Company has available an operating loss carry forward totaling approximately $5.7 million that will expire in 2019 to offset future taxable income. The Company recorded income tax expense of $110,000 for fiscal 2000, compared to a tax benefit of $1.5 million for fiscal 1999. The income tax expense for fiscal 2000 represents taxes payable to New York State and New York City based upon the Company's total assets. The Company paid no taxes for the year ended March 31, 1999, and its effective tax rate was 53.5% for the year ended March 31, 1998. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1999 AND 1998 NET INCOME (LOSS) The Company reported a net loss for the twelve month period ended March 31, 1999 of $4.5 million compared to net income of $1.0 million for the same period the prior year. The decrease in net income was primarily due to increases in non-interest expense and provision for loan losses, offset in part by increases in net interest income and non-interest income. INTEREST INCOME Interest income increased by $646,000, or 2.32%, to $28.4 million for the twelve month period ended March 31, 1999, compared to $27.8 million for the twelve month period ended March 31, 1998. The increase in interest income was primarily attributable to a $7.1 million, or 1.80%, increase in average balance of interest earning assets to $398.8 million for the twelve months ended March 31, 1999, compared to $391.7 million for twelve months ended March 31, 1998, coupled with a 4 basis point increase in the yield on average interest earning assets to 7.14% for the twelve months ended March 31, 1999, compared to 7.10% for the same period the prior year. Interest income on loans increased by $2.3 million, or 12.37%, to $20.6 million for the twelve month period ended March 31, 1999, compared to $18.3 million for the same period the prior year. The increase in interest income from loans reflects a $26.3 million, or 10.83%, increase in the average balance of loans to $269.2 million at March 31, 1999, compared to $242.9 million at March 31, 1998 coupled with a 10 basis point increase in the average yield on loans to 7.64% from 7.54%. Interest income on mortgage-backed securities held to maturity decreased by $3.1 million, or 36.28%, to $5.4 million for the twelve months ended March 31, 1999, compared to $8.5 million for the same period the prior year, reflecting a decrease of $45.7 million in the 52 54 average balance of total mortgage-backed securities to $85.2 million at March 31, 1999 compared to $130.9 million at March 31, 1998 coupled with a 14 basis point decrease in the average yield on mortgage-backed securities to 6.37% from 6.51%. Interest income on investment securities increased by approximately $1.1 million or 168.56% to $1.8 million for the twelve months ended March 31, 1999 compared to $671,000 for the same period the prior year. The increase in interest income on investment securities is primarily due to a $20.2 million, or 166.94%, increase in the average balance of investment securities to $32.3 million for the twelve months ended March 31, 1999, compared to $12.1 million for the same period the prior year. The increase in the average balances of investment securities reflects the increased investment of repayments from loans and mortgage-backed securities into investment securities. INTEREST EXPENSE Interest expense decreased by $204,000, or 1.36%, to $14.8 million for the twelve month period ended March 31, 1999 compared to $15.0 million for the same period the prior year. The decrease in interest expense reflects an 11 basis point decrease in the average cost of such liabilities to 3.85% for the twelve months ended March 31, 1999 compared to 3.96% for the same period the prior year, offset in part by a $4.4 million, or 1.15%, increase in the average balance of interest-bearing liabilities. Interest expense on deposits decreased by $175,000, or 2.04%, to $8.4 million for the twelve month period ended March 31, 1999 compared to $8.6 million for the same period the prior year primarily due to a 13 basis point decrease in the cost average of deposits, offset in part by a $5.6 million, or 2.06%, increase in the average balance of deposits to $275.9 million for the twelve month period ended March 31, 1999 compared to $270.3 million for the same period the prior year. Interest expense on borrowings was unchanged at $6.4 million for the twelve month period ended March 31, 1999 compared to the same period the prior year. The average balance of borrowings decreased by $1.2 million to $107.8 million for the twelve month period ended March 31, 1999 compared to $109.0 million for the same period the prior year. The average cost of borrowings was unchanged at 5.89%. NET INTEREST INCOME Net interest income before provision for loan losses for the twelve month period ended March 31, 1999 increased by $850,000, or 6.64%, to $13.7 million compared to $12.8 million for the same period the prior year. The increase was primarily attributable to a 15 basis point increase in the Company's interest rate spread for the twelve month period ended March 31, 1999 to 3.29% from 3.14%, coupled with a $7.0 million increase in the balance of average interest earning assets to $398.8 million for the twelve month period ended March 31, 1999 compared to the same period the prior year. The Company's net interest margin increased by 16 basis points to 3.43% from 3.27%, average interest-earning assets to interest-bearing liabilities increased to 1.04x for the twelve month period ended March 31, 1999, compared to 1.03x for the same period the prior year. PROVISION FOR LOAN LOSSES Provision for loan losses increased by $2.8 million, or 219.96%, to $4.0 million, for fiscal 1999, compared to $1.3 million for the year ended March 31, 1998. When determining the provision for loan losses, management assesses the risk inherent in its loan portfolio based on the information available at such time relating to trends in the local and national economy, trends in the real estate market and the Company's level on non performing loans and assets and net charge offs. The increase in the provision for loan losses for the twelve month period, in significant part, reflects a one time special provision of $2.5 million. The Company took the special provision along with a general increase in the provision to significantly increase the Bank's allowance for loan losses primarily in response to an increase in non-performing consumer loans and to maintain an adequate level of allowance consistent with the Bank's policies. During the twelve month period, the Bank charged off approximately $3.2 million in non-performing loans. At March 31, 1999, non-performing loans totaled $4.8 million, or 1.66%, of total loans compared to $6.8 million, or 2.47% at March 31, 1998. At March 31, 1999, the Bank's allowance for loan losses was $4.0 million compared to $3.1 million at March 31, 1998, resulting in a ratio of allowance to non-performing loans of 85.60% at March 31, 1999 compared to 53 55 45.30% at March 31, 1998, and a ratio of allowances for loan losses to total loans of 1.48% and 1.11%, respectively. NON-INTEREST INCOME Non-interest income is composed of loan fees and service charges, gains or (losses) from the sale of securities, and fee income for banking services. Non-interest income was unchanged at $2.4 million for the twelve month period ended March 31, 1999. Non-interest income for the twelve month period ended March 31, 1998 reflected a $188,000 gain on the sale of securities. Excluding the gain on the sale of securities, non-interest income increased by $219,000, or 10.13%, for the twelve month period ended March 31, 1999 compared to the same period the prior year. The increase in non-interest income excluding the gain on the sale of securities reflects increases in prepayment fees on loans and increases in fees from bank service charges. NON-INTEREST EXPENSE Non-interest expense increased by approximately $6.3 million, or 54.18%, to $18.0 million for the twelve month period ended March 31, 1999 compared to $11.7 million for the twelve month period ended March 31, 1998. The increase in non-interest expense reflects non-recurring charges of $4.1 million in reconciliation adjustments related to the conversion of the Company's data processing system, $1.2 million in consultant fees related to post conversion assignments, and $750,000 in one-time charges incurred during the fourth quarter, offset in part by a recovery of approximately $750,000 of such adjustments. Excluding all reconciliation adjustments, one-time charges, and the consultant fees, non-interest expense increased by approximately $1.0 million, or 8.69%, to $12.7 million for the twelve month period ended March 31, 1999 compared to $11.7 million for the same period the prior year. This increase primarily reflects increases of $365,000 in salaries and employee benefits expense, $142,000 in equipment expense, $117,000 in FDIC insurance expense, $125,000 in legal expense and $250,000 in connection with the settlement of litigation. INCOME TAX EXPENSE In connection with the loss from operations incurred through the twelve-month period ended March 31, 1999, the Company has reflected a benefit resulting from the carry back of the loss for income taxes paid of approximately $1.5 million of which $1.2 million were paid in fiscal 1998 compared to an income tax expense of $1.2 million for fiscal 1998. In addition, the Company has available an operating loss tax carry forward totaling approximately $4.4 million, which will expire in 2019 to offset future taxable income. The Company paid no taxes for the year ended March 31, 1999, and its effective tax rate was 53.5% for the year ended March 31, 1998. A deferred tax asset of approximately $1.0 million was established in 1999. LIQUIDITY AND CAPITAL RESOURCES Carver Federal's primary sources of funds are deposits, FHLB advances, and proceeds from principal and interest payments on loans and mortgage-backed securities. While maturities and scheduled amortization of loans and investments are predictable sources of funds, deposit flow and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank is required to maintain an average daily balance of liquid assets and short term liquid assets as a percentage of net withdrawable deposit accounts plus short-term borrowings as defined by OTS regulation. The minimum required liquidity and short-term liquidity ratio is 4%. The Bank's liquidity ratios were 20.43% and 16.59% at March 31, 2000 and 1999, respectively. The Bank's most liquid assets are cash and short-term investments. The level of these assets are dependent on the Bank's operating, financing lending and investing activities during any given period. At March 31, 2000, and 1999, assets qualifying for short-term liquidity, including cash and short-term investments, totaled $72.7 million and $50.8 million, respectively. 54 56 The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During fiscal 2000, cash and cash equivalents increased by $881,749. Net cash provided by operating activities was $5,037,186, representing primarily the results of operations adjusted for depreciation and amortization, the provision for possible loan losses and the decrease in other assets. Net cash used in investing activities was $7,898,630, which was used primarily to fund the increase in investment securities, particularly investment securities held to maturity. Net cash provided by financing activities was $3,743,193, reflecting primarily increases in deposits, and advances from the FHLB as well as proceeds from the issuance of preferred stock, offset in part by a net decrease in securities sold under agreements to repurchase. THE YEAR 2000 PROBLEM The Year 2000 problem centered on the inability of some computer systems to recognize the year 2000. Many existing computer programs and systems were originally programmed with six digit dates that provided only two digits to identify the calendar year in the date field without considering the upcoming change in the century. During the past several quarters, the Company developed and implemented a Year 2000 Project Plan (the "Plan") to address the year 2000 problem and its effect on the Company. The Plan included five components, which addressed the issues of awareness, assessment, renovation, validation and implementation. To implement the Plan and ensure its success, the senior management of the Company became actively involved in all phases of the Plan, including remaining actively involved and on premises during the New Year's weekend. The Company primarily used its own personnel with some assistance from outside consultants to minimize costs. The Company also followed the published substantive guidance of the OTS and other federal bank regulatory agencies. These publications, in addition to providing guidance as to the examination criteria, outlined the requirements for the creation and implementation of a compliance plan and target dates for testing and implementation of corrective action. As a result of the Company complying with the federal banking regulatory guidelines and meeting the target dates for testing of its mission critical systems and communicating with all significant suppliers, the Company did not experience any interruptions in any computer operations related to the year 2000 problem. Our loan and deposit customers did not experience any interruption of service due to the difficulties that could have been encountered as a result of the year 2000 problem. We estimated that the total costs related to the year 2000 problem, from inception to date, did not exceed $150,000, and we do not anticipate any additional costs to be incurred related to this matter. REGULATORY CAPITAL POSITION The Bank must satisfy three minimum capital standards established by the OTS. For a description of the OTS capital regulation, see "Regulation and Supervision -- Regulation of Federal Savings Associations -- Capital Requirements." The Bank presently exceeds all capital requirements as currently promulgated. At March 31, 2000, the Bank had tangible, core, and risk-based capital ratios of 6.85%, 6.25%, and 15.38%, respectively. 55 57 The following table reconciles the Bank's stockholders equity at March 31, 2000, under generally accepted accounting principles to regulatory capital requirements:
REGULATORY CAPITAL REQUIREMENTS ---------------------------------------------- GAAP TANGIBLE TIER/CORE RISK-BASED CAPITAL CAPITAL CAPITAL CAPITAL ------- -------- --------- ---------- (IN THOUSANDS) Stockholders' Equity at March 31, 2000(1)......... $29,532 $29,532 $29,532 $29,532 ======= Add: Unrealized loss on securities available for sale, net.................................... -- -- -- General valuation allowances.................... -- -- 2,538 Qualifying intangible assets.................... -- -- -- Deduct: Goodwill........................................ (817) (817) (817) Excess of net deferred tax assets............... -- -- -- Asset required to be deducted................... -- -- (40) ------- ------- ------- Regulatory capital.............................. 28,715 28,715 31,213 Minimum capital requirement..................... 6,283 16,766 16,235 ------- ------- ------- Regulatory capital excess....................... $22,432 $11,949 $14,978 ======= ======= =======
- --------------- (1) Reflects Bank only. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and accompanying notes appearing elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of Carver's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on Carver's performance than do the effects of the general level of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. TAX BAD DEBT RESERVES Federal tax law changes were enacted in August 1996 to eliminate the "thrift bad debt" method of calculating bad debt deductions. The legislation requires the Bank to recapture into taxable income (over a six-year period) all bad debt reserves accumulated after March 31, 1988. Since the Bank's federal bad debt reserves approximated the 1988 base-year amounts, this recapture requirement had no significant impact. The tax law changes also provide that taxes associated with the recapture of pre-1988 bad debt reserves would become payable under more limited circumstances than under prior law. For example, such taxes would no longer be payable in the event that the thrift charter is eliminated and the Bank is required to convert to a bank charter. Amendments to the New York State and New York City tax laws redesignate the Bank's state and New York City bad debt reserves at December 31, 1995 as the base-year amount and also permit future additions to the base-year reserves using the percentage-of-taxable-income method. This change eliminated the excess New York State and New York City reserves for which the Company had recognized a deferred tax liability. Management does not expect these changes to have a significant impact on the Bank. Taxes associated with the recapture of the New York State and New York City base-year reserve would still become payable under various circumstances, including conversion to a bank charter or failure to meet various thrift definition tests. 56 58 RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. This statement also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and those instruments at fair value. This statement, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of this statement is not anticipated to have a material impact on the financial position or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The information required by this item appears under the caption "Discussion of Market Risk -- Interest Rate Sensitivity Analysis" in Item 7. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 57 59 LETTERHEAD OF KPMG LLP TO THE BOARD OF DIRECTORS AND STOCKHOLDERS CARVER BANCORP, INC. We have audited the accompanying consolidated statement of financial condition of Carver Bancorp, Inc. and subsidiaries (the "Company") as of March 31, 2000 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audit. The accompanying financial statements of Carver Bancorp, Inc. as of March 31, 1999 were audited by other auditors whose report thereon dated June 29, 1999, expressed an unqualified opinion on those financial statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2000, and the results of its operations and cash flows for the year then ended in conformity with generally accepted accounting principles. /S/ KPMG LLP MAY 25, 2000 NEW YORK, NEW YORK F-1 60 CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, ---------------------------- 2000 1999 ------------ ------------ ASSETS ASSETS: Cash and amounts due from depository institutions........... $ 10,902,497 $ 11,120,748 Federal funds sold.......................................... 11,300,000 10,200,000 ------------ ------------ Total cash and cash equivalents (Note 20)................... 22,202,497 21,320,748 ------------ ------------ Investment Securities held to maturity (estimated fair value of $24,308,640) (Notes 4, 13 and 20)...................... 24,995,850 -- Securities available for sale (Notes 3, 13 and 20).......... 24,952,220 29,918,137 Mortgage-backed securities held to maturity, net (estimated fair values of $51,939,162 and $65,693,568 at March 31, 2000 and March 31, 1999) (Notes 5, 12, 13 and 20)......... 54,229,230 66,584,447 Loans receivable............................................ 273,083,331 274,541,950 Less allowance for loan losses............................ (2,935,314) (4,020,099) Loans receivable, net (Notes 6, 13 and 20)................ 270,148,017 270,521,851 ------------ ------------ Real estate owned, net...................................... 922,308 184,599 Property and equipment, net (Note 8)........................ 11,175,334 11,884,983 Federal Home Loan Bank of New York stock, at cost (Note 13)....................................................... 5,754,600 5,754,600 Accrued interest receivable (Notes 9 and 20)................ 2,653,266 2,860,693 Excess of cost over net assets acquired, net (Note 10)...... 816,780 1,029,853 Other assets (Notes 14 and 16).............................. 2,268,430 6,422,933 ------------ ------------ Total assets...................................... $420,118,532 $416,482,844 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits (Notes 11 and 20).................................. $281,941,338 $276,999,074 Securities sold under agreements to repurchase (Notes 12 and 20)....................................................... 31,337,000 35,337,000 Advances from Federal Home Loan Bank of New York (Notes 13 and 20)................................................... 66,688,456 65,708,466 Other borrowed money (Notes 18 and 20)...................... 553,201 992,619 Other liabilities (Notes 14 and 17)......................... 6,957,680 6,270,419 ------------ ------------ Total liabilities................................. 387,477,675 385,307,578 ------------ ------------ Commitments and contingencies (Notes 19 and 20)............. -- -- STOCKHOLDERS' EQUITY: (Note 16) Preferred stock, $0.01 par value per share; 1,000,000 authorized; 100,000 shares issued and outstanding...... 1,000 -- Common stock; $0.01 par value per share; 5,000,000 authorized; 2,314,275 issued and outstanding (Note 2)..... 23,144 23,144 Additional paid-in capital (Note 2)......................... 23,789,111 21,423,574 Retained earnings (Notes 2 and 14).......................... 9,479,552 10,721,168 Common stock acquired by the ESOP (Notes 2 and 18).......... (651,950) (992,620) Comprehensive income, net of income tax..................... -- -- ------------ ------------ Total stockholders' equity........................ 32,640,857 31,175,266 ------------ ------------ Total liabilities and stockholders' equity........ $420,118,532 $416,482,844 ============ ============
See Notes to Consolidated Financial Statements F-2 61 CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31, ----------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Interest income: Loans............................................. $19,442,840 $20,576,506 $18,311,042 Mortgage-backed securities........................ 3,640,555 5,430,638 8,522,922 Investment securities............................. 3,593,178 1,800,738 670,509 Federal funds sold................................ 689,929 665,544 323,243 ----------- ----------- ----------- Total interest income..................... 27,366,502 28,473,426 27,827,716 ----------- ----------- ----------- Interest expense: Deposits (Note 11)................................ 8,612,026 8,421,226 8,596,358 Advances and other borrowed money................. 5,396,833 6,393,457 6,422,666 ----------- ----------- ----------- Total interest expense.................... 14,008,859 14,814,683 15,019,024 ----------- ----------- ----------- Net interest income................................. 13,357,643 13,658,743 12,808,692 Provision for loan losses (Note 6).................. 1,099,300 4,029,996 1,259,531 ----------- ----------- ----------- Net interest income after provision for loan losses............................................ 12,258,343 9,628,747 11,549,161 ----------- ----------- ----------- Non-interest income: Loan fees and service charges..................... 353,215 673,541 559,960 Gain on sale of securities held for sale (Note 3)............................................. -- 3,948 188,483 Proceeds from Sale of Alhambra Building........... 728,000 -- -- Other............................................. 1,458,206 1,704,667 1,603,096 ----------- ----------- ----------- Total non-interest income................. 2,539,421 2,382,156 2,351,539 ----------- ----------- ----------- Non-interest expenses: Salaries and employee benefits (Notes 17 and 18)............................................ 5,722,355 5,247,525 4,739,069 Net occupancy expense (Note 19)................... 1,463,052 1,490,592 1,118,467 Equipment......................................... 1,350,710 1,409,429 1,255,301 Other............................................. 7,287,053 9,815,474 4,538,111 ----------- ----------- ----------- Total non-interest expenses............... 15,823,170 17,963,020 11,650,948 ----------- ----------- ----------- Income (loss) before income taxes................... (1,025,406) (5,952,117) 2,249,752 Income taxes (benefit) (Note 14).................... 110,030 (1,499,367) 1,203,466 ----------- ----------- ----------- Net income (loss)................................... $(1,135,436) $(4,452,750) $ 1,046,286 ----------- ----------- ----------- Net income (loss) available to common stockholders...................................... $(1,179,589) $(4,452,750) $ 1,046,286 ----------- ----------- ----------- Net income (loss) per common share.................. $ (0.53) $ (2.02) $ 0.48 ----------- ----------- ----------- Weighted average number of shares outstanding....... 2,238,846 2,206,133 2,187,619 =========== =========== ===========
See Notes to Consolidated Financial Statements F-3 62 CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON ADDITIONAL STOCK PREFERRED COMMON PAID-IN RETAINED ACQUIRED COMPREHENSIVE STOCK STOCK CAPITAL EARNINGS BY ESOP INCOME TOTAL --------- ------- ----------- ------------- ----------- ------------- ----------- Balance -- March 31, 1997...... $ -- $23,144 $21,410,167 $14,359,060 $(1,365,990) $(442,659) $33,983,722 ------ ------- ----------- ----------- ----------- --------- ----------- Net income for the year ended March 31, 1998............... -- -- 1,046,286 -- -- 1,046,286 Preferred Stock................ -- -- -- -- Allocation of ESOP stock....... 58,566 -- 182,132 -- 240,698 Dividends paid................. -- -- (115,714) -- -- (115,714) Options exercised.............. -- (49,836) -- -- -- (49,836) Decrease in unrealized, loss in securities available for sale, net.................... -- -- -- -- 429,189 429,189 ------ ------- ----------- ----------- ----------- --------- ----------- Balance -- March 31, 1998...... 23,144 21,418,897 15,289,632 (1,183,858) (13,470) 35,534,345 ------ ------- ----------- ----------- ----------- --------- ----------- Net loss for the year ended March 31, 1999............... -- -- (4,452,750) -- -- (4,452,750) Allocation of ESOP Stock....... -- 4,677 -- 191,240 -- 195,917 Dividends paid................. -- -- (115,714) (115,714) Decrease in unrealized, loss in Securities available for sale, net.................... -- -- -- -- 13,470 13,470 ------ ------- ----------- ----------- ----------- --------- ----------- Balance -- March 31, 1999...... 23,144 21,423,574 10,721,168 (992,618) -- 31,175,268 ------ ------- ----------- ----------- ----------- --------- ----------- Net loss for the year ended March 31, 2000............... -- -- (1,135,436) -- -- (1,135,436) Preferred Stock................ 1,000 -- 2,365,537 -- -- -- 2,366,537 Allocation of ESOP Stock....... -- -- -- 340,668 -- 340,668 Dividends paid................. -- (106,180) (106,180) Decrease in unrealized, loss in Securities available for sale, net.................... -- -- -- -- -- -- ------ ------- ----------- ----------- ----------- --------- ----------- Balance -- March 31, 2000...... $1,000 $23,144 $23,789,111 $ 9,479,552 $ (651,950) $ -- $32,640,857 ====== ======= =========== =========== =========== ========= ===========
See Notes to Consolidated Financial Statements F-4 63 CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, ---------------------------------------------- 2000 1999 1998 ------------- ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income.............................. $ (1,135,436) $ (4,452,750) $ 1,046,286 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization.................. 1,221,742 1,042,659 695,192 Amortization of intangibles.................... 213,073 216,264 209,892 Other amortization and accretion, net.......... 355,109 1,108,675 402,662 Provision for loan losses...................... 1,099,300 4,029,996 1,259,531 Gain from sale of Alhambra..................... (728,000) -- -- Proceeds from maturity sale of loans........... -- -- 1,459,491 Net gain on sale of securities available for sale......................................... -- (3,948) (188,483) Deferred income taxes.......................... -- -- 58,555 Allocation of ESOP stock....................... 340,668 195,917 240,698 (Increase) decrease in accrued interest receivable................................... 207,427 97,850 215,522 Increase (decrease) in refundable income taxes........................................ -- 1,195,852 -- (Increase) decrease in other assets............ 2,776,042 (38,224) 2,818,687 Increase (decrease) in other liabilities....... 687,261 4,846,323 37,294 ------------- ------------- ------------ Net cash provided by operating activities...... 5,037,186 8,238,614 8,255,327 ------------- ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Principal repayments on investments held to maturity..................................... -- -- 194,476 Principal repayments on securities available for sale..................................... -- 3,753,447 5,061,181 Purchases of securities available for sale..... (460,000,000) (331,888,674) (17,000,000) Proceeds from maturity, sales and call of securities available for sale................ 465,000,000 319,510,288 55,485,112 Purchase of investment securities held to maturity..................................... (25,000,000) -- (1,946,326) Proceeds from maturities and calls of investment securities held to maturity....... -- 1,797,042 8,480,705 Principal repayment of mortgage-backed securities held to maturity.................. 12,209,146 23,592,334 19,313,831 Net change in loans receivable................. (964,438) 4,432,486 (77,036,664) Proceeds from sale of Alhambra................. 1,368,755 -- -- Additions to premises and equipment............ (512,093) (1,656,535) (897,030) (Purchase) Federal Home Loan Bank stock........ -- -- (219,600) ------------- ------------- ------------ Net cash (used in) provided by investing activities................................... (7,898,630) 19,540,388 (8,564,315) ------------- ------------- ------------
F-5 64
YEAR ENDED MARCH 31, ---------------------------------------------- 2000 1999 1998 ------------- ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits....................... 4,942,264 2,104,842 8,422,745 Net (decrease) in short-term borrowings........ (4,000,000) (51,683,000) (942,404) Proceeds of long term borrowing................ -- -- 12,685,000 Repayment of FHLB Advances..................... (19,020,010) -- (8,658,686) Federal Home Loan Bank Advances................ 20,000,000 28,966,780 -- Repayment of other borrowed money.............. (439,418) (191,238) (182,132) Proceeds from issuance of Preferred Stock...... 2,366,537 -- -- Dividends Paid................................. (106,180) (115,714) (115,714) Increase (decrease) in advance payments by borrowers for taxes and insurance............ -- (659,995) (10,507) ------------- ------------- ------------ Net cash provided by (used in) financing activities................................... 3,743,193 (21,578,325) 11,198,302 ------------- ------------- ------------ Net increase (decrease) in cash and cash equivalents.................................. 881,749 6,200,677 10,889,314 Cash and cash equivalents -- beginning......... 21,320,748 15,120,071 4,230,757 ------------- ------------- ------------ Cash and cash equivalents -- ending............ $ 22,202,497 $ 21,320,748 $ 15,120,071 ============= ============= ============ Supplemental disclosure of non-cash activities: Unrealized Gain (loss) on securities available for sale: Unrealized Gain (loss)......................... -- -- (25,417) Deferred income taxes.......................... -- -- 11,947 ============= ============= ============ $ -- $ -- $ 13,470 ============= ============= ============ Loans receivable transferred to real estate owned........................................ $ 737,709 $ -- $ -- ============= ============= ============ Supplemental disclosure of cash flow information: Cash paid for: Interest....................................... $ 13,505,854 $ 14,814,683 $ 15,019,024 ============= ============= ============ Federal, state and city income taxes........... $ 29,354 $ -- $ 515,457 ============= ============= ============
