-----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, IPzmTNmUBKCtAZwqLtYY6cHnU8UZOCvJF2/bN+A24iN4OKsT5I6l07u7ZUOmqluT o2/XZMA6lL3Fk665i8MNQQ== 0000950123-98-006626.txt : 19980716 0000950123-98-006626.hdr.sgml : 19980716 ACCESSION NUMBER: 0000950123-98-006626 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980714 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARVER BANCORP INC CENTRAL INDEX KEY: 0001016178 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 133904174 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13007 FILM NUMBER: 98666113 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 CARVER BANKCORP, 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-21487 CARVER BANCORP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3904174 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 75 WEST 125(TH) STREET, NEW YORK, NEW YORK 10027 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 876-4747 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE AMERICAN STOCK EXCHANGE (TITLE OF CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of May 31, 1998, there were 2,314,275 shares of Common Stock of the registrant issued and outstanding. The aggregate market value of the Registrant's common stock held by non-affiliates (based on the closing sales price of $13 5/8 per share of the registrant's Common Stock on May 29, 