See Notes to Consolidated Financial Statements F-6 65 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BACKGROUND Carver Bancorp, Inc. is a holding company that was incorporated in May 1996 and whose principal wholly owned subsidiaries are Carver Federal Savings Bank and Alhambra Holding Corp. CFSB Realty Corp. and CFSB Credit Corp. are wholly owned subsidiaries of the Bank. Alhambra Realty Corp. is a majority-owned subsidiary of Alhambra. The Bank was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally chartered mutual savings and loan association. The Bank converted to a federal savings bank in 1986 and changed its name at that time. On October 24, 1994, the Bank converted from mutual stock form and issued 2,314,375 shares of its common stock, par value $0.01 per share. On October 17, 1996, the Bank completed its reorganization into a holding company structure and became a wholly owned subsidiary of the Holding Company. In connection with the Reorganization, each share of the Bank's outstanding common stock was exchanged for one share of the Holding Company's common stock, par value $.01 per share. See Note 2. NATURE OF OPERATIONS Carver's banking subsidiary's principal business consists of attracting passbook and other savings accounts through its branch offices and investing those funds in mortgage loans and other investments permitted by federal savings banks. Carver's banking subsidiary has six branches located throughout the City of New York that primarily serve the communities in which they operate. BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION The consolidated financial statements include the accounts of Carver, the Bank, its wholly owned subsidiary, CFSB Realty Corp., CFSB Credit Corp. and Alhambra and its majority-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the period then ended. Estimates that are particularly susceptible to significant changes in the near-term relate to prepayment assumptions on mortgage-backed securities, the determination of the allowance for loan losses and the valuation of real estate owned. Actual results could differ significantly from those estimates. Management believes that prepayment assumptions on mortgage-backed securities are appropriate, the allowance for loan losses is adequate and real estate owned is properly valued. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowance for loan losses or future write downs of real estate owned may be necessary based on changes in economic conditions in the areas where Carver had extended mortgages and other credit instruments. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Carver's allowance for loan losses and real estate owned valuations. Such agencies may require Carver to recognize additions to the allowance for loan losses or additional write downs of real estate owned based on their judgments about information available to them at the time of their examination. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and amounts due from depository institutions and federal funds sold. Generally, federal funds sold are sold for one-day periods. F-7 66 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INVESTMENT AND MORTGAGE-BACKED SECURITIES Carver does not have trading securities, but does differentiate between held to maturity securities and available for sale securities. When purchased, securities are classified in either the investments held to maturity portfolio or the securities available for sale portfolio. Securities can be classified as held to maturity and carried at amortized cost only if the Company has a positive intent and ability to hold those securities to maturity. If not classified as held to maturity, such securities are classified as securities available for sale. Available for sale securities are reported at fair value. Unrealized holding gains or losses for securities available for sale are to be excluded from earnings and reported net of deferred income taxes as a separate component of other comprehensive income in the Consolidated Statements of Changes in Stockholders' Equity. Investment and mortgage-backed securities held to maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using the level-yield method over the remaining period until maturity. Gains or losses on sales of securities of all classifications are recognized based on the specific identification method. LOANS RECEIVABLE Loans receivable are carried at unpaid principal balances plus unamortized premiums, less the allowance for loan losses and deferred loan fees and discounts. Carver defers loan origination fees and certain direct loan origination costs and accretes such amounts as an adjustment of yield over the contractual lives of the related loans using the interest method. Premiums and discounts on loans purchased are amortized or accreted as an adjustment of yield over the contractual lives of the related loans using the interest method. Loans are generally placed on non-accrual status when they are past due three months or more as to contractual obligations or when other circumstances indicate that collection is questionable. When a loan is placed on non-accrual status, any interest accrued but not received is reversed against interest income. Payments received on a non-accrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on an assessment of the ability to collect the loan. A non-accrual loan is restored to accrual status when principal and interest payments become current and its future collectibility is assured. A loan is considered to be impaired, as defined by FAS No. 114, "Accounting by Creditors for Impairment of a Loan," when it is probable that Carver will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. Carver tests loans covered under FAS No. 114 for impairment if they are on nonaccrual status or have been restructured. Consumer credit nonaccrual loans are not tested for impairment because they are included in large groups of smaller-balance homogeneous loans that, by definition along with leases, are excluded from the scope of FAS No. 114. Impaired loans are required to be measured based upon the present value of expected future cash flows, discounted at the loan's initial effective interest rate, or at the loan's market price or fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, an impairment reserve must be established for the difference. The impairment reserve is established by either an allocation of the reserve for credit losses or by a provision for credit losses, depending on the adequacy of the reserve for credit losses. Impairment reserves are not needed when interest payments have been applied to reduce principal, or when credit losses have been recorded so that the recorded investment in an impaired loan is less than the loan valuation. F-8 67 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ALLOWANCE FOR LOAN LOSSES An allowance for loan losses is maintained at a level considered adequate to provide for potential loan losses. Management, in determining the allowance for loan losses, considers the risks inherent in its loan portfolio and changes in the nature and volume of its loan activities, along with the general economic and real estate market conditions. Carver maintains a loan review system which allows for a periodic review of its loan portfolio and the early identification of potential problem loans. Such system takes into consideration, among other things, delinquency status, size of loans, type of collateral and financial condition of the borrowers. Loan loss allowances are established for problem loans based on a review of such information and/or appraisals of the underlying collateral. On the remainder of its loan portfolio, loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of loan portfolio, current economic conditions and management's judgment. Although management believes that adequate loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of the loan loss allowance may be necessary in the future. CONCENTRATION OF RISK The Bank's principle lending activities are concentrated in loans secured by real estate, a substantial portion of which is located in the State of New York and the State of California. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio is susceptible to changes in New York's and California's market conditions. PREMISES AND EQUIPMENT Premises and equipment are comprised of land, at cost, and buildings, building improvements, furnishings and equipment and leasehold improvements, at cost, less accumulated depreciation and amortization. Depreciation and amortization charges are computed using the straight-line method over the following estimated useful lives:
Buildings and improvements 10 to 40 years Furnishings and equipment 3 to 10 years Leasehold improvements The lesser of useful life or remaining term of lease
Significant renewals and betterments are charged to the property and equipment account. Maintenance and repairs are charged to expense in the year incurred. REAL ESTATE OWNED Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at the lower of cost or fair value at the date of acquisition and thereafter carried at the lower of cost or fair value less estimated selling costs. The fair value of such assets is determined based primarily upon independent appraisals and other relevant factors. The amounts ultimately recoverable from real estate owned could differ from the net carrying value of these properties because of economic conditions. Costs incurred to improve properties or get them ready for sale are capitalized. Revenues and expenses related to the holding and operating of properties are recognized in operations as earned or incurred. Gain or loss on sale of properties is recognized as incurred. F-9 68 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EXCESS OF COST OVER NET ASSETS ACQUIRED In connection with the acquisition of two branches, core deposit premiums paid and other capitalized acquisition costs are being amortized to expense over periods from five to fifteen years using the straight-line method. The company reviews these assets annually for signs of permanent impairment. INTEREST-RATE RISK The Bank is principally engaged in the business of attracting deposits from the general public and using these deposits, together with borrowings and other funds, to originate and purchase loans secured by real estate and to purchase investment and mortgage-backed securities. The potential for interest-rate risk exists as a result of the shorter duration of interest-sensitive liabilities compared to the generally longer duration of interest-sensitive assets. In a rising rate environment, liabilities will reprice faster than assets, thereby reducing the market value of long-term assets and net interest income. For this reason, management regularly monitors the maturity structure of the assets and liabilities in order to measure its level of interest-rate risk and plan for future volatility. INCOME TAXES Carver accounts for income taxes using the asset and liability method. Temporary differences between the basis of assets and liabilities for financial reporting and tax purposes are measured as of the balance sheet date. Deferred tax liabilities or recognizable deferred tax assets are calculated on such differences, using current statutory rates which result in future taxable or deductible amounts. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130") establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general -- purpose financial statements. SFAS 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid in capital in the equity section of a statement of financial position. Carver has included the required disclosures in the Consolidated Statements of Changes in Stockholders' Equity. NET INCOME (LOSS) PER COMMON SHARE Basic EPS is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding. Diluted EPS includes any additional common shares as if all potentially dilutive common shares were issued (e.g. convertible preferred stock). For the purpose of these calculations, unreleased ESOP shares are not considered to be outstanding. PENSION PLANS In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. Carver has made the required disclosures in the accompanying Notes to the Consolidated Financial Statements. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, and for F-10 69 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) hedging activities. SFAS 133 supercedes the disclosure requirements in SFAS 80, 105 and 119 and is effective for fiscal periods beginning after June 15, 2000. The adoption of SFAS No. 133 is not expected to have a material impact on the financial position or results of operations of the Company. RECLASSIFICATIONS Certain amounts in the consolidated financial statements presented for prior periods have been reclassified to conform with the 2000 presentation. NOTE 2. CONVERSION TO STOCK FORM OF OWNERSHIP AND REORGANIZATION INTO A HOLDING COMPANY On October 24, 1994, the Bank issued an initial offering of 2,314,375 shares of common stock (par value $0.01) at a price of $10 per share resulting in net proceeds of $21,519,000. As part of the initial public offering, the Bank established a liquidation account at the time of conversion, in an amount equal to the surplus and reserves of the Bank at September 30, 1994. In the unlikely event of a complete liquidation of the Bank (and only in such event), eligible depositors who continue to maintain accounts shall be entitled to receive a distribution from the liquidation account. The total amount of the liquidation account may be decreased if the balances of eligible deposits decreased as measured on the annual determination dates. The balance of the liquidation account was approximately $3,507,800 (unaudited), and $4,139,000 (unaudited) at March 31, 2000 and 1999, respectively, based on an assumed decrease of 15.25% of eligible deposits per annum. On October 17, 1996, the Bank completed the Reorganization and became the wholly owned subsidiary of the Holding Company. Pursuant to an Agreement and Plan of Reorganization, dated May 21, 1996, each share of the Bank's outstanding common stock was exchanged for one share of the Holding Company's common stock. In connection with the Reorganization, a shareholder of the Bank exercised appraisal rights and 100 shares of the Bank's common stock were purchased from such shareholder in the fourth fiscal quarter of 1997. Accordingly 2,314,275 shares of the Company's common stock remain outstanding. The Bank's shareholder approved the Reorganization at the Bank's annual meeting of shareholders held on July 29, 1996. As a result of the Reorganization, the Bank will not be permitted to pay dividends to the Holding Company on its capital stock if the effect thereof would cause its net worth to be reduced below either: (i) the amount required for the liquidation account or (ii) the amount required for the Bank to comply with applicable minimum regulatory capital requirements. NOTE 3. SECURITIES AVAILABLE FOR SALE At March 31, 2000 and 1999, the Company held no MBSs as available for sale.
MARCH 31, 2000 ----------------------------------------------- GROSS UNREALIZED CARRYING ----------------- ESTIMATED VALUE GAINS LOSSES FAIR-VALUE ----------- ------ ------- ----------- U.S. Government Agency securities................ $24,952,220 $-- $-- $24,952,220 ----------- -- -- ----------- 24,952,220 $-- $-- $24,952,220 =========== == == ===========
MARCH 31, 1999 ----------------------------------------------- GROSS UNREALIZED CARRYING ----------------- ESTIMATED VALUE GAINS LOSSES FAIR-VALUE ----------- ------ ------- ----------- U. S. Government Agency securities............... $29,918,137 $-- -- $29,918,137 ----------- -- -- ----------- $29,918,137 $-- $ $29,918,137 =========== == == ===========
F-11 70 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At March 31, 2000 and 1999, U.S. Government Agency securities consisted of short-term discount notes with maturities of 30 days or less. The estimated fair value of the U.S. Government Agency securities approximates the carrying value at March 31, 2000 and 1999. Proceeds from the sales of investment securities available for sale during the years ended March 31, 1999 and 1998, were $24,365,488 and $5,188,483, respectively, resulting in gross gains of $3,948 and $188,483 respectively. There were no sales of investment securities available for sale during the year ended March 31, 2000. NOTE 4. INVESTMENT SECURITIES HELD TO MATURITY, NET
MARCH 31, 2000 ------------------------------------------------ GROSS UNREALIZED CARRYING ------------------ ESTIMATED VALUE GAINS LOSSES FAIR-VALUE ----------- ----- --------- ----------- U.S. Government Agency securities............ $24,995,850 $-- $(687,210) $24,308,640 ----------- -- --------- ----------- $24,995,850 $-- $(687,210) $24,308,640 =========== == ========= ===========
There were no investment securities held to maturity at March 31, 1999. There were no sales of securities held to maturity during the years ended March 31, 2000, 1999 and 1998. NOTE 5. MORTGAGE-BACKED SECURITIES HELD TO MATURITY, NET A summary of gross unrealized gains and losses and estimated fair value follows:
MARCH 31, 2000 --------------------------------------------------- GROSS UNREALIZED CARRYING --------------------- ESTIMATED VALUE GAINS LOSSES FAIR-VALUE ----------- ------- ---------- ----------- Government National Mortgage Association............................. $ 6,516,167 $ -- $ 271,846 $ 6,244,321 Federal Home Loan Mortgage Corporation.... 18,780,043 -- 787,917 17,992,126 Federal National Mortgage Association..... 26,222,474 -- 1,218,331 25,004,143 Small Business Administration............. 759,922 6,260 -- 766,182 Collateralized Mortgage Obligations: Resolution Trust Corporation............ 1,708,032 -- 12,442 1,695,590 Other................................... 242,592 -- 5,792 236,800 ----------- ------- ---------- ----------- $54,229,230 $ 6,260 $2,296,328 $51,939,162 =========== ======= ========== ===========
MARCH 31, 1999 --------------------------------------------------- GROSS UNREALIZED CARRYING --------------------- ESTIMATED VALUE GAINS LOSSES FAIR-VALUE ----------- ------- ---------- ----------- Government National Mortgage Association............................. $ 7,630,635 $55,247 $ -- $ 7,685,882 Federal Home Loan Mortgage Corporation.... 24,635,700 -- 772,154 23,863,546 Federal National Mortgage Association..... 29,718,567 -- 140,411 29,578,156 Small Business Administration............. 1,325,753 4,255 -- 1,330,008 Collateralized Mortgage Obligations: Resolution Trust Corporation............ 2,282,016 -- 36,023 2,245,993 Federal Home Loan Mortgage Corporation.......................... 647,010 -- 1,820 645,190 Other................................... 344,766 27 -- 344,793 ----------- ------- ---------- ----------- $66,584,447 $59,529 $ 950,408 $65,693,568 =========== ======= ========== ===========
F-12 71 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a schedule of final maturities as of March 31, 2000:
CARRYING ESTIMATED VALUE FAIR VALUE ----------- ----------- After one through five years.............................. $ 525,207 $ 498,118 After five through ten years.............................. 5,193,818 5,017,419 After ten years........................................... 48,510,205 46,423,625 ----------- ----------- $54,229,230 $51,939,162 =========== ===========
There were no sales of mortgage-backed securities held to maturity during the years ended March 31, 2000, 1999 and 1998. NOTE 6. LOANS RECEIVABLE, NET
YEAR ENDED MARCH 31, ---------------------------- 2000 1999 ------------ ------------ Real estate mortgage: One- to four-family....................................... $152,457,753 $181,320,829 Multi-family.............................................. 86,184,032 52,365,984 Non-residential........................................... 22,721,310 23,092,010 Equity and second mortgages............................... 251,738 424,981 ------------ ------------ 261,614,833 257,203,804 ------------ ------------ Real estate construction.................................... 6,392,759 11,047,185 ------------ ------------ Commercial loans............................................ 699,844 616,325 ------------ ------------ Consumer: Deposit accounts.......................................... 294,495 376,227 Student education......................................... 67,191 147,064 Other..................................................... 5,412,059 7,883,501 ------------ ------------ 5,773,745 8,406,792 ------------ ------------ Total loans................................................. 274,481,181 277,274,106 ------------ ------------ Add: Premium................................................ 582,263 1,013,770 Less: Loans in process...................................... (1,062,242) (2,635,520) Allowance for loan losses................................... (2,935,314) (4,020,099) Deferred loan fees and discounts............................ (917,871) (1,110,406) ------------ ------------ (4,333,164) (6,752,255) ------------ ------------ $270,148,017 $270,521,851 ============ ============
F-13 72 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is an analysis of the allowance for loan losses:
YEAR ENDED MARCH 31, ---------------------------------------- 2000 1999 1998 ----------- ----------- ---------- Balance -- beginning......................... $ 4,020,099 $ 3,138,000 $2,245,747 Provision charged to operations.............. 1,099,300 4,029,996 1,259,531 Recoveries of amounts previously charged off........................................ 384,625 81,711 -- Loans charged off............................ (2,568,710) (3,229,608) (367,278) ----------- ----------- ---------- Balance -- ending............................ $ 2,935,314 $ 4,020,099 $3,138,000 =========== =========== ==========
Non-accrual loans consist of loans for which the accrual of interest has been discounted as a result of such loans becoming three months or more delinquent as to principal and/or interest payments. Interest income on non-accrual loans is recorded when received. Restructured loans consist of loans where borrowers have been granted concessions in regards to the terms of their loans due to financial or other difficulties which rendered them unable to service their loans under the original contractual terms. The balances of non-accrual and restructured loans and their impact in interest income are as follows:
YEAR ENDED MARCH 31, -------------------------- 2000 1999 1998 ------ ------ ------ (IN THOUSANDS) Non-accrual loans........................................ $2,126 $2,417 $5,568 Restructured loans....................................... -- -- 807 ------ ------ ------ $2,126 $2,417 $6,375 ====== ====== ======
YEAR ENDED MARCH 31, --------------------- 2000 1999 1998 ----- ----- ----- (IN THOUSANDS) Interest income which would have been recorded had loans performed in accordance with original contracts........... $345 $419 $762 Interest income received.................................... -- 107 285 ---- ---- ---- Interest income lost........................................ $345 $312 $477 ==== ==== ====
At March 31, 2000 and 1999, the recorded investment in impaired loans was $2,126,000 and $2,417,000, respectively. The related allowance for credit losses was approximately $330,000 and $553,000 at December 31, 2000 and 1999, respectively. The impaired loan portfolio is primarily collateral dependent. The average recorded investment in impaired loans during the fiscal years ended March 31, 2000 and 1999 was approximately $2,272,000 and $3,993,000, respectively. For the years ended March 31, 2000, 1999 and 1998, the Company recognized cash basis interest income on these impaired loans of $0, 107,000 and $285,000, respectively. At March 31, 2000, loans to officers totaled $111,722. F-14 73 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of loans to the Bank's directors and officers (and to any associates of such persons), exclusive of loans to any such person which in aggregate did not exceed $60,000:
YEAR ENDED MARCH 31, ---------------------- 2000 1999 --------- --------- Balance -- beginning........................................ $ 659,491 $ 850,195 Loans originated............................................ -- -- Other(1).................................................... (530,534) -- Repayments.................................................. (17,235) (190,704) --------- --------- Balance -- ending........................................... $ 111,722 $ 659,491 ========= =========
- --------------- (1) Represents loans to individuals who are no longer directors and officers of Carver at March 31, 2000. NOTE 7. LOANS SERVICING The mortgage loan portfolios serviced for the FHLMC and Fannie Mae are not included in the accompanying financial statements. The unpaid principal balances of these loans aggregated $2,775,000, $3,035,000 and $3,696,000 at March 31, 2000, 1999 and 1998, respectively. Custodial escrow balances, maintained in connection with the foregoing loan servicing, were approximately $56,000, $55,000 and $61,000 at March 31, 2000, 1999 and 1998, respectively. NOTE 8. PREMISES AND EQUIPMENT, NET The detail of premises and equipment is as follows:
MARCH 31, -------------------------- 2000 1999 ----------- ----------- Land...................................................... $ 450,952 $ 450,952 Buildings and improvements................................ 8,521,565 8,501,923 Leasehold improvements.................................... 718,764 697,903 Furnishings and equipment................................. 6,017,827 5,546,237 ----------- ----------- 15,709,108 15,197,015 Less accumulated depreciation and amortization............ 4,533,774 3,312,032 ----------- ----------- $11,175,334 $11,884,983 =========== ===========
Depreciation and amortization charged to operations for the years ended March 31, 2000, 1999 and 1998 were $1,221,742, $1,042,659 and $695,192, respectively. NOTE 9. ACCRUED INTEREST RECEIVABLE The detail of accrued interest receivable is as follows:
MARCH 31, ------------------------ 2000 1999 ---------- ---------- Loans....................................................... $1,768,295 $2,311,991 Mortgage-backed securities.................................. 849,471 522,530 Investments and other interest-bearing assets............... 35,500 26,172 ---------- ---------- $2,653,266 $2,860,693 ========== ==========
F-15 74 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10. EXCESS OF COST OVER ASSETS ACQUIRED, NET The excess of cost over assets acquired relates to the acquisition of the Bedford-Stuyvesant office. The detail is as follows:
MARCH 31, ---------------------- 2000 1999 -------- ---------- Core deposit premium........................................ $787,517 $ 992,956 Acquisition costs........................................... 29,263 36,897 -------- ---------- $816,780 $1,029,853 ======== ==========
NOTE 11. DEPOSITS
MARCH 31, ------------------------------------------------------------- 2000 1999 ----------------------------- ----------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE RATE AMOUNT PERCENT RATE AMOUNT PERCENT -------- -------- ------- -------- -------- ------- (DOLLARS IN THOUSANDS) DEMAND: Interest-bearing.................. 1.66% $ 18,873 6.68% 1.94% $ 16,102 5.81% Non-interest-bearing.............. -- 12,337 4.38 -- 10,609 3.83 1.00 31,210 11.06 1.17 26,711 9.64 SAVINGS: Savings and club.................. 2.51 145,277 51.53 2.51 143,795 51.91 Money Management.................. 3.25 19,418 6.89 2.93 20,932 7.56 Certificate of deposit............ 4.70 86,036 30.52 4.55 85,561 30.89 3.31 250,731 88.94 3.24 250,288 90.36 3.06% $281,941 100.00% 3.04% $276,999 100.00%
The scheduled maturities of certificates of deposits are as follows:
MARCH 31, ------------------ 2000 1999 ------- ------- (IN THOUSANDS) One year or less............................................ $22,860 $18,033 After one year to three years............................... 29,699 30,944 After three years to five years............................. 10,984 10,197 After five years............................................ 22,493 26,387 ------- ------- $86,036 $85,561 ======= =======
The aggregate amount of certificates of deposit with minimum denominations of $100,000 or more was approximately $17,514,000 and $15,915,000 at March 31, 2000 and 1999, respectively. F-16 75 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interest expense on deposits consists of the following:
FOR YEAR ENDED MARCH 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- Demand......................................... $ 314,204 $ 313,391 $ 364,774 Savings and clubs.............................. 3,649,742 3,604,347 3,601,095 Money Management............................... 631,452 613,267 691,939 Certificates of deposit........................ 4,046,587 3,902,435 3,948,687 ---------- ---------- ---------- 8,641,985 8,433,440 8,606,495 Penalty for early withdrawals of certificate of deposit...................................... (29,959) (12,214) (10,137) ---------- ---------- ---------- $8,612,026 $8,421,226 $8,596,358 ========== ========== ==========
NOTE 12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The scheduled maturities of securities sold under agreements to repurchase are as follows:
MARCH 31, INTEREST -------------------------- LENDER MATURITY RATE 2000 1999 - ------ ----------------- ------------- ----------- ----------- Morgan Stanley Repo...... August 13, 1999 5.61% $ $ 4,000,000 Federal Home Loan Bank... March 2, 2000 5.82 7,000,000 Federal Home Loan Bank... May 22, 2000 5.88 4,400,000 4,400,000 Federal Home Loan Bank... July 26, 2000 5.41 8,000,000 8,000,000 Federal Home Loan Bank... September 5, 2000 5.40 6,750,000 6,750,000 Federal Home Loan Bank... October 26, 2000 4.81 5,187,000 5,187,000 Federal Home Loan Bank... December 4, 2000 6.44 7,000,000 ----------- ----------- $31,337,000 $35,337,000 =========== ===========
Information concerning securities sold under agreements to repurchase are summarized as follows:
FOR THE YEAR ENDED MARCH 31, ------------------ 2000 1999 ------- ------- (IN THOUSANDS) Average balance during the year............................. $32,670 $59,296 Average interest rate during the year....................... 5.46% 5.74% Maximum month-end balance during the year................... $35,337 $85,720 Mortgage-backed securities underlying the agreements at year end: Carrying value............................................ $34,225 $39,343 Estimated fair value...................................... $32,878 $39,316
F-17 76 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 13. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK Information relating to the maturities of advances from the Federal Home Loan Bank of New York follows:
MARCH 31, ---------------------------------------------------------- 2000 1999 MATURING --------------------------- --------------------------- YEAR ENDED WEIGHTED WEIGHTED MARCH 31, AVERAGE RATE AMOUNT AVERAGE-RATE AMOUNT - ---------- ------------ ----------- ------------ ----------- 2000............................ 5.78% $19,000,000 2001............................ 5.76% $51,000,000 5.44 31,000,000 2002............................ 5.17 15,000,000 5.17 15,000,000 2003............................ 3.58 358,700 3.58 358,700 2012............................ 3.50 329,756 3.50 349,766 ---- ----------- ---- ----------- 5.60 $66,688,456 5.46 $65,708,466 ==== =========== ==== ===========
At March 31, 2000 and 1999, the advances were secured by pledges of the Bank's investment in the capital stock of the Federal Home Loan Bank totaling $5,754,600 respectively and a blanket assignment of the Bank's unpledged qualifying mortgage, mortgage-backed securities and investment portfolios. NOTE 14. INCOME TAXES The components of income tax expense for the years ended March 31, 2000, 1999 and 1998 are as follows:
YEAR ENDED MARCH 31, ------------------------------------- 2000 1999 1998 -------- ----------- ---------- Federal income tax expense (benefit) Current...................................... $ 0 $ (701,458) $ 521,917 Deferred..................................... 0 (688,823) 237,466 State and local income tax expense (benefit) Current...................................... 110,030 152,059 444,083 Deferred..................................... 0 (261,145) 0 -------- ----------- ---------- Total provision for income tax expense......... $110,030 $(1,499,367) $1,203,466 ======== =========== ==========
The reconciliation of the expected Federal tax rate to the consolidated effective tax rate for the years ended March 31, 2000, 1999 and 1998 are as follows:
YEAR ENDED MARCH 31, ------------------------------------------------------------------ 2000 1999 1998 ------------------- --------------------- -------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT --------- ------- ----------- ------- ---------- ------- Statutory Federal income tax........................ $(348,638) 34.0% $(2,023,720) 34.0% $ 764,916 34.0% State and local income taxes, net of Federal tax benefit.................... 110,030 (10.7) (71,997) 1.2 293,094 13.0 Change in valuation allowance.................. 297,492 (26.0) 596,350 (10.0) 145,456 6.5 Other........................ 51,146 (8.0) 0 0.0 0 0.0 --------- ----- ----------- ----- ---------- ---- Total income tax expense..... $ 110,030 (10.7)% $(1,499,367) 25.2% $1,203,466 53.5% ========= ===== =========== ===== ========== ====
F-18 77 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The bank has net operating loss carryforwards for Federal income tax purposes at March 31, 2000 and 1999 of approximately $5,705,000 and $4,043,000 respectively. These net operating loss carryforwards begin to expire in the year ended March 31, 2019. The Bank's stockholders' equity includes approximately $2.94 million and $4.02 million at March 31, 2000 and 1999, respectively, which has been segregated for Federal income tax purposes as a bad debt reserve. The use of this amount for purposes other than to absorb losses on loans may result in taxable income for Federal income taxes at the then current tax rate. The tax effects of existing temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows:
MARCH 31, ------------------------ 2000 1999 ---------- ---------- DEFERRED TAX ASSETS Net operating loss carryforward............................. $1,939,777 $1,374,601 Allowance for loan losses................................... 1,376,364 1,885,017 Deferred loan fees.......................................... 430,388 520,667 Employees pension plan...................................... 84,305 21,843 Management recognition plan................................. 4,689 21,350 Directors' retirement plan.................................. 207,669 -- Contributions carryforward.................................. 28,278 -- ---------- ---------- Total deferred tax assets before valuation allowance........ 4,071,470 3,823,478 Valuation allowance......................................... (2,281,334) (1,983,842) ---------- ---------- Total deferred tax asset.................................... 1,790,136 1,839,636 ---------- ---------- DEFERRED TAX LIABILITIES Excess of cost over net assets acquired..................... 328,077 399,827 Depreciation................................................ 423,606 401,356 Excess tax bad debt reserve................................. 16,428 16,428 ---------- ---------- Total deferred tax liabilities.............................. 768,111 817,611 ---------- ---------- Net deferred tax assets included in other assets............ $1,022,025 $1,022,025 ========== ==========
Management believes it is more likely than not that the results of future operations will generate sufficient future taxable income to realize the deferred tax asset. The Company will have to generate approximately $2.5 million of future taxable income to realize this asset. F-19 78 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 15. EARNINGS PER SHARE The following table reconciles the income available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted earnings per share for the periods presented:
YEAR ENDED MARCH 31, ---------------------------------------- 2000 1999 1998 ----------- ----------- ---------- Net income (loss)............................ $(1,135,436) $(4,452,750) $1,046,286 Preferred income............................. (44,153) -- -- ----------- ----------- ---------- Net income (loss) -- Basic................... $(1,179,589) $(4,452,750) $1,046,286 Impact of potential conversion of convertible preferred stock to common stock............ 44,153 -- -- ----------- ----------- ---------- Net income (loss) -- Diluted................. $(1,135,436) $(4,452,750) $1,046,286 =========== =========== ========== Weighted average common shares outstanding -- Basic...................................... 2,238,846 2,206,133 2,187,619 Effect of dilutive securities Convertible preferred stock............................ 46,107 -- -- ----------- ----------- ---------- Weighted average common shares outstanding -- Diluted.................................... 2,284,953 2,206,133 2,187,619 =========== =========== ==========
NOTE 16. STOCKHOLDERS' EQUITY Convertible Preferred Stock. On January 11, 2000, Carver sold, pursuant to a Securities Purchase Agreement, dated January 11, 2000, in a private placement 40,000 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock") to Morgan Stanley & Co. Incorporated ("MSDW") and 60,000 Shares of Series B Convertible Preferred Stock (the "Series B Preferred Stock") to Provender Opportunities Fund L.P. ("Provender"). In addition, Carver entered into a Registration Rights Agreement, dated January 11, 2000 with MSDW and Provender. The gross proceeds from the private placement were $2.5 million. The Series A Preferred Stock and Series B Preferred Stock (collectively the "Preferred Stock") accrue annual dividends at $1.97 per share. Dividends are payable semi-annually commencing on June 15 and December 15 of each year. Each share of Preferred Stock is convertible at the option of the holder, at any time, into 2.083 shares of Carver's Common Stock, subject to certain antidilution adjustments. Carver may redeem the Preferred Stock beginning January 15, 2004. In the event of any liquidation, dissolution or winding up of Carver, whether voluntary or involuntary, the holders of the shares of Preferred Stock shall be entitled to receive $25 per share of Preferred Stock plus all dividends accrued and unpaid thereon. Each share of Preferred Stock is entitled to one vote for each share of Common Stock into which the Preferred Stock can be converted. At March 31, 2000 unpaid accrued dividends amounted to $44,153. Regulatory Capital. The operations and profitability of the Bank are significantly affected by legislation and the policies of the various regulatory agencies. As required by the Financial Institutions Reform, Recovery, and Enforcement Act, the OTS promulgated capital requirements for financial institutions consisting of minimum tangible and core capital ratios of 1.5% and 3.0%, respectively, of the institution's adjusted total assets and a minimum risk-based capital ratio of 8.0% of the institution's risk weighted assets. Although the minimum core capital ratio is 3.0%, the FDICIA stipulates that an institution with less than F-20 79 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4.0% core capital is deemed undercapitalized. At March 31, 2000 and 1999, the Bank exceeded all the current capital requirements. The following table sets out the Bank's various regulatory capital categories at March 31, 2000.
AT MARCH 31, 2000 --------------------- DOLLARS PERCENTAGE ------- ---------- (IN THOUSANDS) Tangible equity............................................. $28,715 6.85% Core/leverage capital....................................... 28,715 6.85 Tier 1 risk-based capital................................... 28,715 14.15 Total risk-based capital.................................... 31,213 15.38
The following table reconciles the Bank's stockholders' equity at March 31, 2000, under generally accepted accounting principles to regulatory capital requirements:
REGULATORY CAPITAL REQUIREMENTS ------------------------------------------------ GAAP TANGIBLE TIER I/CORE RISK-BASED CAPITAL CAPITAL CAPITAL CAPITAL ------- -------- ----------- ---------- Stockholders' Equity at March 31, 2000(1)........ $29,532 $29,532 $29,532 $29,532 ======= Add: General valuation allowances................... -- -- 2,538 Deduct: Goodwill....................................... (817) (817) (817) Asset required to be deducted.................. -- -- (40) ------- ------- ------- Regulatory capital............................. 28,715 28,715 31,213 Minimum capital requirement.................... 6,283 16,766 16,235 ------- ------- ------- Regulatory capital excess...................... $22,432 $11,949 $14,978 ======= ======= =======
- --------------- (1) Reflects Bank only. NOTE 17. BENEFIT PLANS PENSION PLAN Carver has a non-contributory defined benefit pension plan covering all eligible employees. The benefits are based on each employee's term of service. Carver's policy is to fund the plan with contributions which equal the maximum amount deductible for federal income tax purposes. The following table sets forth the F-21 80 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) plan's changes in benefit obligation, changes in plan assets and funded status and amounts recognized in Carver's consolidated financial statements:
MARCH 31, ------------------------- 2000 1999 ----------- ---------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at the beginning of the year............ $ 3,144,934 $2,796,385 Service cost............................................. 159,270 161,729 Interest cost............................................ 190,648 188,592 Actuarial (gain)/loss.................................... (488,146) 154,737 Benefits paid............................................ (160,921) (156,509) ----------- ---------- Benefit obligation at the end of the year.................. $ 2,845,785 $3,144,934 =========== ========== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year............. $ 3,625,222 $3,275,671 Actual return on plan assets............................. 250,871 456,614 Employer Contributions................................... 75,637 49,446 Benefits paid............................................ (160,921) (156,509) ----------- ---------- Fair value of plan assets at end of year................... $ 3,790,809 $3,625,222 =========== ========== Funded Status.............................................. $ 945,024 $ 480,288 Contributions............................................ -- 28,847 Unrecognized transition obligation....................... 259,170 294,873 Unrecognized gain........................................ (1,336,832) (943,321) Unrecognized past service liability...................... 14,410 16,544 ----------- ---------- Accrued pension cost....................................... $ (118,228) $ (122,769) =========== ==========
Net periodic pension cost included the following components:
YEAR ENDED MARCH 31, ----------------------------------- 2000 1999 1998 --------- --------- --------- Service cost.................................... $ 159,270 $ 161,729 $ 158,235 Interest cost................................... 190,648 188,592 182,273 Expected return on plan assets.................. (283,757) (260,201) (233,435) Amortization of: Unrecognized transition obligation............ 35,703 35,703 35,703 Unrecognized gain............................. (61,749) (46,076) (58,131) Unrecognized past service liability........... 2,134 2,134 2,134 --------- --------- --------- Net periodic pension cost....................... $ 42,249 $ 81,881 $ 86,779 ========= ========= =========
Significant actuarial assumptions used in determining plan benefits are:
YEAR ENDED MARCH 31, -------------------- 2000 1999 1998 ---- ---- ---- Annual salary increase...................................... 5.50% 4.50% 5.50% Long-term return on assets.................................. 8.00% 8.00% 8.00% Discount rate used in measurement of benefit obligations.... 8.00% 6.50% 7.50%
F-22 81 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SAVINGS INCENTIVE PLAN The Bank has a savings incentive plan, pursuant to Section 401(k) of the Code, for all eligible employees of the Bank. Employees may elect to defer up to the lesser of 15% or the maximum amount allowed under law of their compensation and may receive a 50% matching contribution from the Bank up to the maximum allowed by law. Total incentive plan expenses for the years ended March 31, 2000, 1999 and 1998 were $56,000, $68,000 and $73,000 respectively. DIRECTORS' RETIREMENT PLAN Concurrent with the conversion to the stock form of ownership, the Bank adopted a retirement plan for non-employee directors. The benefits are payable based on the term of service as a director.
MARCH 31, ---------------------- 2000 1999 --------- --------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at the beginning of the year............. $ 795,439 $ 479,672 Service cost.............................................. -- 42,403 Interest cost............................................. 50,918 31,562 Actuarial (gain)/loss..................................... (151,202) 265,977 Benefits paid............................................. (25,025) (24,175) --------- --------- Benefit obligation at the end of the year................... $ 670,130 $ 795,439 ========= ========= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year.............. $ -- $ -- Actual return on plan assets.............................. -- -- Employer Contributions.................................... 25,025 24,175 Benefits paid............................................. (25,025) (24,175) --------- --------- Fair value of plan assets at end of year.................... $ -- $ -- ========= ========= Funded Status............................................... $(670,130) $(795,439) Contributions............................................. 6,256 6,256 Unrecognized loss......................................... 165,758 343,826 Unrecognized past service liability....................... 55,228 110,464 --------- --------- Accrued pension cost........................................ $(442,888) $(334,893) ========= =========
Net periodic pension cost for the years ended March 31, 2000, 1999 and 1998 included the following:
2000 1999 1998 -------- -------- -------- Service cost....................................... $ -- $ 42,403 $ 24,330 Interest cost...................................... 50,918 31,562 31,395 Expected return on plan assets..................... -- -- -- Amortization of: Unrecognized gain................................ 26,866 3,522 88 Unrecognized past service liability.............. 55,236 55,236 55,236 -------- -------- -------- Net periodic pension cost.......................... $133,020 $132,723 $111,049 ======== ======== ========
The actuarial assumptions used in determining plan benefits include annual fee increases of 5.50%, 4.50% and 4.50%, and a discount rate of 8.00%, 6.50% and 6.75%, for the years ended March 31, 2000, 1999 and 1998, respectively. F-23 82 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Subsequent to March 31, 2000 the directors voted to terminate the Directors' Retirement Plan. MANAGEMENT RECOGNITION PLAN Pursuant to the management recognition plan approved at the stockholders meeting held on September 12, 1995, the Bank recognized $178,000, $62,000 and $93,000 as expense for the years ended March 31, 2000, 1999 and 1998, respectively. NOTE 18. EMPLOYEE STOCK OWNERSHIP PLAN Effective upon conversion, an ESOP was established for all eligible employees. The ESOP used $1,821,320 in proceeds from a term loan obtained from a third-party institution to purchase 182,132 shares of Bank common stock in the initial public offering. The term loan principal is payable over forty equal quarterly installments through September 2004. Interest on the term loan is payable quarterly, at a rate of 3.00% over the average federal funds rate. Each year, the Bank intends to make discretionary contributions to the ESOP which will be equal to principal and interest payments required on the term loan less any dividends received by the ESOP on unallocated shares. Shares purchased with the loan proceeds were initially pledged as collateral for the term loan and are held in a suspense account for future allocation among the participants on the basis of compensation, as described by the Plan, in the year of allocation. Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP shares in the consolidated statements of financial condition. As shares are committed to be released from collateral, the Bank reports compensation expense equal to the current market price of the shares, and the shares become outstanding for net income per common share computations. ESOP compensation expense was $326,000, $171,000 and $241,000 for the years ended March 31, 2000, 1999 and 1998 respectively. The ESOP shares at March 31, 2000 and 1999 are as follows:
MARCH 31, -------------------- 2000 1999 -------- -------- Allocated shares............................................ 116,937 75,755 Shares committed to be released............................. -- 19,995 Unreleased shares........................................... 65,195 86,382 Total ESOP shares........................................... 182,132 182,132 Fair value of unreleased shares............................. $570,456 $755,843
NOTE 19. COMMITMENTS AND CONTINGENCIES The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to extend credit and to sell loans. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements of financial condition. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies making commitments as it does for on-balance-sheet instruments. F-24 83 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Bank has outstanding various loan commitments as follows:
MARCH 31, -------------------------- 2000 1999 ----------- ----------- Commitments to originate loans mortgage................... $ 2,472,000 $ 7,440,520 Commitments to purchase loans mortgage.................... 15,000,000 -- Consumer loans............................................ 4,488,000 4,096,000 ----------- ----------- Total........................................... $21,960,000 $11,536,520 =========== ===========
At March 31, 2000, of the $2,472,000 in outstanding commitments to originate mortgage loans, $1,465,000 represents commitments to originate multi-family mortgage loans at fixed rates within a range of 8% to 9 3/4% and $1,007,000 represent the undisbursed balance of construction loans at rates ranging from 8.25% to 8.83%. The commitment to purchase mortgage loans consists of one- to four- family mortgage loans at rates ranging from 7% to 8.375%. At March 31, 2000, undisbursed funds from approved commercial lines of credit totaled $4,579,000. All such lines are secured, including $1,000,000 in warehouse lines of credit secured by the underlying warehoused mortgages, expire within one year, and carry interest rates that float at 1.00% above the prime rate. At March 31, 2000, undisbursed funds from approved consumer lines of credit, primarily credit cards, totaled $4,488,000. $4,256,000 of such lines are unsecured and $232,000 of such lines are secured. All such lines carry adjustable rates. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management's credit evaluation of the counter-party. Collateral held consists primarily of residential real estate, but may include income-producing commercial properties. Rentals, including real estate taxes, under long-term operating leases for certain branch offices aggregated approximately $273,000, $266,000, and $263,000 for the years ended March 31, 2000, 1999 and 1998, respectively. As of March 31, 2000, minimum rental commitments under all noncancellable leases with initial or remaining terms of more than one year and expiring through 2011 are as follows:
YEAR ENDED MARCH 31, MINIMUM RENTAL - -------------------- -------------- (IN THOUSANDS) 2001 $ 283 2002 288 2003 293 2004 298 2005 144 Thereafter 994 ------ $2,300 ======
F-25 84 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Bank also has, in the normal course of business, commitments for services and supplies. Management does not anticipate losses on any of these transactions. LEGAL PROCEEDINGS From time to time, Carver Federal is a party to various legal proceedings incident to its business. At March 31, 2000, except as set forth below, there were no legal proceedings to which Carver Federal or its subsidiaries was a party, or to which any of their property was subject, which were expected by management to result in a material loss. At March 31, 2000, two properties as to which the Bank is mortgagee are the subject of criminal forfeiture action pending in U.S. District Court. The forfeiture proceeding arises from the criminal conviction of principals of the borrowers on the properties. One property is carried as a loan on the Bank's books at an approximate value of $500,000 while the second property is carried as real estate owned, also with an approximate value of $500,000. It is the Bank's position that it is a good faith holder for value and the Bank is opposing the government's attempt to forfeit the properties in disregard of the Bank's interest as mortgagee. The proceedings are in the preliminary stages. See "Asset Quality -- Asset Classification and Allowances for Losses." On or about January 18, 2000, a complaint was filed in the Court of Chancery of the State of Delaware in and for New Castle County entitled BBC Capital Market, Inc. v. Carver Bancorp, Inc., et al., C.A. No. 17743, naming the Holding Company, the individual defendants, Morgan Stanley and Provender as defendants. The complaint alleged, among other things, that plaintiff BBC is a 7.4% stockholder of the Holding Company and sought to challenge the Holding Company's issuance on January 11, 2000 of 40,000 shares of the Holding Company's Series A Preferred Stock to Morgan Stanley and 60,000 shares of the Holding Company's Series B Preferred Stock to Provender. The complaint further alleged, among other things, that: (i) the individual defendants approved the Transactions for the primary purpose of interfering with effective stockholder action at the Holding Company's annual meeting of stockholders on February 24, 2000 at which two director-defendants were up for re-election; (ii) Morgan Stanley sought to intimidate Plaintiff's representatives into dropping any challenge to the election of directors at the Holding Company and that the individual defendants conspired with Morgan Stanley in the alleged intimidation; and (iii) the Holding Company issued a false and misleading proxy statement in connection with the Annual Meeting by not disclosing, among other things, certain facts relating to Plaintiff's nomination of directors at the Annual Meeting and the circumstances surrounding the calling of the Annual Meeting. The complaint alleged four counts: (1) breach of fiduciary duty of loyalty against the individual defendants; (2) breach of fiduciary duty of disclosure against the individual defendants; (3) aiding and abetting breaches of fiduciary duty against Morgan Stanley and Provender; and (4) pursuant to 10 Del. C. sec. 6501, a determination that the individual defendants, Morgan Stanley and Provender, could not cast in excess of 10% of their collective vote at the Annual Meeting. The complaint sought, among other things: (1) an order preliminarily and permanently enjoining the Holding Company, the individual defendants and others from: (a) treating the stock issued to Morgan Stanley and Provender as validly issued for purposes of voting at the Annual Meeting: (b) taking any steps to solicit proxies in favor of the Holding Company's nominees at the Annual Meeting until such time that all alleged disclosure violations were cured; and (c) taking any action to obstruct a proxy solicitation by Plaintiff; (2) an order preliminarily and permanently enjoining Morgan Stanley, Provender and others from aiding and abetting the individual defendants' alleged breach of fiduciary duties and taking any action to obstruct a proxy solicitation by Plaintiff; (3) an order rescinding the Transactions; (4) a declaration that the defendants, Morgan Stanley and Provender, could not cast in excess of 10% of their collective vote at the Annual Meeting; and (5) an award to Plaintiff of the cost and disbursements of the action, including reasonable attorneys' fees and experts' fees. On or about January 29, 2000, defendants filed an answer denying the substantive allegations F-26 85 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of the complaint and seeking, among other things, an order dismissing the complaint in its entirety, with prejudice. On or about January 31, 2000, Plaintiff filed an amended complaint repeating the allegations in the original complaint and adding a count pursuant to 8 Del. C. sec. 220 seeking an order requiring the Holding Company to immediately produce all information requested in Plaintiff's letter demanding that the Holding Company produce certain information relating to the Holding Company's ESOP and 401(k) Savings Plan in RSI Retirement Trust. On or about February 22, 2000, defendants filed an answer denying the substantive allegations of the amended complaint and seeking, among other things, an order dismissing the complaint in its entirety, with prejudice. On or about January 18, 2000, Plaintiff also made a motion for a preliminary injunction to obtain the injunctive relief sought in the complaint and a motion for expedited proceedings to obtain discovery in support of its application for preliminary injunctive relief. The parties engaged in expedited discovery and the Court heard Plaintiff's motion for a preliminary injunction on February 16, 2000. On February 16, 2000, the Court denied Plaintiff's motion for a preliminary injunction in its entirety. On or about March 7, 2000, after the Holding Company's Inspector of Election declared that the Holding Company's nominees had defeated Plaintiff's nominees at the Annual Meeting, Plaintiff filed a second amended complaint which repeated the substantive allegations made in the complaint and the amended complaint and added certain additional allegations, including, among others: (i) further allegations that the Holding Company's proxy statement and related materials issued in connection with the Annual Meeting contained false and misleading statements; and (ii) allegations that the Inspector of Election improperly counted the votes of certain unallocated shares in the ESOP in favor of the Holding Company's nominees. The second amended complaint alleged five counts: (1) breach of fiduciary duty against the individual defendants; (2) breach of fiduciary duty of disclosure against the individual defendants; (3) aiding and abetting breaches of fiduciary duty against Morgan Stanley and Provender, (4) pursuant to 10 Del. C. sec. 6501, a determination that the individual defendants, Morgan Stanley and Provender, could not cast in excess of 10% of their collective vote at the Annual Meeting; and (5) pursuant to 8 Del. C. sec. 225, a determination that the Inspector of Election improperly counted the votes of certain unallocated shares in the ESOP in favor of the Holding Company's nominees. The second amended complaint sought, among other things: (1) an order permanently enjoining the Holding Company, the individual defendants and others from treating any stock issued to Morgan Stanley and Provender as validly issued for purposes of voting; (2) an order rescinding the Transactions; (3) an order declaring that Plaintiff's nominees were elected as directors of the Holding Company at the Annual Meeting; (4) an award to Plaintiff of the cost and disbursements of the Action, including reasonable attorneys' fees and experts' fees; and (5) an award to Plaintiff of its costs and disbursements in the proxy contest, including legal fees, proxy solicitor fees, printing fees and the like. On or about March 27, 2000, defendants filed an answer denying the substantive allegations of the second amended complaint and seeking, among other things, an order dismissing the second amended complaint in its entirety, with prejudice. On or about March 2, 2000, Blaylock filed an application in the Court pursuant to section 8 Del. C. sec. 231(c). The Application alleged that Blaylock is a beneficial holder of approximately 100,000 shares of common stock of the Holding Company and that the Inspector of Election improperly declined to accept and count Blaylock's vote at the Annual Meeting. The Application sought, among other things, an order directing the Inspector of Election to accept and count Blaylock's votes at the Annual Meeting. On or about March 8, 2000, defendants filed an answer to the Application and took no position with respect to the relief sought in the Application. F-27 86 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUBSEQUENT EVENTS On or about April 6, 2000, Plaintiff filed a motion for partial summary judgment with respect to Count V in its second amended complaint seeking a determination that the Inspector of Election improperly counted the votes of certain unallocated shares in the ESOP in favor of the Holding Company's nominees and an order declaring that Plaintiff's nominees had won the election at the Annual Meeting. On April 24, 2000, the Court granted the Partial Summary Judgment Motion and declared that the Inspector of Election improperly counted the votes attaching to the unallocated ESOP shares at the Annual Meeting. The effect of the Court's decision was Plaintiff's nominees, not the Holding Company's nominees, had won the election. By order dated April 20, 2000, the Application was consolidated with the Action and entitled In Re the Carver Bancorp, Inc., Cons. C.A. No. 17743. The issues in the Consolidated Action were scheduled to be tried before the Court beginning on May 15, 2000. The trial was expected to last between 5 and 10 days. On or about April 26, 2000, certain defendants filed motions in the Court seeking; (1) an order directing the entry of a final judgment on the Court's decision and order on the Partial Summary Judgment Motion or, in the alternative, an order certifying an appeal from the Court's interlocutory order on the Partial Summary Judgment Motion, and (2) to stay the proceedings in the Consolidated Action pending appeal of the Partial Summary Judgment Motion. On or about May 4, 2000, the Court denied these motions. On or about May 2, 2000, Plaintiff filed a motion for summary judgment with respect to the Application seeking, among other things, to dismiss the Application. On or about May 19, 2000, with the exception of Blaylock, the parties to the Consolidated Action entered into a Settlement Agreement and Mutual Release. Pursuant to the terms of the Settlement Agreement, among other things, the parties agreed that: (a) BBC's nominees at the Annual Meeting were appointed to the boards of directors of the Holding Company and Carver Federal effective May 19, 2000 for a term expiring at the annual meeting of stockholders for the fiscal year ending March 31, 2002; (b) the Holding Company will hold the 2000 Annual Meeting on or before March 24, 2001; (c) in connection with the 2000 Annual Meeting, the Holding Company will ensure that a sufficient number of directors are made eligible for election to the board of directors of the Holding Company so that the sum of (i) the number two and (ii) the number of directorships up for election at the 2000 Annual Meeting will constitute a majority of the number of directors on the board of directors of the Holding Company as of the date of the 2000 Annual Meeting; (d) certain directors of the Holding Company agreed to pay and will cause their insurance carrier to pay $475,000 to BBC; (e) all claims concerning the subject matter of the Consolidated Action are mutually released and forever discharged; and (f) the parties would promptly execute and file a stipulation and order dismissing the Consolidated Action with respect to the parties to the Settlement Agreement. On or about May 22, 2000, the parties to the Settlement Agreement executed and filed with the Court a Stipulation and Order of Dismissal With Prejudice providing, among other things, that the Consolidated Action is dismissed with prejudice as to the parties to the Settlement Agreement. On May 24, 2000, the Stipulation was entered as an Order of the Court. In light of, among other things, the Settlement Agreement and Stipulation, Blaylock agreed to withdraw the Application with prejudice. Accordingly, by Order dated May 26, 2000, the Court dismissed the Application with prejudice. NOTE 20. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than a forced or liquidation sale. Significant estimations were used by the Bank for the purpose of this disclosure. Estimated fair values have been determined by the Bank using the best available data and estimation methodology suitable for each category F-28 87 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of financial instrument. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate their recorded book balances. The estimation methodologies used and the estimated fair values and carrying values of the Bank's financial instruments are set forth below: CASH AND CASH EQUIVALENTS AND ACCRUED INTEREST RECEIVABLE The carrying amounts for cash and cash equivalents and accrued interest receivable approximate fair value because they mature in three months or less. SECURITIES The fair values for securities available for sale, mortgage-backed securities held to maturity and investment securities held to maturity are based on quoted market or dealer prices, if available. If quoted market or dealer prices are not available, fair value is estimated using quoted market or dealer prices for similar securities. LOANS RECEIVABLE The fair value of loans receivable is estimated by discounting future cash flows, using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities of such loans. DEPOSITS The fair value of demand, savings and club accounts is equal to the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK, SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE AND OTHER BORROWED MONEY The fair values of advances from Federal Home Loan Bank of New York, securities sold under agreement to repurchase and other borrowed money are estimated using the rates currently available to the Bank for debt with similar terms and remaining maturities. COMMITMENTS The fair market value of unearned fees associated with financial instruments with off-balance sheet risk at March 31, 2000 approximates the fees received. The fair value is not considered material. F-30 88 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The carrying amounts and estimated fair values of the Company's financial instruments at March 31, 2000 and 1999 are as follows:
AT MARCH 31, ------------------------------------------------ 2000 1999 ---------------------- ---------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- (IN THOUSANDS) Financial Assets: Cash and cash equivalents..................... $ 22,202 $ 22,202 $ 21,321 $ 21,321 Securities available for sale................. $ 24,952 $ 24,952 $ 29,918 $ 29,918 Investment securities held to maturity........ $ 24,996 $ 24,309 $ -- $ -- Mortgage backed securities.................... $ 54,229 $ 51,939 $ 66,584 $ 65,694 Loans receivable.............................. $270,148 $254,439 $270,522 $272,711 Accrued interest receivable................... $ 2,653 $ 2,653 $ 2,861 $ 2,861 Financial Liabilities: Deposits...................................... $281,941 $279,773 $276,999 $276,999 Securities sold under agreements to purchase................................... $ 31,337 $ 31,337 $ 35,337 $ 35,337 Advances from Federal Home Loan Bank of New York....................................... $ 66,688 $ 66,688 $ 65,708 $ 65,708 Other borrowed money.......................... $ 553 $ 553 $ 993 $ 993
LIMITATIONS The fair value estimates are made at a discrete point in time based on relevant market information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no quoted market value exists for a significant portion of the Bank's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair value estimates are based on existing on an off balance sheet financial instruments without attempting to value anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment and advances from borrowers for taxes and insurance. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectively to these estimated fair values. F-30 89 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 21. QUARTERLY FINANCIAL DATA (UNAUDITED)
YEAR ENDED MARCH 31, 2000(1) ---------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (IN THOUSANDS) Interest income........................................ $6,865 $6,694 $6,960 $ 6,848 Interest expense....................................... (3,580) (3,563) (3,500) (3,366) Net interest income.................................... 3,285 3,131 3,460 3,482 Provision for loan losses.............................. (150) (230) (225) (494) Non-interest income.................................... 475 513 539 1,012 Non-interest expense................................... (2,824) (3,155) (3,202) (6,642) Income taxes........................................... (23) (87) ------ ------ ------ ------- Net income (loss)...................................... $ 786 $ 259 $ 549 $(2,729) ====== ====== ====== ======= Net income (loss) per common share..................... $ .35 $ .11 $ .25 $ (1.23) ====== ====== ====== =======
YEAR ENDED MARCH 31, 1999(1) ---------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Interest income........................................ $7,585 $7,001 $ 6,931 $6,956 Interest expense....................................... (3,887) (3,633) (3,523) (3,772) Net interest income.................................... 3,698 3,368 3,408 3,184 Provision for loan losses.............................. (450) (300) (3,061) (218) Non-interest income.................................... 575 572 347 888 Non-interest expense................................... (3,269) (3,337) (8,270) (3,089) Income taxes (benefit)................................. 236 110 (1,847) -- ------ ------ ------- ------ Net income (loss)...................................... $ 318 $ 193 $(5,729) $ 765 ====== ====== ======= ====== Net income (loss) per common share..................... $ 0.14 $ 0.09 $ (2.59) $ 0.35 ====== ====== ======= ======
- --------------- (1) Sum of four quarter results may not equal year-end results due to rounding. NOTE 22. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. This statement also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and those instruments at fair value. This statement, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of this statement is not anticipated to have a material impact on the financial position or results of operations. NOTE 23. SUBSEQUENT EVENTS (UNAUDITED) On May 12, 2000, the Holding Company announced the completion of the sale of the Bank's branch office located in Roosevelt, New York (the "Branch"), to City National Bank of New York ("CNBNY"), an interim national bank formed by City National Bank of New Jersey ("CNBNJ") to acquire substantially all the assets of the Branch. CNBNY assumed approximately $8.5 million of deposit liabilities and acquired the related branch assets consisting of cash, fixed assets and loans secured by deposits. CNBNY paid a premium of $255,325, representing 3% of deposits. Immediately upon the consummation of the sale, CNBNY merged with and into CNBNJ. F-31 90 CARVER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. In December, 1999, Carver engaged KPMG LLP ("KPMG") as its independent auditors for the fiscal year ending March 31, 2000. Since November, 1995, Mitchell & Titus LLP ("Mitchell & Titus") has been Carver's independent auditor. The decision to change auditors was recommended by Carver's Audit Committee and was approved by Carver's Board of Directors based on a review by Carver of its accounting and tax service needs for future operations. The reports of Mitchell & Titus on Carver's consolidated financial statements for the fiscal years ended March 31, 1999 and 1998 did not contain an adverse opinion or a disclaimer of opinion, and the reports were not qualified or modified as to uncertainty, audit scope or accounting principles. In connection with Carver's audits of consolidated financial statements for each of the two fiscal years ended March 31, 1999 and 1998, there were no disagreements with Mitchell & Titus on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of Mitchell & Titus would have caused Mitchell & Titus to make reference to the matter in their report. In connection with the audits of Carver's consolidated financial statements for each of the two fiscal years ended March 31, 1999 and 1998; (a) Mitchell & Titus did not advise Carver that the internal controls necessary for Carver to develop reliable financial statements do not exist; (b) Mitchell & Titus did not advise Carver that information had come to the attention of Mitchell & Titus that had led it to no longer be able to rely on Carver's management representations, or that had made Mitchell & Titus unwilling to be associated with the financial statements prepared by Carver's management; (c) Mitchell & Titus did not advise Carver that Mitchell & Titus would need to expand significantly the scope of its audit, or that information had come to the attention of Mitchell & Titus during such time period that if further investigated may (i) materially impact the fairness or reliability of either a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the fiscal periods subsequent to the date of the most recent financial statements covered by an audit report (including information that may prevent it from rendering an unqualified audit report on those financial statements) or (ii) cause Mitchell & Titus to be unwilling to rely on Carver's management representations or be associated with Carver's consolidated financial statements; and (d) Mitchell & Titus did not advise Carver that information had come to the attention of Mitchell & Titus of the type described in subparagraph (c) above, the issue not being resolved to the satisfaction of Mitchell & Titus prior to its dismissal. The Company provided Mitchell & Titus with a copy of report Form 8-K and received from Mitchell & Titus a letter addressed to the Securities and Exchange Commission stating that it agrees with the statements made therein. Effective as of December 14, 1999, Carver has entered into an agreement with KPMG that provides for, among other things, the engagement of KPMG as the independent accounting firm that will audit the financial statements of Carver for the fiscal year ending March 31, 2000 and 2001; During Carver's fiscal years ended March 31, 1999 and 1998 and the subsequent period prior to engaging KPMG, Carver (or anyone on Carver's behalf) did not consult KPMG regarding: (1) Either the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on Carver's financial statements; and as such no written report was provided to Carver and no oral advice was provided that the new accountant concluded was an important factor considered by Carver in reaching a decision as to any accounting, auditing or financial reporting issue; or (2) Any matter that was either the subject of disagreement or a reportable event. F-32 91 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. INFORMATION WITH RESPECT TO DIRECTORS The following table sets forth certain information with respect to each director of the Holding Company. Pursuant to the terms of a Securities Purchase Agreement relating to the issuance of the Holding Company's Series B Preferred Stock to Provender, Mr. Frederick O. Terrell was appointed to the Boards of the Holding Company and the Bank for a term expiring at the annual meeting of stockholders for the fiscal year ending March 31, 2001. Pursuant to the terms of the Settlement Agreement, Mr. Kevin Cohee and Ms. Teri Williams were appointed to the Boards of the Holding Company and the Bank for terms expiring at the annual meeting of stockholders for the fiscal year ending March 31, 2002. There are no other arrangements or understandings between the Holding Company and any director pursuant to which such other person was elected to be a director of the Holding Company.
END OF POSITION HELD WITH THE NAME AGE(1) TERM COMPANY AND THE BANK DIRECTOR SINCE - ---- ------ ------ -------------------------- -------------- Deborah C. Wright................... 42 2001 President, Chief Executive 1999 Officer and Director Robert J. Franz..................... 62 2000 Director 1997 Pazel G. Jackson, Jr................ 65 2001 Director 1997 Frederick O. Terrell................ 46 2001 Director 2000 Kevin Cohee......................... 43 2002 Director 2000 Teri Williams....................... 42 2002 Director 2000
- --------------- (1) As of April 30, 2000. The principal occupation and business experience of each director is set forth below. Deborah C. Wright is currently President, Chief Executive Officer and Director of the Holding Company and the Bank, positions she assumed on June 1, 1999. Prior to assuming her current positions, Ms. Wright was President & CEO of the Upper Manhattan Empowerment Zone Development Corporation, a position she held since May 1996. She previously served as Commissioner of the Department of Housing Preservation and Development under Mayor Rudolph W. Giuliani from January 1994 through March 1996. Prior to that appointment, Ms. Wright was named to the New York City Housing Authority Board, by Mayor David N. Dinkins, which manages New York City's 189,000 public housing units. She serves on the boards of the Empire State Department Corporation, the Initiative for a Competitive Inner City, The New York City Partnership, Inc., PENCIL, Inc. and the Ministers and Missionaries Benefit Board of the American Baptist Churches. Ms. Wright earned A.B., J.D. and M.B.A. degrees from Harvard University. Robert J. Franz is a retired Senior Vice President of Booz-Allen & Hamilton, Inc. and former head of the firm's financial industries information technology practice. His entire business career has been focused on the financial services industries in technology and operations consulting, technology management and financial management. He began his business career at The Travelers Corporation where he managed the implementation of one of the first large-scale on-line computer systems in the country. Subsequently, he founded and managed their Corporate Systems Department. Mr. Franz spent twelve years at Arthur Andersen & Co. in New York where he was partner-in-charge of their worldwide capital markets and insurance consulting practices. He also was a member of their global management team for the banking industries. Subsequently, he was Managing Director at Morgan Stanley where he was Controller and Director of Financial Planning and Analysis. Pazel G. Jackson, Jr. is currently employed as a Senior Vice President in the Community Development Group of Chase Manhattan Bank. Since January, 1995, Mr. Jackson has been responsible for new business F-33 92 development in targeted markets throughout the United States. Mr. Jackson is also responsible for assisting the Chase Manhattan Mortgage Corporation's staff in the development and implementation of a national low and moderate income outreach program. Prior to joining Chase Manhattan Bank, Mr. Jackson served as the Senior Credit Officer of the Residential Mortgage Division of Chemical Bank. As Senior Credit Officer, Mr. Jackson was directly responsible for Credit and Risk Management which included oversight of the following areas: credit policy, underwriting, appraisals, quality control, portfolio administration, asset recovery (workouts), post-closing operations and supervision of the Affordable Housing Unit. Mr. Jackson's previous business experience also includes employment as a Senior Vice President in charge of Commercial and Residential Lending at The Bowery Savings Bank. Mr. Jackson joined The Bowery in 1969 and held various positions at this financial savings institution including, Senior Vice President, Assistant to the Chairman (1985-1986); Senior Vice President, Division Head, Real Estate Finance (1981-1985); Senior Vice President, Marketing Director (1977-1981); and Vice President, Asset Recovery (1973-1977). Mr. Jackson also served as Assistant Commissioner, New York City Department of Buildings (1967-1968) and as Chief of Engineering Design for the 1964-1965 New York World's Fair Corporation (1962-1966). Frederick O. Terrell is currently Managing Partner and Chief Executive Officer of Provender Capital Group, LLC, a private equity investment firm based in New York and Los Angeles. Prior to forming Provender in 1997, Mr. Terrell was a Managing Director and Partner with the international investment banking firm of Credit Suisse First Boston, beginning his association with the firm in 1983. In addition to Carver, he is a member of the Boards of Vanguarde Media, Inc., a major urban publishing and Internet content platform, PacPizza, the nation's second largest Pizza Hut franchisee, and the Yale School of Management. Mr. Terrell received his B.A. degree from La Verne College, an M.A. from Occidental College and his MBA from the Yale School of Management. Teri Williams is currently employed as a Senior Vice President of Boston Bank of Commerce. Ms. Williams is also a board member of the Boston Bank of Commerce. Ms. Williams began her business career over 17 years ago at American Express TRS Company where she became one of the youngest vice presidents in the company's history. Ms. Williams is very involved in community projects including Vice Chairperson of Dimock Community Health Center, Treasurer of UNICEF/New England and on the Board of Overseers for WGBH (public tv). Ms. Williams holds a B.A. with distinctions in economics from Brown University and an M.B.A. with honors from Harvard Graduate School of Business Administration. Kevin Cohee is currently Chairman and Chief Executive Officer of Boston Bank of Commerce. Mr. Cohee is also a board member of the Boston Bank of Commerce. Mr. Cohee has an extensive background as an executive and an entrepreneur. In 1979, he founded a consulting firm that specialized in the acquisition of radio and television stations by minorities. By 1988, through a leverage buyout, Mr. Cohee obtained Military Professional Services, Inc., a 29 year old company that marketed Visa and Master Card credit cards to military personnel. Mr. Cohee purchased a majority controlled interest in Boston Bank of Commerce in 1995. Mr. Cohee holds a B.A. and M.B.A. from the University of Wisconsin and a J.D. from Harvard Law School. RECENT DEVELOPMENTS As previously announced by the Company in a press release issued on May 25, 2000 (the "May Release"), Messrs. Robert Holland, Jr. and Strauss Zelnick have agreed to join the Boards of the Holding Company and Carver Federal. Each of Messrs. Holland and Zelnick will commence his service as a director on July 18, 2000, the date of the next regularly scheduled meeting of the Boards of the Holding Company and Carver Federal. Mr. Holland is Chairman and Chief Executive Officer of Workplace Integrators, a Southeast Michigan company he acquired in June 1997 and has since built into one of the largest Steelcase Office Furniture dealerships in the United States. Mr. Holland is the former President and Chief Executive Officer of Ben & Jerry's and previously served as the Chairman and Chief Executive Officer of Rokher-J, Inc., a New York-based holding company participating in business development projects and providing strategy development assistance to senior management of major corporations. Prior to these positions, Mr. Holland was a long- F-34 93 standing partner with McKinsey & Company. Mr. Holland is a member of the Boards of The MONY Group, AC Nielsen Corporation, Lexmark International, Inc., Tricon Restaurants, Inc., Trumark, Inc., and Mazaruni Granite Products. He spent ten years as the Chairman of the Board of Trustees of Spelman College, where he currently serves as Vice Chairman, and is a member of the Board of the Harlem Junior Tennis Program and the Executive Board of the Harvard Journal of African-American Public Policy. Mr. Zelnick is President and Chief Executive Officer of BMG Entertainment, a $4.7 billion music and entertainment unit of Bertelsmann A.G. BMG Entertainment includes the record labels Arista, RCA, Windham Hill and Ariola, among many others, as well as one of the largest music publishing companies in the world, the world's largest record club and significant online activities, including a joint partnership in GetMusic, which promotes artists and sells their music over the Internet. Mr. Zelnick has spent his career in the entertainment industry and has a broad background in managing and developing creative organizations, including businesses in film, television, video and multimedia. Before joining BMG, Mr. Zelnick was President and Chief Executive Officer of Crystal Dynamics, a leading producer and distributor of interactive entertainment software. Prior to that, he worked for four years as President and Chief Operating Officer of 20th Century Fox. He spent three years at Vestron Inc. as a senior executive, becoming President and Chief Operating Officer. Mr. Zelnick also served as Vice President, International Television for Columbia Pictures. Mr. Zelnick's educational board memberships include Wesleyan University and Pencil Inc. He also serves on the board of several other charitable, corporate and entertainment organizations. Mr. Zelnick holds a J.D. and an M.B.A. from Harvard University and a B.A. from Wesleyan University. Also announced in the May Release were the resignations of Messrs. David N. Dinkins and David R. Jones, both effective May 25, 2000, and the retirement of Mr. Herman Johnson, effective May 19, 2000. INFORMATION WITH RESPECT TO OFFICERS The following table sets forth certain information with respect to each officer of the Holding Company. There are no arrangements or understandings between the Holding Company and any officer pursuant to which such person was selected to be a officer of the Holding Company.
END OF POSITION HELD WITH THE NAME AGE(1) TERM COMPANY AND THE BANK OFFICER SINCE(2) - ---- ------ ------ ---------------------- ---------------- Deborah C. Wright...... 42 President, Chief Executive Officer and 1999 Director Walter T. Bond......... 42 Senior Vice President and Special 1993 Assistant to the President and Chief Executive Officer James Boyle............ 50 Senior Vice President and Chief Financial Officer Anthony M. Galleno..... 58 Vice President and Controller 1998 Margaret D. Peterson... 50 Senior Vice President and Chief 1999 Administrative Officer J. Kevin Ryan.......... 50 Senior Vice President and Chief Lending 2000 Officer Judith Taylor.......... 57 Acting Senior Vice President and Chief 1999 of Retail Banking
- --------------- (1) As of April 30, 2000. (2) Includes terms as officers of the Bank prior to the incorporation of the Holding Company in 1996. The principal occupation and business experience of each officer is set forth below. Walter T. Bond is Senior Vice President and Special Assistant to the President and Chief Executive Officer. Mr. Bond is also a member of the Bank's Investment Committee. Mr. Bond joined the Bank in February 1993, as Assistant Vice President, Mortgage Lender. Mr. Bond is a member of the New York Society of Securities Analyst and the Financial Managers Society. F-35 94 James Boyle is Senior Vice President and Chief Financial Officer. Mr. Boyle, whose experience as a finance professional spans more than 28 years, was formerly Senior Vice President and Chief Financial Officer of Broad National Bank, which was recently acquired by Independence Community Bank. During his career, he has managed reporting, budgeting, taxes and investment management. At Broad National Bank, Mr. Boyle was instrumental in reducing the bank's efficiency ratio, strengthening accounting controls and procedures, and developing a budget system and managerial reports to clearly define profit and expense goals and ensure accountability. He was instrumental in helping Broad National return to profitable operations and in raising new capital, after it suffered loan losses in the early 1990's. Mr. Boyle has also held senior level financial positions at National Westminister Bancorp NJ and First Jersey National Bank. He began his career at Peat, Marwick, Mitchell & Company. Anthony Galleno is Vice President and Controller. After serving 35 years in the banking business, Mr. Galleno joined the Bank in September, 1998. During his previous 35 years of service in a thrift financial environment, he served in various capacities including Senior Vice President-District Manager Community Lending (Home Savings of America, FSB), Senior Vice President-Chief Financial Officer (The Bowery Savings Bank), Vice President-Controller (The Bowery Savings Bank) and Senior Vice President-Corporate Secretary of both Home Savings of America, FSB-NY and The Bowery Savings Bank. He has served as a Board member of Home Savings of America, FSB-NY, The Bowery Savings Bank, Long Island Housing Partnership, Queens Child Guidance Center and various other organizations. Margaret D. Peterson is Senior Vice President and Chief Administrative Officer, integrating Human Resources, Information Technology, Facilities, Vendor Management and other support activities. Ms. Peterson joined Carver Federal in November 1999. Ms. Peterson came to Carver from Deutsche Bank where she served as a Compensation Planning Consultant in Corporate Human Resources. Prior to joining Deutsche Bank, Ms. Peterson was a Vice President and Senior HR Generalist for Citibank Global Asset Management. Besides her 11 years in Human Resources, Ms. Peterson has 10 years of Systems and Technology experience from various positions held at JP Morgan and Chase. Ms. Peterson earned a B.S. from Pace University, a M.B.A. from Columbia University as a Citicorp Fellow, and has been designated a Certified Compensation Professional by the American Compensation Association. J. Kevin Ryan is Senior Vice President and Chief Lending Officer. Mr. Ryan joined Carver Federal in June 2000 and has over 20 years' experience in real estate and lending. Prior to joining Carver, Mr. Ryan served as Vice President-Team Leader for Commercial Real Estate at Greenpoint Mortgage Funding Co., where he was employed since 1996. From 1985 through 1996, Mr. Ryan served as President of a commercial and residential real estate appraisal company, which he founded in New York City. Mr. Ryan also served in various positions at Dime Savings Bank of NY from 1977 to 1985, including Vice President, and as an Adjunct Professor of Management & Economics at St. John's University from 1981-1984. He also is a member of the Queens County Board of Habitat for Humanity. Mr. Ryan received a BBA in Management from Hofstra University and an MBA in Finance from Fordham University. Judith Taylor is Acting Senior Vice President and Chief of Retail Banking. Ms. Taylor joined Carver Federal in November 1999. Ms. Taylor was most recently with The Resolution Trust Corporation, where she served as CEO of four savings and loan associations. Prior to joining the Resolution Trust Corporation, Ms. Taylor was a Vice President at Chemical Bank. She brings over 30 years of experience to Carver. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Holding Company's directors and certain officers and persons who own more than ten percent of a registered class of the Holding Company's equity securities to file reports of ownership and changes in ownership with the SEC and the American Stock Exchange. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish the Holding Company with copies of all Section 16(a) forms they file. Based solely on a review of copies of such reports of ownership furnished to the Holding Company, or written representations that no forms were necessary, the Holding Company believes that, during the last fiscal year, all filing requirements applicable to its officers, directors and greater than ten percent shareholders of the F-36 95 Company were complied with, except for the late filing with the SEC of one Form 3 "Initial Statement of Beneficial Ownership of Securities" by James Boyle upon first becoming an executive officer of the Holding Company, the late filing of a Form 5 "Annual Statement of Changes in Beneficial Ownership" by Herman Johnson a former director, reporting two transactions involving the disposition of 1398 shares of Common Stock, and the late filing of a Form 5 "Annual Statement of Beneficial Ownership of Securities" by Walter T. Bond, reporting the late filing of the disposition of 354 shares of Common Stock. ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table sets forth cash and noncash compensation for the fiscal year ended March 31, 2000 awarded to or earned by the Holding Company's Chief Executive Officer and by each other executive officer whose compensation exceeded $100,000 for services rendered in all capacities to the Holding Company and the Bank during the fiscal year ended March 31, 2000 ("Named Executive Officers"). No other officers received total compensation in excess of $100,000 in the fiscal year ended March 31, 2000. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION --------------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ------------------------------------- -------------------- ---------------------- OTHER RESTRICTED ANNUAL STOCK LTIP ALL OTHER NAME AND FISCAL SALARY COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION PRINCIPAL POSITIONS YEAR(1) ($) BONUS ($)(2) ($)(3) ($)(3)(4) (#) ($) ($) - ------------------- ------- ------- ------------ ------------ ---------- ------- ------- ------------ Deborah C. Wright..... 2000 201,558 -- -- $60,937.50 -- -- -- President and Chief Executive Officer Judith Taylor......... 2000 106,309 -- -- -- -- -- -- Acting Senior Vice President and Chief of Retail Banking
- --------------- (1) Information is provided for fiscal year ended March 31, 2000 only, as Ms. Wright and Ms. Taylor were not providing services to the Holding Company in the fiscal years ended March 31, 1999 and 1998. (2) Does not include perquisites and other personal benefits the value of which did not exceed the lesser of $50,000 or 10% of salary and bonus. (3) Pursuant to her employment agreement, an award of 7,500 shares of restricted stock was made to Ms. Wright as of June 1, 1999, which vest in equal installments over a three-year period. The dollar amount in the table for this award is based on the closing price of $8.125 per share of Common Stock on June 1, 1999, the award date, as reported on the Nasdaq Stock Market. When shares become vested and are distributed, the recipient also receives an amount equal to accumulated dividends and earnings thereon, if any. EMPLOYEE BENEFIT PLANS Management Recognition Plan. The MRP provides for automatic grants of restricted stock to certain employees as of the September 12, 1995 adoption of the MRP. In addition, the MRP provides for additional discretionary grants of restricted stock to those employees selected by the committee established to administer the MRP. Awards generally vest in three to five equal annual installments commencing on the first anniversary date of the award, provided the recipient is still an employee of the Holding Company or the Bank on such date. Awards will become 100% vested upon termination of service due to death or disability. When shares become vested and are distributed, the recipients will receive an amount equal to any accrued dividends with respect thereto. Incentive Compensation Plan. The Incentive Compensation Plan provides incentive compensation to certain eligible employees in the form of bonuses, stock options and restricted stock. For each fiscal year, F-37 96 eligible employees will receive a bonus equal to 4% of such employee's compensation, multiplied by the lesser of 8 and the "Multiplier." In addition, each such employee may receive a restricted stock award of shares having a market value equal to 30% of the employee's bonus and an option to purchase 4 times the number of shares of restricted stock awarded to such employee. Option Plan. The Option Plan provides for automatic option grants to certain employees as of September 12, 1995. In addition, the Option Plan provides for additional discretionary option grants to those employees selected by the committee established to administer the Option Plan with an exercise price equal to the fair market value of a share of Common Stock on the date of the grant. Options granted under the Option Plan generally vest in three to five equal annual installments commencing on the first anniversary of the effective date of the grant, provided the recipient is still an employee of the Holding Company or the Bank on such date. Upon death or disability, all options previously granted automatically become exercisable. The following table provides certain information with respect to the options and SARs granted to Ms. Wright and Ms. Taylor during the fiscal year ended March 31, 2000. OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE - -------------------------------------------------------------------------------------------- VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF NUMBER OF TOTAL STOCK PRICE SECURITIES OPTIONS/ APPRECIATION FOR UNDERLYING SARS GRANTED EXERCISE OF OPTION TERM OPTION/SARS TO EMPLOYEES BASE PRICE --------------------- NAME GRANTED (#) IN FISCAL YEAR ($/SH) EXPIRATION DATE 5% ($) 10% ($) - ---- ------------------- -------------- ----------- --------------- --------- --------- Deborah C. Wright(1)........... 30,000 100% $8.125 6/01/09 153,243 388,475 Judith Taylor......... -- -- -- -- -- --
- --------------- (1) Pursuant to the terms of Ms. Wright's employment agreement, options for 15,000 shares were immediately exercisable upon grant. Options for the remaining 15,000 shares under the award become exercisable in three equal annual installments commencing as of the first anniversary of the date of grant and on each of the next two anniversary dates thereof, provided Ms. Wright remains in employment as of the applicable anniversary date. The following table provides certain information with respect to the number of shares of Common Stock acquired through the exercise of, or represented by, outstanding stock options held by Ms. Wright and Ms. Taylor on March 31, 2000. Also reported is the value for any "in-the-money" options, which represent the positive spread between the exercise price of any such existing stock options and the fiscal year-end price of Common Stock, which was $8.75 per share. FISCAL YEAR END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY SHARES VALUE OPTIONS/SARS AT FISCAL OPTIONS/SARS AT FISCAL ACQUIRED ON REALIZED ON YEAR-END (1) YEAR-END (1) EXERCISE EXERCISE (#) ($) NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---- ----------- ----------- ------------------------- ------------------------- Deborah C. Wright.............. -- -- 15,000/15,000 -- Judith Taylor.................. -- -- -- --
- --------------- (1) Ms. Wright held no options that were "in-the-money" as of March 31, 2000. Pension Plan. The Bank maintains a non-contributory, tax-qualified defined benefit plan (the "Pension Plan"). As required, the Bank annually contributes an amount to the Pension Plan necessary to satisfy the actuarially determined minimum funding requirements in accordance with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). F-38 97 Employees who are 18 years of age or older and who have completed one year of service with the Bank are eligible to participate in the Pension Plan. Participants become 100% vested after five years of service, death, or termination of the Pension Plan, regardless of the participant's years of service. The Pension Plan also provides for early retirement benefits, on an actuarially reduced basis, at the election of a participant who terminates employment after age 55. Under the Pension Plan, each participant is entitled to a retirement benefit equal to the greater of (a) the product of 50% of final earnings (as defined in the Pension Plan) reduced by 50% of the social security amount (as defined in the Pension Plan) times the ratio of number of years of credited service (as defined in the Pension Plan) up to a maximum of 15, over 15 if the participant's employment ceased after the normal retirement age (as defined in the Pension Plan) or multiplied by the ratio of the number of years of credited service divided by the greatest of (i) 15 and (ii) the number of years of credited service he or she would have had on his or her normal retirement date, if the participant's employment ceased prior to the normal retirement age (as defined in the Pension Plan), or (b) $25 multiplied by the number of the participants' months of credited service. The following table sets forth the estimated annual benefits that would be payable under the Pension Plan in the form of a single life annuity before reduction for the social security amount upon retirement at the normal retirement date. The amounts are expressed at various levels of compensation and years of service.
YEARS OF CREDITED SERVICE ---------------------------------------------------- FINAL EARNINGS(1) 15 20 25 30 35 - ----------------- -------- -------- -------- -------- -------- $100,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 150,000 75,000 75,000 75,000 75,000 75,000 200,000(2) 100,000 100,000 100,000 100,000 100,000 250,000(2) 125,000 125,000 125,000 125,000 125,000
- --------------- (1) Final earnings equal the average of the participant's highest three consecutive calendar years of taxable compensation during the last 10 full calendar years of employment prior to termination, or the average of the Participant's annual compensation over his or her total service, if less. (2) Under Section 401(a)(17) of the Code, a participant's compensation in excess of $170,000 (as adjusted to reflect cost-of-living increases) is disregarded for purposes of determining final earnings. The amounts shown in the table include the supplemental retirement benefits payable to Ms. Wright under her employment agreement to compensate for the limitation on includible compensation. EMPLOYMENT AGREEMENTS AND SEVERANCE PROVISIONS Employment Agreement with Deborah C. Wright. As of June 1, 1999, both the Holding Company and the Bank entered into employment agreements to secure the services of Deborah C. Wright as President and Chief Executive Officer of the Holding Company and the Bank. The employment agreement with the Holding Company is intended to set forth the aggregate compensation and benefits payable to Ms. Wright for all services rendered to the Holding Company and any of its subsidiaries, including the Bank, and to the extent that payments under the Holding Company's employment agreement and the Bank's employment agreement are duplicative, payments due under the Holding Company's employment agreement would be offset by amounts actually paid by the Bank for services rendered to it. Both employment agreements provide for an initial term of three years beginning June 1, 1999. Prior to the second anniversary date of the agreements, and each anniversary date thereafter, the term of the agreements may be extended an additional year after a review by the Board of the Bank and the Holding Company of Ms. Wright's performance. Unless the Board or Ms. Wright determines not to extend the agreements, in general the remaining term of the agreements will not exceed two years. The employment agreements provide for an annual base salary of $235,000 which will be reviewed annually by the Board. Under the agreements, as of June 1, 1999, Ms. Wright is entitled to a restricted stock award of 7,500 shares of Common Stock, which will vest in equal installments over a three year period, and F-39 98 the grant of an option to purchase 30,000 shares of Common Stock, 50% of which is immediately exercisable and 50% of which will become exercisable in equal installments over a three year period. In addition, the employment agreements provide for an annual incentive payment based on the achievement of certain performance goals, future grant of stock awards, a supplemental retirement benefit, additional life insurance protection and participation in the various employee benefit plans maintained by the Holding Company and the Bank from time to time. The agreements also provide customary corporate indemnification and errors and omissions insurance coverage throughout the term of the agreements and for six years thereafter. The Bank or the Holding Company may terminate Ms. Wright's employment at any time for cause as defined in the employment agreements. In the event the Bank or the Holding Company terminates Ms. Wright's employment for reasons other than for cause, she would be entitled to a severance benefit equal in value to the cash compensation, retirement and other fringe benefits she would have earned had she remained employed for the remaining term of the agreements. The same severance benefits would be available if Ms. Wright resigns during the term of the employment agreements following: a loss of title, office or membership on the Board; a material reduction in her duties, functions or responsibilities; involuntary relocation of her principal place of employment by over 30 miles from its location as of June 1, 1999; other material breach of contract by the Holding Company or the Bank that is not cured within 30 days; or a change in control. In the event of a change in control, the remaining term of Ms. Wright's Agreement with the Holding Company at any point in time will be three years unless written notice of non-renewal is given by the Board or Ms. Wright. A portion of the severance benefits payable to Ms. Wright under the employment agreements in the event of a change in control might constitute "excess parachute payments" current federal tax laws. Federal tax laws impose a 20% excise tax, payable by the executive, on excess parachute payments. In the event that any amounts paid to Ms. Wright following a change of control would constitute "excess parachute payments", the employment agreement with the Holding Company provides that she will be indemnified for any excise taxes imposed due to such excess parachute payments, and any additional income and employment taxes imposed as a result of such indemnification of excise taxes. Any excess parachute payments and indemnification amounts paid will not be deductible compensation expenses for the Holding Company or the Bank. DIRECTORS' COMPENSATION Directors' Fees. The Bank's directors, other than the Chief Executive Officer, receive $600 per meeting attended of the Bank's Board of Directors, except that the Chairman receives a fee of $850 per meeting. In addition, the Chairman of the Board receives a quarterly retainer fee of $1,000. Fees for executive committee meetings are $700 per meeting and $475 for all other committee meetings. Ms. Wright does not receive fees for her attendance at meetings of either the Holding Company's or Bank's Board of or their respective committees. Directors of the Bank also serve as directors of the Holding Company, but do not receive additional fees for service as directors of the Holding Company. Option Plan. The Holding Company maintains the Option Plan for the benefit of its directors and certain key employees. Any individual who becomes an outside director following the effective date of the Option Plan will be granted options to purchase 1,000 shares of Common Stock with an exercise price equal to the fair market value of a share of Common Stock on the date of the grant. Options granted under the Option Plan generally vest in five equal annual installments commencing on the first anniversary of the effective date of the grant, provided the recipient is still a director of the Holding Company or the Bank on such date. In September, 1997, the Option Plan was amended to provide the Committee with discretion to grant stock options that will vest and become exercisable pursuant to a vesting schedule that differs from the Option Plan's standard five-year schedule. The Option Plan continues to provide that upon the death or disability of an option holder, all options previously granted to such individual will automatically become exercisable. Management Recognition Plan. The Holding Company maintains the MRP for the benefit of its directors and certain key employees. Any individual who becomes an outside director following the effective date of the MRP will be granted 1,000 shares of restricted stock. Awards granted under the MRP will generally vest in five equal annual installments commencing on the first anniversary date of the award, F-40 99 provided the recipient is still a director of the Holding Company or the Bank on such date. Awards will become 100% vested upon termination of service due to death or disability. When shares become vested and are distributed, the recipients will receive an amount equal to any accrued dividends with respect thereto. The MRP was also amended in September, 1997, to permit the Committee, in its discretion, to grant restricted stock awards with vesting schedules that differ from the Plan's standard five-year schedule. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth certain information as to those persons believed by management to be beneficial owners of more than 5% of the outstanding shares of Common Stock or Preferred Stock on May 31, 2000, as disclosed in certain reports regarding such ownership filed by such persons, with the Holding Company or the SEC in accordance with Section 13 of the Exchange Act. Other than those persons listed below, the Company is not aware of any person or group, as such term is defined in the Exchange Act, that beneficially owns more than 5% of the outstanding shares of Common Stock as of May 31, 2000. For purposes of the table set forth below and the table set forth under "-- Stock Ownership of Management," an individual is considered to "beneficially own" any securities (a) over which such individual exercises sole or shared voting or investment power, or (b) of which such individual has the right to acquire beneficial ownership, including the right to acquire beneficial ownership by the exercise of stock options within 60 days after May 31, 2000. As used herein, "voting power" includes the power to vote, or direct the voting of, such securities, and "investment power" includes the power to dispose of, or direct the disposition of, such securities.
AMOUNT AND PERCENT OF NATURE OF SHARES OF NAME AND ADDRESS BENEFICIAL CLASS OF STOCK TITLE OF CLASSES OF BENEFICIAL OWNER OWNERSHIP OUTSTANDING(1) - ---------------- --------------------------------- ---------- -------------- Common Stock.................... EQSF Advisers, Inc. 218,500(2) 9.44% 767 Third Avenue New York, NY 10017 Common Stock.................... Carver Bancorp, Inc. 166,656(3) 7.20% Employee Stock Ownership Plan Trust (the "ESOP Trust") 75 West 125th Street New York, NY 10027 Common Stock.................... Koch Asset Management, L.L.C 222,550(4) 9.64% 1293 Mason Road Town & Country, MO 63131 Common Stock.................... BBC Capital Market, Inc. 170,700(5) 7.38% 133 Federal Street Boston, MA 02110 Series A........................ Morgan Stanley & Co. Incorporated 40,000(6) 100.00% Preferred Stock 1585 Broadway New York, New York 10036 Series B........................ Provender Opportunities Fund L.P. 60,000(7) 100.00% Preferred Stock 17 State Street New York, NY 10004
- --------------- (1) The total number of shares of Common Stock outstanding on May 31, 2000 was 2,314,275 shares. (2) Based on a Schedule 13G, dated February 14, 2000, and filed with the SEC jointly by EQSF Advisers, Inc. ("EQSF") and Martin J. Whitman, the Chief Executive Officer and controlling person of EQSF. EQSF beneficially owns 218,500 shares of Common Stock. Mr. Whitman disclaims beneficial ownership of such stock. Third Avenue Value Fund, Inc., an investment Company registered under the Investment Company Act of 1940, has the right to receive dividends with respect to, and proceeds from the sale of, such shares. EQSF has sole voting and dispositive power over such shares. F-41 100 (3) Based on a Schedule 13G, dated February 14, 2000, and filed with the SEC by the Carver Bancorp, Inc. ESOP Committee (the "Administrative Committee"). The Administrative Committee established to administer the ESOP consists of officers of the Bank. The ESOP's assets are held in the ESOP Trust, for which HSBC Bank USA serves as trustee (the "ESOP Trustee"). The Administrative Committee instructs the ESOP Trustee regarding the investment of funds contributed to the ESOP. Common Stock purchased by the ESOP Trust is held in a suspense account and allocated to participants' accounts annually based on contributions made to the ESOP by the Bank. Shares released from the suspense account are allocated among participants in proportion to their compensation, as defined in the ESOP, for the year the contributions are made, up to the limits permitted under the Code. The ESOP Trustee must vote all allocated shares held in the ESOP Trust in accordance with the instructions of participants. As of December 31, 1999, a total of 101,461 shares had been allocated, but not distributed, to participants. Under the ESOP, unallocated shares or shares for which no voting instructions have been received will be voted by the ESOP Trustee in the same proportion as allocated shares with respect to which the ESOP Trustee receives instructions. In the absence of any voting instructions with respect to allocated shares, the Board, on behalf of the Holding Company, directs the voting of all shares of unallocated stock, or in the absence of such directions from the Board, the ESOP Trustee has sole discretion with respect to the voting of such shares. Each member of the Board disclaims beneficial ownership of the shares held in the ESOP Trust. (4) Based on a Schedule 13G, dated February 25, 1999, as subsequently amended and filed with the SEC jointly by Koch Asset Management, L.L.C. ("KAM") and Donald Leigh Koch, the sole Managing Member of KAM. KAM is a registered investment adviser which furnishes investment advice to individual clients by exercising trading authority over securities held in accounts on behalf of such clients (collectively, the "Managed Portfolios"). In its role as an investment adviser to its clients, KAM has sole dispositive power over the Managed Portfolios and may be deemed to be the beneficial owner of shares of Common Stock held by such Managed Portfolios. However, KAM does not have the right to vote or to receive dividends from, or proceeds from the sale of, the Common Stock held in such Managed Portfolios and disclaims any ownership associated with such rights. Mr. Koch may be deemed to have the power to exercise any dispositive power that KAM may have with respect to the Common Stock held by the Managed Portfolios. Mr. Koch, individually, owns and holds voting power with respect to Managed Portfolios containing approximately 44,400 shares of Common Stock, or an aggregate of approximately 1.9% of the total number of outstanding shares of Common Stock (the "Koch shares"). Other than with respect to the Koch shares, all shares reported in the Schedule 13G have been acquired by Koch Asset Management, L.L.C., and Mr. Koch does not have beneficial ownership, voting rights, rights to dividends, or rights to sale proceeds associated with such shares. (5) Based on a Schedule 13D, dated April 2, 1999, as subsequently amended and filed with the SEC jointly by BBOC and BBC. Kevin Cohee, the Chairman, President and Chief Executive Officer of BBOC, and Teri Williams, the Senior Vice President-Marketing/Human Resources of BBOC, collectively own as joint tenants 66.6% of the outstanding common stock of BBOC. Mr. Cohee and Ms. Williams disclaim beneficial ownership of the Common Stock owned beneficially by BBOC or BBC Capital. BBOC and BBC Capital have sole voting and sole dispositive power over all of the shares of Common Stock shown. (6) Morgan Stanley holds 40,000 shares of the Holding Company's Series A Preferred Stock, which Carver issued on January 11, 1999 through a private placement. The Series A Preferred Stock accrues annual dividends at $1.96875 per share. Dividends are payable semi-annually commencing on June 15 and December 15 of each year. Each share of Series A Preferred Stock was purchased for $25.00 and is convertible at the option of the holder at any time into 2.083 shares of the Holding Company's Common Stock, subject to certain antidilution adjustments. The Holding Company may redeem the Series A Preferred Stock beginning January 15, 2004. In the event of any liquidation, dissolution or winding up of the Holding Company, whether voluntary or involuntary, the holders of the shares of Series A Preferred Stock shall be entitled to receive $25 per share of Series A Preferred Stock plus all dividends accrued and unpaid thereon. Morgan Stanley is deemed to have beneficial ownership of 83,333 shares of the Holding Company's Common Stock since it may elect to convert the Series A Preferred Stock at any time. Pursuant to a Securities Purchase Agreement, dated January 11, 2000, among Morgan Stanley, F-42 101 Provender (as defined below) and the Holding Company, Morgan Stanley has agreed not to grant any proxies with respect to the Series A Preferred Stock or any Common Stock of the Holding Company other than as recommended by the Holding Company's Board of Directors without first obtaining the Holding Company's prior consent. (7) Provender holds 60,000 shares of the Holding Company's Series B Preferred Stock, which the Holding Company issued on January 11, 1999 through a private placement. The Series B Preferred Stock accrues annual dividends at $1.96875 per share. Dividends are payable semi-annually commencing on June 15 and December 15 of each year. Each share of Series B Preferred Stock was purchased for $25.00 and is convertible at the option of the holder at any time into 2.083 shares of the Holding Company's Common Stock, subject to certain antidilution adjustments. The Holding Company may redeem the Series B Preferred Stock beginning January 15, 2004. In the event of any liquidation, dissolution or winding up of the Holding Company, whether voluntary or involuntary, the holders of the shares of Series B Preferred Stock shall be entitled to receive $25 per share of Series B Preferred Stock plus all dividends accrued and unpaid thereon. Provender is deemed to have beneficial ownership of 125,000 shares of the Holding Company's Common Stock since it may elect to convert the Series B Preferred Stock at any time. Pursuant to a Securities Purchase Agreement, dated January 11, 2000, among Morgan Stanley, Provender and the Holding Company, Provender has agreed not to grant any proxies with respect to the Series B Preferred Stock or any Common Stock of the Holding Company other than as recommended by the Holding Company's Board without first obtaining the Holding Company's prior consent. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth information, determined as of May 31, 2000, as to the total number of shares of Common Stock beneficially owned by each director and each Named Executive Officer, as defined herein, identified in the Summary Compensation Table, appearing elsewhere herein, and all directors and executive officers of the Holding Company or the Bank as a group. Ownership information is based upon information furnished by the respective individuals. Except as otherwise indicated, each person and the group shown in the table has sole voting and investment power with respect to the shares indicated.
AMOUNT AND PERCENT OF NATURE OF COMMON BENEFICIAL STOCK NAME TITLE OWNERSHIP(1)(2) OUTSTANDING(3) - ---- ----------------------------- --------------- -------------- Deborah C. Wright(4)............. President and Chief Executive 25,800 * Officer, Director Robert J. Franz.................. Director 2,700 * Pazel G. Jackson, Jr............. Director 1,500 * Frederick O. Terrell(5).......... Director 125,000 5.40% Kevin Cohee(6)................... Director 170,700 7.38% Teri Williams(7)................. Director 170,700 7.38% All directors, former directors and executive officers as a group (13 persons)(8)(9)(10)(11).............................. 474,567 20.51%
- --------------- * Less than 1% of outstanding Common Stock. (1) Includes 20,000, 400 and 400 shares which may be acquired by Ms. Wright and Messrs. Franz and Jackson, respectively, pursuant to options granted under the Carver Bancorp, Inc. 1995 Stock Option Plan (the "Option Plan"). (2) Excludes 5,000, 600 and 600 shares of restricted stock granted to Ms. Wright and Messrs. Franz and Jackson, respectively, pursuant to the Carver Bancorp, Inc. Management Recognition Plan (the "MRP") and/or the Incentive Compensation Plan with respect to which such individuals have neither voting nor dispositive power. (3) Percentages with respect to each person or group of persons have been calculated on the basis of 2,314,275 shares of Common Stock, the total number of shares of the Holding Company's Common F-43 102 Stock outstanding as of May 31, 2000, plus the number of shares of Common Stock which such person or group has the right to acquire within 60 days after May 31, 2000, by the exercise of stock options. (4) Ms. Wright was awarded 30,000 options to purchase the Holding Company's Common Stock at a price per share of $8.125 under the Option Plan, 15,000 of which vested as of June 1, 1999, 5,000 of which vested on June 1, 2000, and the remainder of which vest in two equal installments of 5,000 beginning on June 1, 2001. Ms. Wright was also awarded 7,500 shares of restricted stock under the MRP, 2,500 of which vested on June 1, 2000, and the remainder will vest in two equal installments of 2,500 beginning on June 1, 2001. (5) Includes 60,000 Shares of the Series B Preferred Stock owned by Provender. Provender is also deemed to have beneficial ownership of 125,000 shares of Common Stock, which represents 5.12% of the Holding Company's outstanding Common Stock (since the Series B Preferred Stock may be converted at any time.) As a Managing General Partner of Provender, Mr. Terrell may be deemed to beneficially own such securities. Mr. Terrell disclaims beneficial ownership to such securities. (6) Represents shares owned by BBC Capital, a subsidiary of Boston Bank of Commerce, in which Kevin Cohee is an executive officer and controlling shareholder. (7) Represents shares owned by BBC Capital, a subsidiary of Boston Bank of Commerce, in which Teri Williams is an executive officer and controlling shareholder. (8) Includes 3,224 shares in the aggregate held by the ESOP Trust that have been allocated as of December 31, 1999 to the individual accounts of executive officers under the ESOP and as to which an executive officer has sole voting power for the shares allocated to such person's account, but no dispositive power, except in limited circumstances. Also includes 65,795 unallocated shares held by the ESOP Trust as to which the Board shares voting and dispositive power. Each member of the Board disclaims beneficial ownership of the shares held in the ESOP. (9) Includes 105 shares in the aggregate attributable to the individual accounts of executive officers under the 401(k) Plan and as to which each executive officer has sole dispositive power for the shares allocated to such person's account and shared voting power with the members of the committee established to administer the 401(k) Plan. (10) Includes 3,140 shares which may be acquired by executive officers pursuant to options granted under the Option Plan. Also includes 309 shares which may be acquired by the executive officers pursuant to options granted under the Incentive Compensation Plan. Excludes the 240 shares of restricted stock awarded to the executive officers under the MRP and Incentive Compensation Plan with respect to which such executive officers have neither voting nor dispositive power. (11) Includes 125,000 shares of Common Stock issuable on conversion of the Series B Preferred Stock held by Provender Opportunities Fund L.P. Excluding the effect of the Series B Preferred Stock, the directors, former directors and executive officers of the Holding Company own 347,467 shares of the Common Stock representing 15.04% of such securities. See footnote 6 above. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") requires that all loans or extensions of credit to executive officers and directors must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with the general public and must not involve more than the normal risk of repayment or present other unfavorable features. Carver Federal offers loans to its directors, officers and employees, which loans are made in the ordinary course of business, and are not made with more favorable terms nor do they involve more than the normal risk of collectibility or present unfavorable features. Furthermore, loans above the greater of $25,000 or 5% of the Bank's capital and surplus (up to $500,000) to the Bank's directors and executive officers must be approved in advance by a disinterested majority of the Bank's Board. Under prior law, however, Carver had a policy of offering loans to directors, officers, employees and their immediate family members residing at the same address on terms substantially equivalent to those offered to the public, except the interest rates on loans were reduced so long as the director, officer or employee remained at the Bank. F-44 103 The following table sets forth information at March 31, 2000 relating to loans made to directors and executive officers of the Bank whose terms included reduced interest rates or other preferential terms and whose total aggregate balances exceeded $60,000 at any time since April 1, 1999.
HIGHEST BALANCE BALANCE AT SINCE NAME AND RELATION ORIGINAL INTEREST MARCH 31, APRIL 1, TO COMPANY TYPE OF LOAN DATE ORIGINATED AMOUNT RATE 2000 1999 - ----------------- ------------ --------------- --------------- ------------- ---------- -------- Herman Johnson, Director.............. Mortgage 10/18/89 $150,000 8.50% $102,581 $110,375
On January 11, 2000, the Holding Company sold 60,000 shares of its Series B Preferred Stock to Provender Opportunities Fund L.P., a limited partnership, at $25 per share, in a private placement. Mr. Terrell is Managing General Partner of Provender. For additional information on the Series B Preferred Stock and Mr. Terrell's appointment to the Board of Directors, see "-- Security Ownership of Certain Beneficial Owners," "-- Security Ownership of Management" and "Directors and Executive Officers of the Registrant." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) List of Documents Filed as Part of this Report (1) Consolidated Financial Statements. The following are incorporated by reference from Item 8 hereof. F-45 104 INDEPENDENT AUDITORS' REPORT Consolidated Statements of Financial Condition as of March 31, 2000 and 1999 Consolidated Statements of Operations for Each of the Years in the Three-Year Period Ended March 31, 2000 Consolidated Statements of Changes in Stockholders' Equity for Each of the Years in the Three-Year Period Ended March 31, 2000 Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period Ended March 31, 2000 (2) Financial Statement Schedules. All financial statement schedules have been omitted as the required information is either inapplicable or included in the Financial Statements or related notes. (b) Reports on Form 8-K Filed During the Last Quarter of the Registrant's Fiscal Year Ended March 31, 2000 The following reports on Form 8-K were filed during the fourth quarter of the Company's fiscal year ended March 31, 2000: (1) Form 8-K dated January 14, 2000 announcing the sale of Series A and Series B Convertible Preferred Stock. (2) Form 8-K dated March 3, 2000 announcing the results of the Annual Meeting of Stockholders. (c) Exhibits required by Item 601 of Regulation S-K: Exhibits. The following is a list of exhibits filed as part of this Annual Report and is also the Exhibit Index.
NO. EXHIBIT --- ------- 3.1 Certificate of Incorporation of Carver Bancorp, Inc.(1) 3.2 Bylaws of Carver Bancorp, Inc.(1) 4.1 Stock certificate of Carver Bancorp, Inc.(1) 4.2 Federal Stock Charter of Carver Federal Savings Bank(1) 4.3 Bylaws of Carver Federal Savings Bank(1) 4.4 Amendments to Bylaws of Carver Federal Savings Bank(3) 4.5 Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock(5) 4.6 Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock(5) 10.1 Carver Bancorp, Inc. 1995 Stock Option Plan, effective as of September 12, 1995(1) 10.2 Carver Federal Savings Bank Retirement Income Plan, as amended and restated effective as of January 1, 1989(1) 10.3 Carver Federal Savings Bank 401(k) Savings Plan in RSI Retirement Trust, as amended and restated effective as of May 1, 1993(1) 10.4 Carver Bancorp, Inc. Employee Stock Ownership Plan, effective as of January 1, 1993(1) 10.5 Carver Federal Savings Bank Deferred Compensation Plan, effective as of August 10, 1993(1) 10.6 Carver Federal Savings Bank Retirement Plan for Nonemployee Directors, effective as of October 24, 1994(1) 10.7 Carver Bancorp, Inc. Management Recognition Plan, effective as of September 12, 1995(1) 10.8 Carver Bancorp, Inc. Incentive Compensative Plan, effective as of September 12, 1995(1) 10.9 Employment Agreement by and between Carver Federal Savings Bank and Thomas L. Clark, entered into as of April 1, 1997(2)
F-46 105
NO. EXHIBIT --- ------- 10.10 Employment Agreement by and between Carver Bancorp, Inc. and Thomas L. Clark, entered into as of April 1, 1997(2) 10.11 Employment Agreement by and between Carver Federal Savings Bank and Deborah C. Wright, entered into as of June 1, 1999(4) 10.12 Employment Agreement by and between Carver Bancorp, Inc. and Deborah C. Wright, entered into as of June 1, 1999(4) 10.13 Securities Purchase Agreement by and among Carver Bancorp, Inc., Morgan Stanley & Co. Incorporated and Provender Opportunities Fund L.P. 10.14 Registration Rights Agreement by and among Carver Bancorp, Inc., Morgan Stanley & Co. Incorporated and Provender Opportunities Fund L.P. 10.15 Settlement Agreement and Mutual Release by and among BBC Capital Market, Inc., The Boston Bank of Commerce, Kevin Cohee and Teri Williams; Carver Bancorp, Inc., Deborah C. Wright, David N. Dinkins, Linda H. Dunham, Robert J. Franz, Pazel G. Jackson, Jr., Herman Johnson and David R. Jones; Morgan Stanley & Co., Incorporated; and Provender Opportunities Fund, L.P. and Frederick O. Terrell. 10.16 Stipulation and Order of Dismissal with Prejudice 21.1 Subsidiaries of the Registrant 23.1 Consent of Mitchell & Titus LLP 23.2 Consent of KPMG LLP 27.1 Financial Data Schedule (only submitted with filing in electronic format)
- --------------- (1) Incorporated herein by reference to Registration Statement No. 333-0559 on Form S-4 of Carver Bancorp. Inc., filed with the Securities and Exchange Commission during July 1997, as amended. (2) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997. (3) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1998. (4) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report of Form 10-K for the fiscal year ended March 31, 1999. (5) Incorporated herein by reference to the Exhibits to the Registrant's Current Report on Form 8-K, dated January 14, 2000. F-47 106 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CARVER BANCORP, INC. July 14, 2000 By /s/ DEBORAH C. WRIGHT ------------------------------------ Deborah C. Wright President and Chief Executive Officer (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ DEBORAH C. WRIGHT President, Chief Executive Officer July 14, 2000 - --------------------------------------------------- and Director (Principal Executive Deborah C. Wright Officer) /s/ JAMES BOYLE Senior Vice President and Chief July 14, 2000 - --------------------------------------------------- Financial Officer (Principal James Boyle Financial and Accounting Officer) Director July 14, 2000 - --------------------------------------------------- Robert J. Franz /s/ PAZEL G. JACKSON, JR. Director July 14, 2000 - --------------------------------------------------- Pazel G. Jackson, Jr. /s/ FREDERICK O. TERRELL Director July 14, 2000 - --------------------------------------------------- Frederick O. Terrell Director July 14, 2000 - --------------------------------------------------- Kevin Cohee Director July 14, 2000 - --------------------------------------------------- Teri Williams
F-48 107 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.1 Certificate of Incorporation of Carver Bancorp, Inc.(1) 3.2 Bylaws of Carver Bancorp, Inc.(1) 4.1 Stock certificate of Carver Bancorp, Inc.(1) 4.2 Federal Stock Charter of Carver Federal Savings Bank(1) 4.3 Bylaws of Carver Federal Savings Bank(1) 4.4 Amendments to Bylaws of Carver Federal Savings Bank(3) 4.5 Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock(5) 4.6 Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock(5) 10.1 Carver Bancorp, Inc. 1995 Stock Option Plan, effective as of September 12, 1995(1) 10.2 Carver Federal Savings Bank Retirement Income Plan, as amended and restated effective as of January 1, 1989(1) 10.3 Carver Federal Savings Bank 401(k) Savings Plan in RSI Retirement Trust, as amended and restated effective as of May 1, 1993(1) 10.4 Carver Bancorp, Inc. Employee Stock Ownership Plan, effective as of January 1, 1993(1) 10.5 Carver Federal Savings Bank Deferred Compensation Plan, effective as of August 10, 1993(1) 10.6 Carver Federal Savings Bank Retirement Plan for Nonemployee Directors, effective as of October 24, 1994(1) 10.7 Carver Bancorp, Inc. Management Recognition Plan, effective as of September 12, 1995(1) 10.8 Carver Bancorp, Inc. Incentive Compensative Plan, effective as of September 12, 1995(1) 10.9 Employment Agreement by and between Carver Federal Savings Bank and Thomas L. Clark, entered into as of April 1, 1997(2) 10.10 Employment Agreement by and between Carver Bancorp, Inc. and Thomas L. Clark, entered into as of April 1, 1997(2) 10.11 Employment Agreement by and between Carver Federal Savings Bank and Deborah C. Wright, entered into as of June 1, 1999(4) 10.12 Employment Agreement by and between Carver Bancorp, Inc. and Deborah C. Wright, entered into as of June 1, 1999(4) 10.13 Securities Purchase Agreement by and among Carver Bancorp, Inc., Morgan Stanley & Co. Incorporated and Provender Opportunities Fund L.P. 10.14 Registration Rights Agreement by and among Carver Bancorp, Inc., Morgan Stanley & Co. Incorporated and Provender Opportunities Fund L.P. 10.15 Settlement Agreement and Mutual Release by and among BBC Capital Market, Inc., The Boston Bank of Commerce, Kevin Cohee and Teri Williams; Carver Bancorp, Inc., Deborah C. Wright, David N. Dinkins, Linda H. Dunham, Robert J. Franz, Pazel G. Jackson, Jr., Herman Johnson and David R. Jones; Morgan Stanley & Co., Incorporated; and Provender Opportunities Fund, L.P. and Frederick O. Terrell. 10.16 Stipulation and Order of Dismissal with Prejudice 21.1 Subsidiaries of the Registrant 23.1 Consent of Mitchell & Titus LLP 23.2 Consent of KPMG LLP
F-49 108
EXHIBIT NO. DESCRIPTION - ----------- ----------- 27.1 Financial Data Schedule (only submitted with filing in electronic format)
- --------------- (1) Incorporated herein by reference to Registration Statement No. 333-0559 on Form S-4 of Carver Bancorp. Inc., filed with the Securities and Exchange Commission during July 1997, as amended. (2) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997. (3) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1998. (8) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1999. (9) Incorporated herein by reference to the Exhibits to the Registrant's Current Report on Form 8-K, dated January 14, 2000. F-50 EX-10.13 2 ex10-13.txt SECURITIES PURCHASE AGREEMENT 1 EXHIBIT 10.13 SECURITIES PURCHASE AGREEMENT dated January 11, 2000 among CARVER BANCORP, INC. MORGAN STANLEY & CO. INCORPORATED and PROVENDER OPPORTUNITIES FUND L.P. 2 TABLE OF CONTENTS -----------------
PAGE ---- ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions.......................................................1 ARTICLE 2 PURCHASE AND SALE OF SECURITIES SECTION 2.01. The Purchase......................................................6 SECTION 2.02. Closing Documentation.............................................6 SECTION 2.03. Legending of Securities...........................................6 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE ISSUER SECTION 3.01. Corporate Existence and Power.....................................7 SECTION 3.02. Corporate Authorization...........................................7 SECTION 3.03. Governmental Authorization........................................8 SECTION 3.04. Noncontravention..................................................8 SECTION 3.05. Capitalization....................................................8 SECTION 3.06. Subsidiaries......................................................9 SECTION 3.07. Financial Statements.............................................10 SECTION 3.08. Absence of Certain Changes.......................................10 SECTION 3.09. No Material Undisclosed Liabilities..............................10 SECTION 3.10. Litigation.......................................................11 SECTION 3.11. Compliance with Laws.............................................11 SECTION 3.12. SEC Reports......................................................11 SECTION 3.13. Material Contracts...............................................11 SECTION 3.14. Finders' Fees....................................................12 SECTION 3.15. Offering of Securities...........................................12 SECTION 3.16. Intellectual Property............................................12 SECTION 3.17. Environmental Compliance.........................................12 SECTION 3.18. Compliance with ERISA............................................13 SECTION 3.19. Taxes............................................................13
3 SECTION 3.20. Regulatory Matters................................................14 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS SECTION 4.01. Existence and Power..............................................16 SECTION 4.02. Authorization....................................................16 SECTION 4.03. Governmental Authorization.......................................16 SECTION 4.04. Noncontravention.................................................16 SECTION 4.05. Finders' Fees....................................................17 SECTION 4.06. Private Placement................................................17 ARTICLE 5 COVENANTS OF THE ISSUER AND THE PURCHASERS SECTION 5.01. Confidentiality..................................................18 SECTION 5.02. Public Announcements.............................................18 SECTION 5.03. Restrictions of Certain Actions by the Purchasers................19 SECTION 5.04. Issuer Repurchases of Common Stock...............................19 SECTION 5.05. Right of First Offer.............................................20 SECTION 5.06. Board of Directors...............................................20 SECTION 5.07. Certain Life Insurance...........................................21 SECTION 5.08. Certain Other Arrangements.......................................21 ARTICLE 6 MISCELLANEOUS SECTION 6.01. Notices..........................................................21 SECTION 6.02. Amendments; Waivers..............................................22 SECTION 6.03. Successors and Assigns...........................................22 SECTION 6.04. Survival.........................................................22 SECTION 6.05. Entire Agreement.................................................22 SECTION 6.06. Applicable Law...................................................23 SECTION 6.07. Severability.....................................................23 SECTION 6.08. Fees and Expenses................................................23 SECTION 6.09. Counterparts.....................................................23
4 SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT dated January 11, 2000 among Carver Bancorp, Inc., a Delaware corporation (the "ISSUER"), Morgan Stanley & Co. Incorporated, a Delaware corporation ("MS" and a "PURCHASER"), and Provender Opportunities Fund L.P., a Delaware limited partnership ("PROVENDER" and a "PURCHASER" and, together with MS, the "PURCHASERS"). WHEREAS, the Issuer desires to sell the Securities (as defined below) to the Purchasers, and the Purchasers desire to purchase the Securities from the Issuer, upon the terms and subject to the conditions hereinafter set forth; NOW THEREFORE, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions. (a) The following terms, as used herein, have the following meanings: "AFFILIATE" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person; provided that neither the Purchaser nor any of its Subsidiaries shall be considered an Affiliate of the Issuer. "APPLICABLE LAW" means any applicable constitution, treaty, statute, rule, regulation, ordinance, order, directive, code, interpretation, judgment, decree, injunction, writ, determination, award, permit, license, authorization, directive, requirement, ruling or decision of, agreement with, or by any Governmental Authority. "BALANCE SHEET" means the unaudited consolidated balance sheet of the Issuer and its Subsidiaries as of the Balance Sheet Date. "BALANCE SHEET DATE" means November 30, 1999. "BENEFIT ARRANGEMENT" means any employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "BUSINESS DAY" means any day except a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized by law to close. 5 "CODE" means the Internal Revenue Code of 1986, as amended. "COMMISSION" means the U.S. Securities and Exchange Commission or any governmental body succeeding to the functions thereof. "COMMON STOCK" means the common stock, par value $.01 per share, of the Issuer. "DISCLOSURE SCHEDULE" means the Disclosure Schedule dated the date hereof and separately delivered by the Issuer to the Purchasers. "ENVIRONMENTAL LAWS" means any federal, state, local or foreign law (including, without limitation, common law), treaty, judicial decision, regulation, rule, judgment, order, decree, injunction, permit or governmental restriction or requirement or any agreement with any governmental authority or other third party, whether now or hereafter in effect, relating to human health and safety, the environment or to pollutants, contaminants, wastes or chemicals or any toxic, radioactive, ignitable, corrosive, reactive or otherwise hazardous substances, wastes or materials. "ENVIRONMENTAL LIABILITIES" means all liabilities of the Issuer and each of its Subsidiaries, whether contingent or fixed, known or unknown, which (i) arise under or relate to matters covered by Environmental Laws and (ii) relate to actions occurring or conditions existing on or prior to the Closing Date. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA GROUP" means the Issuer and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Issuer, are treated as a single employer under Section 414 of the Code. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FDIA" means the Federal Deposit Insurance Act, as amended. "FDIC" means the Federal Deposit Insurance Corporation. "GOVERNMENTAL AUTHORITY" means any governmental body, agency or official of any country or political subdivision of any country, including, but not limited to, federal, state, county and local governments, administrative agencies and courts. 2 6 "HAZARDOUS SUBSTANCE" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics, including, without limitation, any substance regulated under Environmental Laws. "HOLA" means the Home Owners' Loan Act of 1933, as amended. "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, any Person shall be deemed to own subject to Lien any asset that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "MATERIAL ADVERSE EFFECT" means any change or effect (or aggregation of changes and effects) that is materially adverse to the business, assets, condition (financial or otherwise) or results of operations of the Issuer and its Subsidiaries, taken as a whole. "MULTIEMPLOYER PLAN" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "PERSON" means an individual or a corporation, partnership, limited liability company, association, trust, or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "PLAN" means any employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "PREFERRED STOCK" means the preferred stock, par value $.01 per share, of the Issuer. 3 7 "PURCHASE PRICE" means, in the case of MS, $1,000,000 in immediately available funds and, in the case of Provender, $1,500,000 in immediately available funds. "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement dated January 11, 2000 among the Issuer and the Purchasers. "REGULATED ACTIVITY" means any generation, treatment, storage, recycling, transportation or disposal of any Hazardous Substance. "SEC REPORTS" means the forms, reports and documents filed with the Commission. "SECURITIES" means, in the case of MS, 40,000 shares of Series A Preferred Stock and, in the case of Provender, 60,000 shares of Series B Preferred Stock. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SERIES A CERTIFICATE OF DESIGNATIONS" means the Certificate of Designations, Preferences and Rights of Series A Preferred Stock, substantially in the form attached as Exhibit A hereto. "SERIES A PREFERRED STOCK" means the Issuer's Series A Convertible Preferred Stock, par value $.01 per share. "SERIES B CERTIFICATE OF DESIGNATIONS" means the Certificate of Designations, Preferences and Rights of Series B Preferred Stock, substantially in the form attached as Exhibit B hereto. "SERIES B PREFERRED STOCK" means the Issuer's Series B Convertible Preferred Stock, par value $.01 per share. "SUBSIDIARY" means, with respect to any Person, any other Person of which a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person. "TAX" (and, with correlative meaning, "TAXES") means (i) any net income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, value added, transfer, franchise, profits, license, withholding on amounts paid by the Issuer or any of its Subsidiaries, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental or windfall 4 8 profit tax, custom, duty or other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or any penalty, addition to tax or additional amount due from, or in respect of the Issuer or any of its Subsidiaries, as the case may be, imposed by any governmental authority (a "TAXING AUTHORITY") responsible for the imposition of any such tax (domestic or foreign) and (ii) any liability of the Issuer or any of its Subsidiaries for the payment of any amount as a result of being a party to any tax sharing agreement or with respect to the payment of any amount of the type described in (i) as a result of any existing express or implied agreement or arrangement (including, but not limited to, an indemnification agreement or arrangement). (b) Each of the following terms is defined in the Section set forth opposite such term:
TERM SECTION - ---- ------- 10-K 3.09 10-Qs 3.09 Exercise Notice 5.05(a) Intellectual Property 3.16 Issuer Preamble Issuer Securities 3.05(b) MS Preamble Material Contract 3.13 Offer 5.05(a) Offer Price 5.05(a) Offered Shares 5.05(a) Provender Preamble Purchasers Preamble Regulatory Authorities 3.20(c) Regulatory Reports 3.20(c) Representatives 6.01 Returns 3.19 Subsidiary Securities 3.06(b) Transfer Notice 5.05(a)
ARTICLE 2 PURCHASE AND SALE OF SECURITIES SECTION 2.01. The Purchase. Upon the basis of the representations and warranties herein contained of the Purchasers, the Issuer hereby sells to each Purchaser, and each Purchaser, upon the basis of the representations and warranties herein contained of the Issuer, hereby purchases severally and not 5 9 jointly from the Issuer the Securities for the Purchase Price. The Issuer hereby delivers to each Purchaser, against payment of the Purchase Price by such Purchaser to the Issuer, certificates evidencing the Securities being purchased in definitive form and registered in the name of such Purchaser. SECTION 2.02. Closing Documentation. In connection herewith, the parties are taking (or causing to be taken) the following actions: (a) the Series A Certificate of Designations and the Series B Certificate of Designations shall have been filed with the Secretary of State of Delaware; (b) the Registration Rights Agreement shall be executed and delivered by the Issuer and the Purchasers; and (c) Thacher Proffitt & Wood, counsel to the Issuer, shall deliver to each Purchaser an opinion covering certain matters relating to the sale and issuance of the Securities. SECTION 2.03. Legending of Securities. (a) All shares of Series A Preferred Stock, Series B Preferred Stock or Common Stock to be issued to the Purchasers hereunder shall bear the following legend: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OF THE UNITED STATES AND THE SECURITIES REGULATORY AUTHORITIES OF APPLICABLE STATES OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO A RIGHT OF FIRST OFFER SET FORTH IN A CERTAIN SECURITIES PURCHASE AGREEMENT DATED JANUARY 11, 2000 AMONG THE CORPORATION, MORGAN STANLEY & CO. INCORPORATED AND PROVENDER OPPORTUNITIES FUND L.P. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION." (b) The Issuer agrees to remove the first sentence of foregoing legend at the request of the Purchaser (i) at such time as the shares of Series A Preferred Stock, Series B Preferred Stock or Common Stock, as the case may be, are freely transferable pursuant to Rule 144(k) or (ii) upon delivery of an opinion of counsel reasonably acceptable to the Issuer to the effect that such shares may be transferred without registration under the Securities Act. The Issuer agrees to remove the second sentence of the foregoing legend at the request of a Purchaser at such time as the shares of Series A Preferred Stock, Series B Preferred Stock or Common Stock, as the case may be, are no longer subject to the right of first offer set forth in Section 5.05. 6 10 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE ISSUER The Issuer represents and warrants to each Purchaser that, except as disclosed in the Disclosure Schedule: SECTION 3.01. Corporate Existence and Power. The Issuer is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all corporate powers and all material governmental licenses, authorizations, permits, consents and approvals required to carry on its business as now conducted. The Issuer is registered as a savings and loan holding company under the HOLA. The Issuer is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where such qualification is necessary, except for those jurisdictions where failure to be so qualified or in good standing could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. The Issuer has heretofore made available to each Purchaser or its counsel true and complete copies of the certificate of incorporation and bylaws of the Issuer as currently in effect. SECTION 3.02. Corporate Authorization. The execution, delivery and performance by the Issuer of this Agreement and the Registration Rights Agreement, and the consummation of the transactions contemplated hereby and thereby are within the Issuer's corporate powers and have been duly authorized by all necessary corporate action on the part of the Issuer. This Agreement constitutes and, when executed and delivered in accordance with its terms, the Registration Rights Agreement will constitute, a legal, valid and binding agreement of the Issuer, enforceable against the Issuer in accordance with its terms, except (i) as such enforcement is limited by bankruptcy, insolvency and other similar laws affecting the enforcement of creditors' rights generally or the reorganization of financial institutions, (ii) for limitations imposed by general principles of equity and (iii) that rights to indemnity may be limited by federal and state securities laws and public policy considerations. The Securities, when issued and delivered in accordance with the terms of this Agreement, will be validly issued and outstanding, fully paid and nonassessable, and free and clear of any Liens other than Liens arising as a result of the status of the Purchasers. The shares of Common Stock issuable upon conversion of the Securities have been reserved for issuance and will, when issued, be validly issued and outstanding, fully paid and nonassessable, and free and clear of any Liens other than Liens arising as a result of the status of the Purchasers. 7 11 SECTION 3.03. Governmental Authorization. The execution, delivery and performance by the Issuer of this Agreement and the Registration Rights Agreement, and the consummation of the transactions contemplated hereby and thereby require no consent, approval, authorization or other action by or in respect of any Governmental Authority except (i) the filing of the Series A Certificate of Designations and the Series B Certificate of Designations in accordance with the law of the State of Delaware, (ii) the filing of a listing application for the shares of Common Stock issuable upon conversion of the Securities with the American Stock Exchange, (iii) any filing required pursuant to the securities laws of the State of New York and (iv) other filings, notifications and consents that are immaterial to the consummation of the transactions contemplated hereby and thereby. SECTION 3.04. Noncontravention. The execution, delivery and performance by the Issuer of this Agreement and the Registration Rights Agreement, and the consummation of the transactions contemplated hereby and thereby do not and will not (i) violate the certificate of incorporation or bylaws of the Issuer, (ii) assuming compliance with the matters referred to in Section 3.03, violate any Applicable Law, (iii) require any consent or other action by any Person under, constitute a default under, or give rise to any right of termination, cancellation or acceleration of any material right or obligation of the Issuer or any Subsidiary of the Issuer or to a loss of any material benefit to which the Issuer or any Subsidiary of the Issuer is entitled under any provision of any agreement or other instrument binding upon the Issuer or any Subsidiary of the Issuer or (iv) result in the creation or imposition of any Lien on any material asset of the Issuer or any Subsidiary of the Issuer, except for, in the case of clauses (ii), (iii) and (iv), such matters that could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. SECTION 3.05. Capitalization. (a) The authorized capital stock of the Issuer consists of 12,000,000 shares of Common Stock and 2,000,000 shares of Preferred Stock. The outstanding shares of Common Stock and Preferred Stock as well as all securities convertible into or exchangeable for shares of Common Stock as of December 31, 1999 are set forth on the Disclosure Schedule. No shares of Common Stock or Preferred Stock or any securities convertible into or exchangeable for shares of Common Stock have been issued since such date. (b) All of the outstanding shares of capital stock of the Issuer have been duly authorized and validly issued and are fully paid and nonassessable. Except as set forth in Section 3.05(a), there are no outstanding (i) shares of capital stock or voting securities of the Issuer, (ii) securities of the Issuer or any Subsidiary of the Issuer convertible into or exchangeable for shares of capital stock or voting securities of the Issuer or (iii) options or other rights to acquire from the Issuer or any Subsidiary of the Issuer, or other obligation of the Issuer to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital 8 12 stock or voting securities of the Issuer (the items in clauses 3.05(b)(i), 3.05(b)(ii) and 3.05(b)(iii) being referred to collectively as the "ISSUER SECURITIES"). There are no outstanding obligations of the Issuer or any Subsidiary of the Issuer to repurchase, redeem or otherwise acquire any Issuer Securities. SECTION 3.06. Subsidiaries. (a) Carver Federal Savings Bank is a federal savings bank duly organized, validly existing and in good standing under the laws of the United States. Each other Subsidiary of the Issuer is a corporation or limited liability company duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation or formation. Each Subsidiary of the Issuer has all powers (corporate or otherwise) and all material governmental licenses, authorizations, permits, consents and approvals required to carry on its business as now conducted. Each Subsidiary of the Issuer is duly qualified to do business as a foreign corporation or limited liability company and is in good standing in each jurisdiction where such qualification is necessary, except for those jurisdictions where failure to be so qualified or in good standing could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (b) All of the outstanding capital stock or other voting securities or other equity interests of each Subsidiary of the Issuer is owned by the Issuer, directly or indirectly, free and clear of any Lien and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other voting securities or other equity interests). There are no outstanding (i) securities of the Issuer or any Subsidiary of the Issuer convertible into or exchangeable for shares of capital stock or voting securities or other equity securities of any Subsidiary of the Issuer or (ii) options or other rights to acquire from the Issuer or any Subsidiary of the Issuer, or other obligation of the Issuer or any Subsidiary of the Issuer to issue, any capital stock, voting securities, other equity interests or securities convertible into or exchangeable for capital stock or voting securities or other equity interests of any Subsidiary of the Issuer (the items in clauses 3.06(b)(i) and 3.06(b)(ii) being referred to collectively as the "SUBSIDIARY SECURITIES"). There are no outstanding obligations of the Issuer or any Subsidiary of the Issuer to repurchase, redeem or otherwise acquire any outstanding Subsidiary Securities. SECTION 3.07. Financial Statements. The audited consolidated balance sheet as of March 31, 1999 and the related audited consolidated statement of income and cash flows for the fiscal year ended March 31, 1999 and the unaudited interim consolidated balance sheet for the six months ended September 30, 1999 and the related unaudited interim consolidated statements of income and cash flows for the six months ended September 30, 1999 of the Issuer and its Subsidiaries and the Balance Sheet have been delivered by the Issuer to the Purchaser. Such financial statements fairly present, in conformity with generally accepted accounting principles applied on a consistent basis (except as may be 9 13 indicated in the notes thereto), the consolidated financial position of the Issuer and its Subsidiaries as of the dates thereof and their consolidated results of operations and cash flows for the periods then ended (subject to normal year-end adjustments and the absence of notes in the case of any unaudited interim financial statements). SECTION 3.08. Absence of Certain Changes. Since the Balance Sheet Date, the business of the Issuer and its Subsidiaries has been conducted in the ordinary course consistent with past practices and there has not been any event, occurrence, development or state of circumstances or facts which has had or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect or an adverse effect on the ability of the Issuer to perform its obligations under this Agreement and the Registration Rights Agreements. SECTION 3.09. No Material Undisclosed Liabilities. There are no liabilities of the Issuer or any Subsidiary of the Issuer of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which could reasonably be expected, individually or in the aggregate, to result in such a liability, other than: (i) liabilities provided for in the Balance Sheet or disclosed in the notes thereto or in the Form 10-K of the Issuer for the year ended March 31, 1999, as amended on Form 10-K/A (as so amended, the "10-K"), or in the Forms 10-Q of the Issuer for the quarters ended June 30, 1999 and September 30, 1999 (the "10-Qs"); (ii) liabilities incurred since the Balance Sheet Date in the ordinary course of business consistent with past practices; (iii) liabilities under this Agreement and the Registration Rights Agreement or incurred in connection with the transactions contemplated by this Agreement and the Registration Rights Agreement; and (iv) other undisclosed liabilities which, individually or in the aggregate, are not material to the Issuer and its Subsidiaries, taken as a whole. SECTION 3.10. Litigation. There is no action, suit, investigation or proceeding (or any basis therefor) pending against, or to the knowledge of the Issuer, threatened against or affecting, the Issuer or any Subsidiary of the Issuer or any of their respective properties before any court or arbitrator or any governmental body, agency or official which could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect or which in any 10 14 manner challenges or seeks to prevent, enjoin, alter or materially delay the transactions contemplated by this Agreement. SECTION 3.11. Compliance with Laws. Neither the Issuer nor any Subsidiary of the Issuer is in violation of, or has since January 1, 1997 violated, or to the best knowledge of the Issuer, is under investigation with respect to or been threatened to be charged with or given notice of any violation of, any Applicable Law, in each case other than any such violations that could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. SECTION 3.12. SEC Reports. Since January 1, 1997, the Issuer has filed all required SEC Reports when due (or within permitted extension periods) in accordance with the Exchange Act. As of their respective dates (or, in the case of any amended SEC Report, as of the date of the amendment), the SEC Reports complied in all material respects with all applicable requirements of the Exchange Act or the Securities Act, as the case may be. As of their respective dates (or, in the case of any amended SEC Report, as of the date of the amendment), none of the SEC Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. SECTION 3.13. Material Contracts. Each of the agreements, contracts, leases and commitments listed as an exhibit to the 10-K, any of the 10-Qs or any Form 8-K filed with the Commission since January 1, 1999 (each, a "MATERIAL CONTRACT") is a legal, valid and binding agreement of the Issuer or a Subsidiary of the Issuer, as the case may be, and is in full force and effect, and none of the Issuer, such Subsidiary or, to the knowledge of the Issuer, any other party thereto is in default or breach, in each case except for any such default or breach that could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, and, to the best knowledge of the Issuer, no event or circumstance has occurred that, with notice or lapse of time or both, would constitute any event of default thereunder. SECTION 3.14. Finders' Fees. The fees and commissions of any investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of the Issuer in connection with the transactions contemplated by this Agreement or the Registration Rights Agreement, including without limitation Keefe, Bruyette & Woods, will be paid by the Issuer. SECTION 3.15. Offering of Securities. Neither the Issuer nor any Person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Issuer under circumstances which would require, under the Securities Act, the integration of such offering with the 11 15 offering and sale of the Securities) which might subject the offering, issuance or sale of the Securities to the registration requirements of Section 5 of the Securities Act. SECTION 3.16. Intellectual Property. The Issuer and each of its Subsidiaries owns, or has the legal right to use, all material patents, patent applications, trademarks, trademark applications, tradenames, copyrights, technology, know-how and processes and other intellectual property rights necessary for each of them to conduct its business as currently conducted (the "INTELLECTUAL PROPERTY"). No claim has been asserted and is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does the Issuer know of any facts or circumstances that could provide a reasonable basis for any such claim. To the best knowledge of the Issuer, the use of such Intellectual Property by the Issuer and its Subsidiaries does not infringe on the rights of any Person, except for such infringements which could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. SECTION 3.17. Environmental Compliance. (a) No notice, notification, demand, request for information, citation, summons, complaint or order has been issued, no complaint has been filed, no penalty has been assessed and no investigation or review is pending, or to the Issuer's best knowledge, threatened by any governmental or other entity (i) with respect to any alleged material violation by the Issuer or any of its Subsidiaries of any Environmental Law, (ii) with respect to any alleged failure by the Issuer or any of its Subsidiaries to have any material permit, certificate, license, approval, registration or authorization required under any Environmental Law in connection with the conduct of their businesses or (iii) with respect to any Regulated Activity or any release, as defined in 42 U.S.C. 9601(22), of any Hazardous Substance which could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (b) (i) Neither the Issuer nor any of its Subsidiaries has engaged in any Regulated Activity other than in compliance in all material respects with all applicable Environmental Laws and (ii) to the best knowledge of the Issuer, no release, as defined in 42 U.S.C. 9601(22), of any Hazardous Substance has occurred at or on any property now or previously owned or leased by the Issuer or any of its Subsidiaries which could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (c) To the best knowledge of the Issuer, there are no Environmental Liabilities that could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. SECTION 3.18. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations, if any, under the minimum funding standards 12 16 of ERISA and the Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code with respect to each Plan to the extent the ERISA Group maintains such plans. No member of the ERISA Group has (a) sought a waiver of the minimum funding standards under Section 412 of the Code in respect of any Plan, (b) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Code or (c) incurred any liability under Title IV of ERISA other than a liability to the Pension Benefit Guaranty Corporation for premiums under Section 4007 of ERISA. SECTION 3.19. Taxes. (a) The Issuer and each of its Subsidiaries has filed in accordance with Applicable Law, all material Tax returns, statements, reports and forms (collectively, "RETURNS") required to be filed with any Taxing Authority when due (taking into account any extension of a required filing date); (b) at the time filed, such Returns were true, correct and complete in all material respects; (c) the Issuer and each of its Subsidiaries has timely paid all Taxes shown as due and payable on the Returns that have been filed; (d) the charges, accruals and reserves for Taxes reflected on the Balance Sheet (excluding any provision for deferred income taxes) are adequate under United States generally accepted accounting principles, consistently applied, to cover the Tax liabilities accruing through the date thereof; (e) there is no action, suit, proceeding, investigation, audit or claim pending or, to the knowledge of the Issuer, threatened against or with respect to it in respect of any Tax; (f) all Returns filed with the City of New York with respect to Tax years of the Issuer and its Subsidiaries through the Tax year ended March 31, 1998 have been examined and closed or are Returns with respect to which the applicable period for assessment under Applicable Law, after giving effect to extensions or waivers, has expired; no Returns filed with any other Taxing Authority with respect to any Tax years of the Issuer and its Subsidiaries have been examined, and all Returns filed with any other Taxing Authority with respect to Tax years of the Issuer and its Subsidiaries through the Tax year ended March 31, 1998 are Returns with respect to which the applicable period for assessment under Applicable Law, after giving effect to extensions or waivers, has expired; (g) neither the Issuer nor any of its Subsidiaries has any obligation under any Tax sharing agreement, Tax allocation agreement or Tax indemnity agreement or any other agreement or arrangement in respect of any Tax with any Person other than the Issuer or its Subsidiaries; (h) neither the Issuer nor any of its Subsidiaries has been a member of an affiliated, consolidated, combined or unitary group other than one of which the Issuer was the common parent; (i) proper and adequate amounts have been withheld by the Issuer and its Subsidiaries from their respective employees and other Persons for all periods in compliance in all material respects with the Tax, social security and unemployment, excise and other withholding provisions of all federal, state, local and foreign laws; (j) there is no Tax lien, whether imposed by any federal, state, 13 17 local, or foreign taxing authority, outstanding against the assets, properties or business of the Issuer or any of its Subsidiaries, other than any liens that could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and (k) the Issuer is not now, has never been and does not contemplate becoming a "United States Real Property Holding Corporation" as defined in Section 897(c)(2) of the Code and Section 1.897-2(b) of the Treasury regulations thereunder. SECTION 3.20. Regulatory Matters. (a) Carver Federal Savings Bank is the only "insured depository institution" within the meaning of the FDIA that is, directly or indirectly, "controlled" by the Issuer within the meaning of the FDIA and is the only federal savings bank of which 5% or more of any class of voting securities are directly or indirectly owned or controlled by the Issuer, all within the meaning of the HOLA. Carver Federal Savings Bank maintains in full force and effect deposit insurance with the FDIC through the Bank Insurance Fund or Savings Association Insurance Fund, and has fully paid to the FDIC as and when due all assessments with respect to its deposits as are required to maintain such deposit insurance in full force and effect. As of the date hereof, Carver Federal Savings Bank is rated Satisfactory under the Community Reinvestment Act. (b) Carver Federal Savings Bank has paid, as and when due, all fees, charges, assessments, or the like, to each and every governmental or regulatory agency having jurisdiction with respect to it as required by law, regulation, or rule, other than any such items the failure of which to pay would not, individually or in the aggregate, have a Material Adverse Effect. (c) Since January 1, 1997, the Issuer and its Subsidiaries have filed all material reports, registrations, applications and statements, together with any amendments required to be made with respect thereto, that are required to be filed with (A) the Office of Thrift Supervision, (B) the FDIC, and (C) any other applicable federal or state banking authorities (all such authorities referred to collectively as "REGULATORY AUTHORITIES," and all such filings and reports referred to collectively as the "REGULATORY REPORTS"). As of its filing date, each Regulatory Report complied in all material respects with all of the statutes, rules and regulations enforced or promulgated by the Regulatory Authority with which they were filed. Except for examinations conducted by a Regulatory Authority in the regular course of the business of the Issuer and its Subsidiaries since January 1, 1997, no Regulatory Authority has initiated any proceeding, or, to the knowledge of the Issuer or its Subsidiaries, any investigation, into the business or operations of the Issuer or its Subsidiaries. There is no unresolved violation, criticism or exception by any Regulatory Authority with respect to any report or statement relating to any examination or the Issuer or its Subsidiaries, except as to such matters which would not have a Material Adverse Effect. 14 18 (d) Neither the Issuer nor any of its Subsidiaries is a party to any commitment letter or similar undertaking to, cease-and-desist order or written agreement or memorandum of understanding with, or subject to any written order or directive from, or is a recipient of any extraordinary supervisory letter from, or has adopted any board resolutions at the request of, any federal or state governmental authority charged with the supervision or regulation of banks or engaged in the insurance of bank deposits, nor has the Issuer or its Subsidiaries been advised that any such governmental authority is contemplating issuing or requesting any of the foregoing. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS Each Purchaser hereby represents and warrants to the Issuer, severally as to itself only and not jointly as to the other Purchaser, that: SECTION 4.01. Existence and Power. Such Purchaser is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has all powers (corporate, partnership or otherwise) and all material governmental licenses, authorizations, permits, consents and approvals required to carry on its business as now conducted. Such Purchaser is duly qualified to do business and is in good standing in each jurisdiction where such qualification is necessary, except for those jurisdictions where failure to be so qualified could not reasonably be expected to have, individually or in the aggregate, a material adverse effect on such Purchaser. SECTION 4.02. Authorization. The execution, delivery and performance by such Purchaser of this Agreement and the Registration Rights Agreement, and the consummation of the transactions contemplated hereby and thereby, are within such Purchaser's powers (corporate, partnership or otherwise) and have been duly authorized by all necessary action on the part of such Purchaser. This Agreement constitutes and, when executed and delivered in accordance with its terms, the Registration Rights Agreement will constitute, a legal, valid and binding agreement of such Purchaser, enforceable against such Purchaser in accordance with its terms, except (i) as such enforcement is limited by bankruptcy, insolvency and other similar laws affecting the enforcement of creditors' rights generally, (ii) for limitations imposed by general principles of equity and (iii) that rights to indemnity may be limited by federal and state securities laws and public policy considerations. SECTION 4.03. Governmental Authorization. The execution, delivery and performance by such Purchaser of this Agreement and the Registration Rights Agreement, and the consummation of the transactions contemplated hereby and 15 19 thereby, require no action by or in respect of, or filing with, any governmental body, agency or official other than filings, notifications and consents that are immaterial to the consummation of the transactions contemplated hereby. SECTION 4.04. Noncontravention. The execution, delivery and performance by such Purchaser of this Agreement and the Registration Rights Agreement, and the consummation of the transactions contemplated hereby and thereby, do not and will not (i) violate the organizational documents of such Purchaser, (ii) assuming compliance with the matters referred to in Section 4.03, violate any Applicable Law, except for any such violation which would not have a material adverse effect on the ability of such Purchaser to consummate the transactions contemplated hereby and thereby or (iii) require any consent or other action by any Person, or constitute a default, under any provision of any agreement or other instrument binding upon such Purchaser, except as to matters which would not be material to such Purchaser. SECTION 4.05. Finders' Fees. The fees and commissions of any investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of such Purchaser in connection with the transactions contemplated by this Agreement or the Registration Rights Agreement will be paid by such Purchaser. SECTION 4.06. Private Placement. (a) Such Purchaser understands that the offering and sale of the Securities is intended to be exempt from registration under the Securities Act pursuant to Section 4(2) of the Securities Act and any applicable state securities or blue sky laws. (b) The Securities to be acquired by such Purchaser pursuant to this Agreement are being acquired for its own account and without a view to the resale or distribution of such Securities or any interest therein other than in a transaction exempt from registration under the Securities Act. (c) Such Purchaser is an "Accredited Investor" as such term is defined in Regulation D under the Securities Act. (d) Such Purchaser has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in the Securities and such Purchaser is capable of bearing the economic risks of such investment, including a complete loss of its investment in the Securities. Such Purchaser understands that its investment in the Securities involves a high degree of risk. (e) Such Purchaser has been furnished with and carefully read a copy of the Form 10-K, each of the Form 10-Qs and this Agreement and has been given the opportunity to ask questions of, and receive answers from, the Issuer 16 20 concerning the terms and conditions of the Securities and other related matters. The Issuer has made available to such Purchaser or its agents all documents and information relating to an investment in the Securities requested by or on behalf of such Purchaser. (f) Such Purchaser understands that the Securities have not been and, except as provided in the Registration Rights Agreement, are not being registered under the Securities Act or any state securities laws, and may not be offered, sold, pledged or otherwise transferred except in compliance with the Securities Act or state securities laws. ARTICLE 5 COVENANTS OF THE ISSUER AND THE PURCHASERS SECTION 5.01. Confidentiality. Each Purchaser will hold, and will use its reasonable best efforts to cause its officers, directors, employees, accountants, counsel, consultants, advisors, financing sources, financial institutions, and agents (the "REPRESENTATIVES") to hold, in confidence, unless compelled to disclose by judicial or administrative process or by other requirements of law or national stock exchange, all confidential documents and information concerning the Issuer or any of its Affiliates that are furnished to such Purchaser, except to the extent that such information can be shown to have been (i) previously known on a nonconfidential basis by such Purchaser or such Representatives, (ii) in the public domain through no fault of such Purchaser or its Representatives (with respect to information received in their capacity as such) or (iii) later acquired by such Purchaser or such Representatives from sources other than the Issuer or any of its Affiliates not known by such Purchaser or such Representatives, as applicable, to be bound by any confidentiality obligation; provided that such Purchaser may disclose such information to any of its Representatives in connection with the transactions contemplated by this Agreement and the Registration Rights Agreement so long as such Persons are informed by such Purchaser of the confidential nature of such information and are directed by such Purchaser to treat such information confidentially. The obligation of each Purchaser to hold and to cause its Representatives to hold any such information in confidence shall be satisfied if such Purchaser exercises the same care with respect to such information as such Purchaser would take to preserve the confidentiality of its own similar information. If a Purchaser or any of its Representatives is requested to disclose any confidential information by judicial or administrative process or by other requirements of law or a national stock exchange, such Purchaser will promptly notify the Issuer of such request so that the Issuer may seek an appropriate protective order. Each Purchaser agrees that it will not, and will use its reasonable best efforts to cause its Representatives not to, use any confidential documents or information for any purpose other than monitoring and evaluating 17 21 its investment in the Issuer and in connection with the transactions contemplated by this Agreement and the Registration Rights Agreement. SECTION 5.02. Public Announcements. The parties agree to consult with each other before issuing any press release or making any public statement with respect to this Agreement and the transactions contemplated hereby and, except as may be required by Applicable Law or any listing agreement with any national securities exchange, will not issue any such press release or make any such public statement prior to such consultation. Notwithstanding the foregoing, the parties have agreed upon the form of press release to be issued by the Issuer in connection with the execution of this Agreement and each party may make public statements that are materially consistent with such press release without prior consultation with the other party. SECTION 5.03. Restrictions of Certain Actions by the Purchasers. For so long as any Purchaser owns any Preferred Stock or any Common Stock, without the Issuer's prior consent, such Purchaser will not, and will cause each of its Affiliates not to, directly or indirectly: (a) make, or take any action to solicit, initiate or encourage, either alone, in conjunction with another Person or as part of a group (as such term is defined in Section 13(d)(3) of the Exchange Act), any offer or proposal for, or any indication of interest in, a merger or other business combination involving the Issuer or the acquisition of (i) any equity interest in excess of five percent of the total voting power of the Issuer's voting securities or (ii) a substantial portion of the assets of the Issuer or any Subsidiary; (b) make, or in any way participate in, any "solicitation" of "proxies" to vote (as such terms are defined in Rule 14a-1 under the Exchange Act or any successor provision), solicit any consent or become a "participant" in any "election contest" (as such terms are defined or used in Rule 14a-11 under the Exchange Act or any successor provision); (c) grant any proxies with respect to any Preferred Stock or Common Stock to any Person (other than as recommended by the Board of Directors of the Issuer) or deposit any such securities in a voting trust or enter into any other arrangement or agreement with respect to the voting thereof (other than a proxy granted to, or a voting trust or arrangement with, one or more of its Affiliates); or (d) initiate, support or otherwise solicit stockholders for the approval of one or more stockholder proposals with respect to the Issuer as described in Rule 14a-8 under the Exchange Act (other than as recommended by the Board of Directors of the Issuer), or induce or attempt to induce any other Person to initiate any such stockholder proposal. 18 22 SECTION 5.04. Issuer Repurchases of Common Stock. In the case of MS, the Issuer agrees that, for so long as MS shall hold Series A Preferred Stock or shares of Common Stock received upon the conversion of Series A Preferred Stock, the Issuer (i) shall give MS prompt notice of the adoption by the Issuer of any plan or program to repurchase shares of Common Stock and (ii) to the extent that the repurchase of such shares would cause MS to hold shares of Common Stock (on an as converted basis) equal to more than 4.99% of the outstanding shares of Common Stock (assuming full conversion of the Series A Preferred Stock), the Issuer shall repurchase from MS a proportionate number of shares of Series A Preferred Stock at a price per share equal to the greater of (A) the liquidation preference per share plus an amount equal to accrued and unpaid dividends thereon (whether or not declared) to the date fixed for repurchase and (B) the value of the shares of Common Stock into which such share of Series A Preferred Stock is convertible based on the average weighted price per share of Common Stock paid pursuant to such repurchase plan or program. SECTION 5.05. Right of First Offer. (a) If a Purchaser desires to transfer (i) any shares of Preferred Stock prior to the fourth anniversary of the date hereof or (ii) any shares of Common Stock issued upon conversion of Preferred Stock, such Purchaser shall give prompt written notice (the "TRANSFER NOTICE") to the Issuer of such intention, specifying the number of shares of Preferred Stock or Common Stock proposed to be transferred (the "OFFERED SHARES"). The Transfer Notice shall constitute an irrevocable offer (the "OFFER") by such Purchaser to sell to the Issuer the Offered Shares at a price (the "OFFER PRICE") equal to (A) in the case of Preferred Stock, the aggregate price specified by such Purchaser in the Transfer Notice and (B) in the case of the Common Stock, the aggregate Daily Price (as defined in the Series A Certificate of Designations or the Series B Certificate of Designations, as the case may be) of such Offered Shares on the Business Day immediately prior to date of delivery of the Transfer Notice. The Issuer shall have the right, exercisable by the Issuer within three Business Days after receipt of such Transfer Notice, to elect to purchase all, but not a part of, the Offered Shares specified in such Transfer Notice for cash at the Offer Price by delivery of a written notice (the "EXERCISE NOTICE") to such Purchaser stating the Issuer's irrevocable acceptance of the Offer. (b) If the Issuer elects to purchase the Offered Shares, the closing of the purchase of the Offered Shares shall take place on a mutually acceptable closing date which shall be not more than five Business Days after delivery of the Exercise Notice. The closing shall take place at such time and place as the parties mutually agree. (c) If the Issuer fails to elect to purchase the Offered Shares within the period specified in Section 5.05(a), such Purchaser shall be free, during the 60-day 19 23 period following the expiration of such period, to transfer any portion of or all the Offered Shares at a price not less than 95% of the Offer Price. SECTION 5.06. Board of Directors. (a) Provender shall be entitled to designate one director nominee to the Board of Directors of the Issuer for so long as it continues to beneficially own shares of Series B Preferred Stock (or shares of Common Stock received upon the conversion thereof) representing at least 50% of the Series B Preferred Stock (or the shares of Common Stock received upon the conversion thereof) purchased by Provender pursuant to this Agreement. Such director nominee shall be reasonably acceptable to the Issuer and shall initially be Fred Terrell. The Issuer agrees to use its best efforts to take all actions necessary to have such director nominee elected to the Board of Directors. The Issuer shall be deemed to have used its best efforts to elect such director nominee to the Board of Directors if it nominates such designee, includes the designee in the Issuer's proxy statement, recommends a vote for such designee and casts proxies given to the Issuer in favor of such designee. (b) The director nominated pursuant to this Section 5.06 shall be entitled to receive the same compensation and benefits that are provided to the other non- executive members of the Board of Directors. SECTION 5.07. Certain Life Insurance. As promptly as practicable after the date hereof, the Issuer shall procure a life insurance policy in an amount not less than $2,500,000 on the life of the current President and Chief Executive Officer of the Issuer. The Issuer shall maintain such policy for so long as the Series A Preferred Stock or the Series B Preferred Stock is outstanding. SECTION 5.08. Certain Other Arrangements. For so long as the Purchasers hold Preferred Stock, in the event that the Issuer determines to issue shares of another series of Preferred Stock, each Purchaser shall have the option to exchange all (but not less than all) of its Preferred Stock for such other series of Preferred Stock on a dollar-for-dollar basis based on the liquidation preference and accrued but unpaid dividends on such Purchaser's shares of Preferred Stock and the liquidation preference or issue price, if lower, of such other series of Preferred Stock. ARTICLE 6 MISCELLANEOUS SECTION 6.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including telecopier or similar writing) and shall be given to such party at its address or telecopier number set forth on the signature page hereof, or such other address or telecopier number as such party 20 24 may hereinafter specify for the purpose to the party giving such notice. Each such notice, request or other communication shall be effective (i) if given by telecopy, when such telecopy is transmitted to the telecopy number specified pursuant to this Section 6.01 and the appropriate confirmation is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in this Section 6.01. SECTION 6.02. Amendments; Waivers. (a) No failure or delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. (b) Any provision of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by the parties hereto, or in the case of a waiver, by the party against whom the waiver is to be effective. SECTION 6.03. Successors and Assigns. This provisions of this Agreement shall be binding upon and accrue to the benefit of the parties hereto and their respective successors and permitted assigns; provided that no party may assign any of its rights and obligations under this Agreement without the other party's prior written consent. SECTION 6.04. Survival. The representations and warranties contained in this Agreement shall survive the Closing until December 31, 2000, except that (i) the representations and warranties contained in Sections 3.01, 3.02, 3.03, 3.05, 4.01, 4.02, and 4.03 shall survive indefinitely and (ii) the representations and warranties contained in Sections 3.17, 3.18 and 3.19 shall survive until the expiration of the statute of limitations applicable to the matters covered thereby (giving effect to any waiver, mitigation or extension thereof, if applicable). Notwithstanding the preceding sentence, any representation or warranty in respect of which a claim may be brought under this Agreement shall survive the time at which it would otherwise terminate pursuant to the preceding sentence, if notice of the inaccuracy or breach thereof giving rise to such claim shall have been given in reasonable detail to the party against whom such claim may be brought prior to such time. The covenants and agreements of the parties contained in this Agreement shall survive the Closing in accordance with their terms or, if no term is specified, indefinitely. 21 25 SECTION 6.05. Entire Agreement. This Agreement (including the Disclosure Schedule), the Registration Rights Agreement and any other documents executed concurrently herewith constitute the entire agreement and understanding of the parties hereto and supersede any and all prior agreements and understandings, written or oral, relating to the subject matter hereof. SECTION 6.06. Applicable Law. This Agreement shall be construed in accordance with and governed by the laws of the State of New York, without regard to the conflicts of law rules of such state. SECTION 6.07. Severability. The invalidity or unenforceability of any provisions of this Agreement in any jurisdiction shall not affect the validity, legality or enforceability of the remainder of this Agreement in such jurisdiction or the validity, legality or enforceability of this Agreement, including any such provision, in any other jurisdiction, it being intended that all rights and obligations of the parties hereunder shall be enforceable to the fullest extent permitted by law. SECTION 6.08. Fees and Expenses. Unless otherwise provided herein, all costs and expenses incurred in connection with the transactions contemplated by this Agreement shall be paid by the party incurring such costs and expenses. In the case of Provender, the Issuer shall pay reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by Provender in connection with the purchase of the Securities in an amount up to, but not exceeding, $50,000. The Issuer shall pay any and all stamp, transfer and other similar taxes payable or determined to be payable in connection with the execution and delivery of this Agreement or the issuance of the Securities. SECTION 6.09. Counterparts. This Agreement may be executed in any number of counterparts each of which shall be an original with the same effect as if the signatures thereto and hereto were upon the same instrument. 22 26 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. CARVER BANCORP, INC. By: /s/ Deborah C. Wright ---------------------------------------- Name: Deborah C. Wright Title: President and Chief Executive Officer Address for notices: -------------------- Carver Bancorp, Inc. 75 West 125th Street New York, New York 10027 Facsimile: (212) 426-6214 Attention: President and Chief Executive Officer MORGAN STANLEY & CO. INCORPORATED By: /s/ Roxanne M. Beer ---------------------------------------- Name: Roxanne M. Beer Title: Vice President Address for notices: -------------------- Morgan Stanley & Co. Incorporated 1585 Broadway New York, NY 10036 Facsimile: 212-761-0358 Attention: Roxanne M. Beer 27 PROVENDER OPPORTUNITIES FUND L.P. By: /s/ Derek K. Jones ---------------------------------------- Name: Derek K. Jones Title: General Partner By: /s/ Raymond J. Walsh, Jr. ---------------------------------------- Name: Raymond J. Walsh, Jr. Title: General Partner Address for notices: Provender Capital Group, LLC 17 State Street New York, New York 10004 Facsimile: (212) 271-8875 Attention: Raymond J. Walsh, Jr. EX-10.14 3 ex10-14.txt REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.14 REGISTRATION RIGHTS AGREEMENT Dated January 11, 2000 among CARVER BANCORP, INC. MORGAN STANLEY & CO. INCORPORATED and PROVENDER OPPORTUNITIES FUND L.P. 2 TABLE OF CONTENTS -----------------
PAGE ---- ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions.....................................................1 ARTICLE 2 REGISTRATION RIGHTS SECTION 2.01. Demand Registration Rights......................................3 SECTION 2.02. Piggy-Back Registration Rights..................................4 SECTION 2.03. Registration Procedures.........................................5 SECTION 2.04. Participation in Underwritten Registrations.....................9 SECTION 2.05. Holdback Agreements.............................................9 SECTION 2.06. Indemnification.................................................9 ARTICLE 3 MISCELLANEOUS SECTION 3.01. Notices........................................................13 SECTION 3.02. Amendments; Waivers............................................13 SECTION 3.03. Successors; Assigns............................................13 SECTION 3.04. Entire Agreement...............................................13 SECTION 3.05. Applicable Law.................................................14 SECTION 3.06. Remedies.......................................................14 SECTION 3.07. Severability...................................................14 SECTION 3.08. Fees and Expenses..............................................14 SECTION 3.09. Counterparts...................................................14
3 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT dated January 11, 2000 among Carver Bancorp, Inc., a Delaware corporation (the "ISSUER"), Morgan Stanley & Co. Incorporated, a Delaware corporation ("MS"), and Provender Opportunities Fund L.P., a Delaware limited partnership ("PROVENDER"). Each of MS and Provender is sometimes hereinafter referred to as a "HOLDER". WHEREAS, the Issuer, MS and Provender are parties to a Securities Purchase Agreement dated January 11, 2000 (the "PURCHASE AGREEMENT") pursuant to which MS purchased 40,000 shares of Series A Preferred Stock from the Issuer and Provender purchased 60,000 shares of Series B Preferred Stock from the Issuer; and WHEREAS, the parties hereto desire to provide for certain rights and obligations relating to the capital stock of the Issuer following the date hereof. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions. (a) The following terms, as used herein, have the following meanings: "BUSINESS DAY" means any day except a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized by law to close. "COMMISSION" means the Securities and Exchange Commission or any successor commission or agency having similar powers. "COMMON SHARES" means shares of the common stock of the Issuer, par value $0.01 per share. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "PERSON" means an individual, partnership, corporation, limited liability company, trust, joint stock company, association, joint venture, or any other entity or organization. 4 "PUBLIC OFFERING" means any underwritten public offering of equity securities of the Issuer pursuant to an effective registration statement under the Securities Act other than pursuant to a registration statement on Form S-4 or Form S-8 or any successor or similar form. "REGISTRABLE COMMON SHARES" means Registrable Securities that are Common Shares. "REGISTRABLE SECURITIES" means (i) all Series A Preferred Shares and all Series B Preferred Shares owned by the Holders and (ii) all Common Shares owned by the Holders or into which the Series A Preferred Shares or the Series B Preferred Shares owned by the Holders may be converted. Registrable Securities shall cease to be Registrable Securities when (i) a registration statement with respect to the sale of such Registrable Securities shall have become effective under the Securities Act and such Registrable Securities shall have been disposed of pursuant to such registration statement, or (ii) such Registrable Securities shall have ceased to be outstanding. "REGISTRATION EXPENSES" means all (i) registration, qualification and filing fees, (ii) fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of a qualified independent underwriter, if any, counsel in connection therewith and the reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities), (iii) printing expenses, (iv) internal expenses of the Issuer (including, without limitation, all salaries and expenses of officers and employees performing legal or accounting duties), (v) fees and disbursements of counsel for the Issuer, (vi) customary fees and expenses for independent certified public accountants retained by the Issuer (including the expenses of any comfort letters or costs associated with the delivery by independent certified public accountants of a comfort letter or comfort letters), (vii) fees and expenses of any special experts retained by the Issuer in connection with such registration, (viii) reasonable fees and expenses of one separate firm of attorneys for the Holders selling securities pursuant to such registration and (ix) fees and expenses of listing the Registrable Securities on a securities exchange; but shall not include any underwriting fees or discounts or commissions attributable to the sale of Registrable Securities. "SELLING HOLDER" means any Holder who sells Registrable Securities pursuant to Section 2.01 or 2.02. "SERIES A PREFERRED SHARES" means shares of Series A Convertible Preferred Stock, par value $0.01 per share, of the Issuer. 2 5 "SERIES B PREFERRED SHARES" means shares of Series B Convertible Preferred Stock, par value $0.01 per share, of the Issuer. "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "SUBSIDIARY" means any entity of which ownership interests having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions are at the time directly or indirectly owned by the Issuer. (b) Each of the following terms is defined in the Section set forth opposite such term:
TERM SECTION ---- ------- Holders Preamble Indemnified Party 2.06(c) Indemnifying Party 2.06(c) Inspectors 2.03(h) Issuer Preamble Purchase Agreement Recitals Records 2.03(h)
ARTICLE 2 REGISTRATION RIGHTS SECTION 2.01. Demand Registration Rights. (a) Each of MS and Provender shall have the right to make written demand upon the Issuer, on not more than two separate occasions (subject to the provisions of this Section 2.01), to register under the Securities Act outstanding Registrable Securities, and the Issuer shall use commercially reasonable efforts to cause such shares to be registered under the Securities Act as soon as reasonably practicable so as to permit the sale thereof promptly; provided that each such demand shall cover, as the case may be, at least (i) $500,000 liquidation preference of Series A Preferred Shares or Series B Preferred Shares, as the case may be, or (ii) 41,667 Common Shares (subject in each such case to adjustment for stock splits, reverse stock splits, stock dividends and similar events after the date hereof). Each such demand will specify the type and number of Registrable Securities proposed to be sold and the intended method of disposition thereof. A registration that is a Public Offering shall not count for purposes of determining the number of registrations to which the requesting Holder is entitled pursuant to this Section 2.01(a) unless the 3 6 requesting Holder is able to register and sell at least 75% of the Registrable Securities requested to be included in such registration. (b) Notwithstanding the provisions of Section 2.01(a), the Issuer (i) shall not be obligated to prepare or file more than one registration statement pursuant to this Section 2.01 during any 9-month period and (ii) shall be entitled to postpone the filing of any registration statement otherwise required to be prepared and filed pursuant to Section 2.01(a) for a period of up to 90 days if the Issuer determines in its reasonable judgment and in good faith that the registration and distribution of the Registrable Securities that are the subject of such registration would impair or interfere with in any material respect any contemplated financing, acquisition, disposition, corporate reorganization or other material transaction or corporate development involving the Issuer or any of its Subsidiaries or would require premature disclosure thereof. In the event of such postponement, the requesting Holder shall have the right to withdraw the request for registration by giving written notice to the Issuer within 20 days after receipt of the notice of postponement and, in the event of such withdrawal, such request shall not be counted for purposes of determining the number of registrations to which the requesting Holder is entitled pursuant to Section 2.01(a). (c) The requesting Holder shall be entitled to select the managing underwriter or underwriters of any Public Offering effected pursuant to this Section 2.01, which selection shall be reasonably satisfactory to the Issuer. The Issuer will enter into customary agreements (including an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities to be sold pursuant thereto. SECTION 2.02. Piggy-Back Registration Rights. (a) If the Issuer at any time proposes to register any of its Common Shares, Series A Preferred Shares or Series B Preferred Shares under the Securities Act (other than (i) by a registration on Form S-4, Form S-8 or any successor or similar form, (ii) pursuant to a stock option or other employee benefit or similar plan or (iii) pursuant to a direct share purchase plan, dividend reinvestment plan or similar plan of the Issuer), the Issuer shall, as promptly as practicable, give written notice to each Holder of the Issuer's intention to effect such registration. If, within 15 days after receipt of such notice, any Holder submits a written request to the Issuer specifying the number of Registrable Securities intended to be disposed of by such Holder, the Issuer will use commercially reasonable efforts to include such the shares specified in such Holder's request in such registration. No registration effected under this Section 2.02 shall relieve the Issuer of its obligation to effect any registration upon request under Section 2.01. If a Holder has been permitted to participate in a proposed offering pursuant to this Section 2.02(a), the Issuer thereafter may determine either not to file a registration relating thereto, or to withdraw such registration statement, or otherwise not consummate such offering, without any liability 4 7 hereunder other than its obligation to pay the Registration Expenses in connection therewith. (b) If a registration pursuant to this Section 2.02 involves a Public Offering and the managing underwriter shall advise the Issuer that the inclusion of all the securities proposed to be included in such registration would exceed the largest number of securities that can be sold without having a material adverse effect on such offering, including the price at which such securities can be sold, the Issuer will include in such registration (i) first, if the registration is initiated by the Issuer, the Common Shares the Issuer proposes to sell and, if the registration is initiated by a Person (other than the Issuer or a Holder), the Common Shares such Person proposes to sell, (ii) second, the Registrable Securities requested to be included in such registration by the Holders, allocated (if necessary) among such Holders pro rata based on the Registrable Securities requested to be included in such registration, and (iii) third, if the registration is initiated by the Issuer, Common Shares to be sold for the account of other Persons having incidental registration rights and, if the registration is initiated by a Person (other than the Issuer), the Common Shares to be sold for the account of the Issuer and the Common Shares to be sold for the account of other Persons having incidental registration rights, in each such case, with such priorities among them as the Issuer shall determine. SECTION 2.03. Registration Procedures. If the Issuer is required to use commercially reasonable efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Section 2.01 or 2.02, the Issuer will, as promptly as possible: (a) prepare and file with the Commission a registration statement on an appropriate form, and thereafter use commercially reasonable efforts to cause such registration statement to become effective and to remain effective for 90 days or such shorter period as shall be necessary to effect the distribution of the Registrable Securities and prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period specified above and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement until such time as all of such securities have been disposed of in accordance with the intended methods of disposition by the Selling Holders set forth in such registration statement; provided that the Issuer will, at least 5 Business Days (or at least 3 Business Days in the case of incidental registrations) prior to filing a registration statement or prospectus or any amendment or supplement thereto, furnish to the Selling Holders copies of such registration statement or prospectus (or amendment or supplement) as proposed to be filed (including, upon the request of any Selling Holder, documents to be incorporated by reference therein) which documents will be subject to the 5 8 reasonable review and comments of the Selling Holders (and their attorneys) during such 5-Business Day period (or 3-Business Day period, as the case may be) and the Issuer will not file any registration statement, any prospectus or any amendment or supplement thereto (or any such documents incorporated by reference) containing any statements with respect to the Selling Holders to which the Selling Holders shall reasonably object in writing; (b) furnish to the Selling Holders and to any underwriter such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 or Rule 430A under the Securities Act, in conformity with the requirements of the Securities Act, documents incorporated by reference in such registration statement, amendment, supplement or prospectus and such other documents (in each case including all exhibits), as the Selling Holders or such underwriter may reasonably request; (c) after the filing of the registration statement, promptly notify the Selling Holders of the effectiveness thereof and of any stop order issued or threatened by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered and promptly notify the Selling Holders of such lifting or withdrawal of such order; (d) use commercially reasonable efforts to register or qualify all Registrable Securities and other securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Selling Holders or any underwriter shall reasonably request, to keep such registration or qualification in effect for so long as such registration statement remains in effect, and take any other action which may be reasonably necessary or advisable to enable the Selling Holders to consummate the disposition in such jurisdictions of the securities owned by the Selling Holders, except that the Issuer shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this Section 2.03(d) be obligated to be so qualified, to subject itself to taxation in any such jurisdiction or to consent to general service of process in any such jurisdiction; (e) use commercially reasonable efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the Selling Holders to consummate the disposition of such Registrable Securities; (f) furnish to the Selling Holders and to each underwriter, if any, a signed counterpart of: (i) an opinion of counsel for the Issuer addressed to the 6 9 Selling Holders and such underwriter on which opinion the Selling Holders and such underwriter are entitled to rely and (ii) a "comfort" letter signed by the independent public accountants who have certified the Issuer's financial statements included in such registration statement, each in customary form and covering such matters of the type customarily covered by opinions or comfort letters, as the case may be, as the Selling Holders or the managing underwriter therefor reasonably request. The Issuer will use its best efforts to have such comfort letters addressed to each Selling Holder; (g) immediately notify the Selling Holders at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and promptly prepare and furnish to the Selling Holders a reasonable number of copies of any supplement to or amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make statements therein not misleading in the light of the circumstances under which they were made; (h) make available for inspection by the Selling Holders, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other professional retained by any Holder or underwriter (collectively, the "INSPECTORS"), all financial and other records, pertinent corporate documents and properties of the Issuer (collectively, the "RECORDS") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and shall cause (i) the Issuer's officers, directors and employees to supply all information reasonably requested by any Inspectors and (ii) the senior management of the Issuer and its Subsidiaries to participate in any "road show" presentations to investors for such period of time as is reasonably requested by the managing underwriters, in each case in connection with such registration statement. Each Selling Holder agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Issuer unless and until such information is made generally available to the public. Each Selling Holder further agrees that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Issuer and allow the Issuer, at its expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential; 7 10 (i) use commercially reasonable efforts to list all Registrable Securities covered by such registration statement on any securities exchange or quotation system on which any of the Common Shares is then listed or traded; and (j) otherwise use commercially reasonable efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement or such other document that shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder. The Issuer may require each Selling Holder to promptly furnish to the Issuer, as a condition precedent to including such Holder's Registrable Securities in any registration, such written information regarding such Holder and the distribution of such securities as the Issuer may from time to time reasonably request in writing. Each Selling Holder agrees that upon receipt of any notice from the Issuer of the happening of any event of the kind described in Section 2.03(g), such Holder will forthwith discontinue its disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 2.03(g) and, if so directed by the Issuer, will deliver to the Issuer (at the Issuer's expense) all copies, other than permanent file copies, then in such Holder's possession, of the prospectus and any amendments or supplements thereto relating to such Registrable Securities current at the time of receipt of such notice. In the event the Issuer shall give such notice, the Issuer shall extend the period during which the effectiveness of such registration statement shall be maintained by the number of days during the period from and including the date of the giving of notice pursuant to Section 2.03(g) to the date when the Issuer shall make available to the Selling Holders a prospectus supplemented or amended to conform with the requirements of Section 2.03(g). The Issuer will promptly pay all Registration Expenses in connection with any registration of Registrable Securities pursuant to Section 2.01 or 2.02. SECTION 2.04. Participation in Underwritten Registrations. In connection with any Public Offering pursuant to Section 2.01 or 2.02, each Selling Holder agrees to complete and execute all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of the relevant underwriting arrangements. SECTION 2.05. Holdback Agreements. If any registration or offering of Registrable Securities shall be in connection with a Public Offering, the Issuer and each Selling Holder agree not to effect any public sale or distribution of any Common Shares or any securities convertible into or exchangeable or exercisable 8 11 for Common Shares (in each case other than as part of such Public Offering), if and to the extent requested by the managing underwriter during the 90-day period beginning on the effective date of such registration statement without the written consent of such managing underwriter. SECTION 2.06. Indemnification. (a) Indemnification by the Issuer. The Issuer agrees to indemnify and hold harmless each Selling Holder, its officers, directors and agents and each Person, if any, who controls each Selling Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages, liabilities or expenses caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus relating to the Registrable Securities (as amended or supplemented if the Issuer shall have furnished any amendments or supplements thereto) or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Issuer will reimburse each Selling Holder for any legal or any other expenses reasonably incurred by them in connection with investigating or defending such loss, claim, damage, liability or expense, except insofar as such losses, claims, damages, liabilities or expenses are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information furnished in writing to the Issuer by such Selling Holder or on such Selling Holder's behalf expressly for use therein; provided that with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus, or in any prospectus, as the case may be, the indemnity agreement contained in this paragraph shall not apply to the extent that any such loss, claim, damage, liability or expense results from the fact that a current copy of the prospectus (or the amended or supplemented prospectus, as the case may be) was not sent or given to the Person asserting any such loss, claim, damage, liability or expense at or prior to the written confirmation of the sale of the Registrable Securities concerned to such Person if it is determined that the Issuer has provided such prospectus (or amended or supplemented prospectus) and it was the responsibility of such Selling Holder to provide such Person with a current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) and such current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) would have cured the defect giving rise to such loss, claim, damage, liability or expense. The Issuer also agrees to indemnify any underwriters of the Registrable Securities, their officers and directors and each Person who controls such underwriters on substantially the same basis as that of the indemnification of each Selling Holder provided in this Section 2.06(a). (b) Indemnification by the Holder. Each Selling Holder agrees, severally but not jointly, to indemnify and hold harmless the Issuer, its officers, directors and agents and each Person, if any, who controls the Issuer within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange 9 12 Act to the same extent as the foregoing indemnity from the Issuer to each Selling Holder, but only (i) with respect to information furnished in writing by such Selling Holder or on such Selling Holder's behalf expressly for use in any registration statement or prospectus relating to the Registrable Securities, or any amendment or supplement thereto, or any preliminary prospectus or (ii) to the extent that any loss, claim, damage, liability or expense described in Section 2.06(a) results from the fact that a current copy of the prospectus (or the amended or supplemented prospectus, as the case may be) was not sent or given to the Person asserting any such loss, claim, damage, liability or expense at or prior to the written confirmation of the sale of the Registrable Securities concerned to such Person if it is determined that it was the responsibility of such Selling Holder to provide such Person with a current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) and such current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) would have cured the defect giving rise to such loss, claim, damage, liability or expense. Each Selling Holder also agrees to indemnify and hold harmless the underwriters of the Registrable Securities, their officers and directors and each Person who controls such underwriters on substantially the same basis as that of the indemnification of the Issuer provided in this Section 2.06(b). (c) Conduct of Indemnification Proceedings. In case any proceeding (including any governmental investigation) shall be instituted involving any Person in respect of which indemnity may be sought pursuant to this Section 2.06, such Person (an "INDEMNIFIED PARTY") shall promptly notify the Person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party, and shall assume the payment of all fees and expenses; provided that the failure of any Indemnified Party so to notify the Indemnifying Party shall not relieve the Indemnifying Party of its obligations hereunder except to the extent that the Indemnifying Party is materially prejudiced by such failure to notify. In any such proceeding, any Indemnified Party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (ii) in the reasonable judgment of such Indemnified Party representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the Indemnifying Party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for all such Indemnified Parties, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Indemnified Parties, such firm shall be designated in writing by the Indemnified Party that had the largest number of Registrable Securities included in such registration. The Indemnifying 10 13 Party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent, or if there be a final judgment for the plaintiff, the Indemnifying Party shall indemnify and hold harmless such Indemnified Parties from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such settlement includes an unconditional release of such Indemnified Party from all liability arising out of such proceeding. (d) Contribution. If the indemnification provided for in this Section 2.06 is unavailable to the Indemnified Parties in respect of any losses, claims, damages or liabilities referred to herein, then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (i) as between the Issuer and the Selling Holders on the one hand and the underwriters on the other, in such proportion as is appropriate to reflect the relative benefits received by the Issuer and the Selling Holders on the one hand and the underwriters on the other, from the offering of the Registrable Securities, or if such allocation is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits but also the relative fault of the Issuer and the Selling Holders on the one hand and of such underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations and (ii) as between the Issuer on the one hand and the Selling Holders on the other, in such proportion as is appropriate to reflect the relative fault of the Issuer and of the Selling Holders in connection with such statements or omissions, as well as any other relevant equitable considerations. The relative benefits received by the Issuer and the Selling Holders on the one hand and such underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Issuer and the Selling Holders bear to the total underwriting discounts and commissions received by such underwriters, in each case as set forth in the table on the cover page of the prospectus. The relative fault of the Issuer and the Selling Holders on the one hand and of such underwriters on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Issuer and a Selling Holder or by such underwriters. The relative fault of the Issuer on the one hand and of the Selling Holders on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties' relative intent, 11 14 knowledge, access to information and opportunity to correct or prevent such statement or omission. The Issuer and the Selling Holders agree that it would not be just and equitable if contribution pursuant to this Section 2.06 were determined by pro rata allocation (even if the underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 2.06, no underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities underwritten by it and distributed to the public were offered to the public exceeds the aggregate amount of any damages which such underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no Selling Holder shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities of such Selling Holder were offered to the public exceeds the amount of any damages which such Selling Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. ARTICLE 3 MISCELLANEOUS SECTION 3.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including telecopier or similar writing) and shall be given to such party at its address or telecopier number set forth on the signature page hereof, or such other address or telecopier number as such party may hereinafter specify for the purpose to the party giving such notice. Each such notice, request or other communication shall be effective (i) if given by telecopy, when such telecopy is transmitted to the telecopy number specified pursuant to this Section 3.01 and the appropriate communication is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in this Section 3.01. 12 15 SECTION 3.02. Amendments; Waivers. (a) No failure or delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. (b) Any provision of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by the parties hereto, or in the case of a waiver, by the party against whom the waiver is to be effective. SECTION 3.03. Successors; Assigns. The provisions of this Agreement shall be binding upon and accrue to the benefit of the parties hereto and their respective successors and permitted assigns; provided that no party may assign any of its rights or obligations under this Agreement without the other party's prior written consent. Notwithstanding the foregoing, if MS or Provender transfers to any Person more than 50% of the Series A Preferred Shares or Series B Preferred Shares, as the case may be, acquired by it pursuant to the Purchase Agreement, such Holder may assign its rights under Article 2 to such Person without the prior written consent of the Issuer; provided that such Person agrees to be bound by the provisions of this Agreement as if such Person were such Holder hereunder. SECTION 3.04. Entire Agreement. The Purchase Agreement (including the Disclosure Schedule thereto) and this Agreement constitute the entire agreement and understanding of the parties hereto and supersede any and all prior agreements and understandings between the parties hereto, written or oral, relating to the subject matter hereof. SECTION 3.05. Applicable Law. This Agreement shall be construed in accordance with and governed by the laws of the State of New York, without regard to the conflicts of law rules of such state. SECTION 3.06. Remedies. The parties hereto acknowledge and agree that in the event of any breach of this Agreement, the parties would be irreparably harmed and could not be made whole by monetary damages. Each party hereto accordingly agrees (i) not to assert by way of defense or otherwise that a remedy at law would be adequate, and (ii) that the parties agree, in addition to any other remedy to which they may be entitled, that the remedy of specific performance of this Agreement is appropriate in any action in court. SECTION 3.07. Severability. The invalidity or unenforceability of any provisions of this Agreement in any jurisdiction shall not affect the validity, legality or enforceability of the remainder of this Agreement in such jurisdiction 13 16 or the validity, legality or enforceability of this Agreement, including any such provision, in any other jurisdiction, it being intended that all rights and obligations of the parties hereunder shall be enforceable to the fullest extent permitted by law. SECTION 3.08. Fees and Expenses. Unless otherwise provided herein, all costs and expenses incurred in connection with the transactions contemplated by this Agreement shall be paid by the party incurring such costs and expenses. SECTION 3.09. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original with the same effect as if the signatures thereto and hereto were upon the same instrument. 14 17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. CARVER BANCORP, INC. By: /s/ Deborah C. Wright ----------------------------------------- Name: Deborah C. Wright Title: President and Chief Executive Officer Address for notices: Carver Bancorp, Inc. 75 West 125th Street New York, New York 10027 Facsimile: (212) 426-6214 Attention: President and Chief Executive Officer MORGAN STANLEY & CO. INCORPORATED By: /s/ Roxanne M. Beer ----------------------------------------- Name: Roxanne M. Beer Title: Vice President Address for notices: Morgan Stanley & Co. Incorporated 1585 Broadway New York, NY 10036 Facsimile: 212-761-0358 Attention: Roxanne M. Beer 18 PROVENDER OPPORTUNITIES FUND L.P. By: /s/ Derek K. Jones ----------------------------------------- Name: Derek K. Jones Title: General Partner By: /s/ Raymond J. Walsh, Jr. ----------------------------------------- Name: Raymond J. Walsh, Jr. Title: General Partner Address for notices: Provender Capital Group, LLC 17 State Street New York, New York 10004 Facsimile: (212) 271-8875 Attention: Raymond J. Walsh, Jr. EX-10.15 4 ex10-15.txt SETTLEMENT AGREEMENT 1 EXHIBIT 10.15 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY - -------------------------------------X IN RE CARVER BANCORP, INC. : Cons. C.A. No. 17743 - -------------------------------------X SETTLEMENT AGREEMENT AND MUTUAL RELEASE This Settlement Agreement and Mutual Release ("Agreement") is made and entered as of this 19th day of May, 2000 (the "Effective Date"), by and among BBC Capital Market, Inc. ("BBC Capital"), The Boston Bank of Commerce, Kevin Cohee and Teri Williams (collectively, the "BBC Capital Parties"); Carver Bancorp, Inc. ("Carver"), Deborah C. Wright, David N. Dinkins, Linda H. Dunham, Robert J. Franz, Pazel G. Jackson, Jr., Herman Johnson and David R. Jones (the "Individual Directors") (collectively, the "Carver Parties"); Morgan & Stanley & Co., Incorporated ("Morgan Stanley"); and Provender Opportunities Fund, L.P., and Frederick O. Terrell (collectively, the "Provender Parties"). W I T N E S S E T H: WHEREAS, BBC Capital, the Carver Parties, Morgan Stanley and the Provender Parties are parties to a lawsuit entitled In re Carver Bancorp, Inc., Cons. C.A. No. 17743, pending in the Court of Chancery of the State of Delaware (the "Action"). NOW, THEREFORE, in consideration of the mutual promises contained herein and for other good and valuable consideration, the undersigned parties to this settlement agreement (the "Agreement") do hereby agree as follows: 2 1. The Carver Parties and BBC Parties agree that, effective May 19, 2000, Kevin Cohee and Teri Williams will be appointed by Carver to serve (a) on the Carver Board of Directors (the "Carver Board") for a term expiring at the annual meeting of stockholders for the fiscal year ending March 31, 2002 and (b) on the Board of Directors of Carver Federal Savings Bank ("Carver Bank Board") for a coterminous period, irrespective of whether the Carver Bank Board is classified. 2. The Carver Parties and BBC Parties agree that, Carver will hold its annual meeting of stockholders for the fiscal year ending March 31, 2000 on or before March 24, 2001 (the "2000 Annual Meeting"). 3. The Carver Parties and BBC Parties agree that, in connection with the 2000 Annual Meeting, Carver will ensure that a sufficient number of directors are made eligible for election to the Carver Board so that the sum of (a) the number two and (b) the number of directorships up for election at the 2000 Annual Meeting will constitute a majority of the number of directors on the Carver Board as of the date of the 2000 Annual Meeting. The foregoing provision will apply under all circumstances including, without limitation, in the event that the holders of Carver's Series A Preferred Stock and/or Series B Preferred Stock are permitted to designate one or more additional directors to the Carver Board at any time before the 2000 Annual Meeting pursuant to the terms of those securities. 4. BBC Capital has represented that its proxy contest and litigation expenses exceed $550,000. Within three business days of the earlier of the date on which the parties execute this Agreement and file a stipulation and order of dismissal in the Delaware Court of Chancery or May 19, 2000, the Individual Directors agree to pay and will cause their insurance carrier to pay $475,000 to BBC Capital in immediately available funds. 3 5. Upon execution of this Agreement, BBC Capital and Carver shall issue a joint press release announcing the settlement, the language of which shall be consented to by BBC Capital and Carver, which consent shall not be unreasonably withheld. A copy of the joint press release is attached hereto as Exhibit A. 6. The terms of this Agreement will become effective irrespective of the outcome of the application submitted in the Action by Blaylock & Partners, L.P. 7. On the Effective Date, the BBC Capital Parties, the Carver Parties, Morgan Stanley and the Provender Parties shall execute and file a Stipulation and Order in the form annexed hereto as Exhibit B. 8. The BBC Capital Parties, the Carver Parties, Morgan Stanley and the Provender Parties hereby mutually release, remise and acquit and forever discharge each other from any and all claims concerning the subject matter of the action titled In re Carver Bancorp, Inc., Civil Action No. 17743; provided, however, that this release shall not release the obligations undertaken pursuant to this Agreement. Each party hereto acknowledges that (i) such party has been advised by counsel in connection with the execution of this mutual release; and (ii) this instrument is intended as a complete, absolute and final mutual release and compromise with respect to all matters referenced in this paragraph. 9. This Agreement shall not in any event be construed or deemed a concession on the part of any of the parties to the truth of any allegations, claims or defenses made by any of the parties in the Action or of any liability or wrongdoing of any of the parties. 10. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof. The representations, warranties, covenants and agreements set forth in this Agreement constitute all representations, warranties, covenants and agreements of the parties hereto 4 and upon which the parties have relied. No change, modification, amendment, addition, or termination of this Agreement or any part thereof shall be valid unless in writing and signed by or on behalf of the party to be charged therewith. Nothing else, including, but not limited to, detrimental reliance, estoppel, oral representations or promises whatsoever shall amend, modify or alter this Agreement. 11. No waiver of the provisions hereof shall be effective unless in writing and signed by the party to be charged with such waiver. No waiver shall be deemed a continuing waiver or waiver in respect of any subsequent breach or default, either of similar or different nature, unless expressly so stated in writing. 12. This Agreement shall be governed, interpreted and construed in accordance with the laws of the State of Delaware applicable to contracts to be performed entirely within that State. 13. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 14. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 15. Each of the signatories hereto warrants that it, he or she has full power, capacity and authority to execute this Agreement on behalf of the party or parties so indicated. 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the dates first indicated above with the intent that this Agreement be a sealed instrument under the laws of the State of Delaware. BBC CAPITAL MARKET, INC. Dated: May , 2000 -- ------------------------------ By: Title: THE BOSTON BANK OF COMMERCE Dated: May , 2000 -- ------------------------------ By: Title: Dated: May , 2000 -- ------------------------------ Kevin Cohee Dated: May , 2000 -- ------------------------------ Teri Williams CARVER BANCORP, INC. Dated: May , 2000 -- ------------------------------ By: Title: Dated: May , 2000 -- ------------------------------ Deborah C. Wright 6 Dated: May , 2000 -- ------------------------------ David R. Jones Dated: May , 2000 -- ------------------------------ David N. Dinkins Dated: May , 2000 -- ------------------------------ Linda H. Dunham Dated: May , 2000 -- ------------------------------ Robert J. Franz Dated: May , 2000 -- ------------------------------ Pazel G. Jackson, Jr. Dated: May , 2000 -- ------------------------------ Herman Johnson 7 MORGAN STANLEY & CO., INCORPORATED Dated: May , 2000 -- ------------------------------ By: Title: PROVENDER OPPORTUNITIES FUND, L.P. Dated: May , 2000 -- ------------------------------ By: Title: Dated: May , 2000 -- ------------------------------ Frederick O. Terrell EX-10.16 5 ex10-16.txt STIPULATION AND ORDER OF DISMISSAL W/PREJUDICE 1 EXHIBIT 10.16 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY - -------------------------------------X IN RE CARVER BANCORP, INC. : Cons. C.A. No. 17743 - -------------------------------------X STIPULATION AND ORDER OF DISMISSAL WITH PREJUDICE IT IS HEREBY STIPULATED AND AGREED by the parties to this action listed below by and through their undersigned counsel, that pursuant to Court of Chancery Rule 41(a), the action filed by BBC Capital Market, Inc. in C.A. No. 17743 be and hereby is dismissed with prejudice as to the parties listed below. Each party will bear its own court costs. It is further stipulated between BBC Capital Market, Inc., and Carver Bancorp, Inc., Deborah C. Wright, David N. Dinkins, Linda H. Dunham, Robert J. Franz, Pazel G. Jackson, Jr., Herman Johnson, David R. Jones (collectively, the "Carver Parties), and it is ordered by the Court, that: 1. Effective May 19, 2000, Kevin Cohee and Teri Williams will be appointed by Carver to serve (a) on the Carver Board of Directors (the "Carver Board") for a term expiring at the annual meeting of stockholders for the fiscal year ending March 31, 2002 and (b) on the Board of Directors of Carver Federal Savings Bank ("Carver Bank Board") for a coterminous period, irrespective of whether the Carver Bank Board is classified. 2. Carver will hold its annual meeting of stockholders for the fiscal year ending March 31, 2000 on or before March 24, 2001 (the "2000 Annual Meeting"). 3. In connection with the 2000 Annual Meeting, Carver will ensure that a sufficient number of directors are made eligible for election to the Carver Board so that the sum of (a) the number two and (b) the number of directorships up for election at the 2000 Annual Meeting will constitute a majority of the number of directors on the Carver Board as of the date of the 2000 Annual Meeting. The foregoing provision will apply under all circumstances including, without limitation, in the event that the holders of 2 Carver's Series A Preferred Stock and/or Series B Preferred Stock are permitted to designate one or more additional directors to the Carver Board at any time before the 2000 Annual Meeting pursuant to the terms of those securities. Dated: May , 2000 BOUCHARD MARGULES & FRIEDLANDER ----- ----------------------------------- By: Andre G. Bouchard Attorneys for Plaintiff BBC Capital Market, Inc. Dated: May , 2000 RICHARDS, LAYTON & FINGER ----- --------------------------------------- By: Jesse A. Finkelstein Attorneys for Defendants 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 Dated: May , 2000 YOUNG CONAWAY STARGATT & TAYLOR LLP ----- --------------------------------------- By: Martin S. Lessner Attorneys for Provender Opportunities Fund L.P. and Frederick O. Terrell Dated: May , 2000 MORRIS, NICHOLS, ARSHT & TUNNELL ----- --------------------------------------- By: Jon E. Abramczyk Attorneys for Morgan Stanley & Co., Incorporated IT IS SO ORDERED on this _______ day of __________, 2000. - --------------------------- Vice Chancellor EX-21.1 6 ex21-1.txt SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Carver Bancorp, Inc. (the "Company") is the holding company for Carver Federal Savings Bank (the "Bank"), a federally chartered stock savings bank. The Bank, in turn, wholly owns two subsidiaries, CSFB Credit Corp. and CSFB Realty Corp, both of which are incorporated in the State of New York. The Company is the sole stockholder of Alhambra Holding Corp., a Delaware corporation ("Alhambra"). Alhambra owns 80% of the common stock and 100% of the preferred stock of Alhambra Realty Corp., a Delaware corporation. EX-23.1 7 ex23-1.txt CONSENT OF MITCHELL & TITUS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders Carver Bancorp, Inc. We consent to the incorporation by reference in the annual report on Form 10-K of Carver Bancorp, Inc. and subsidiaries of our report dated June 29, 1999, relating to the consolidated statement of financial position of Carver Bancorp, Inc. and subsidiaries as of March 31, 1999, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended March 31, 1999 and 1998, which report appears in the March 31, 2000 annual report on Form 10-K of Carver Bancorp, Inc. and subsidiaries. New York, New York July 14, 2000 EX-23.2 8 ex23-2.txt CONSENT OF KPMG LLP 1 EXHIBIT 23.2 LETTERHEAD OF KPMG LLP To the Board of Directors 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 25, 2000, relating to the consolidated statement of financial condition of Carver Bancorp, Inc. and subsidiaries as of March 31, 2000, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended March 31, 2000, which report appears in the March 31, 2000, annual report on Form 10-K of Carver Bancorp, Inc. and subsidiaries. /s/ KPMG LLP July 5, 2000 EX-27.1 9 ex27-1.txt FINANCIAL DATA SCHEDULE
9 FINANCIAL DATA SCHEDULE FOR THE PERIOD AT AND ENDING MARCH 31, 2000 This schedule contains summary financial information extracted from the balance sheet and the statement of earnings of Carver Bancorp, Inc. for the period at and ending March 31, 2000 and is qualified in its entirety by reference to such financial statements. 12-MOS MAR-31-2000 MAR-31-2000 22,202,497 0 11,300,000 0 24,952,220 79,225,080 76,247,802 273,083,331 2,935,314 420,118,532 281,941,338 98,025,456 6,957,680 553,201 0 1,000 23,144 32,616,713 420,118,532 19,442,840 7,233,733 689,929 27,366,502 8,612,026 14,008,859 13,357,643 1,099,300 0 15,823,170 (1,025,406) (1,025,406) 0 0 (1,135,436) (.53) (.53) 7.12 2,126,000 0 0 0 4,020,000 2,569,000 385,000 2,935,000 2,935,000 0 0
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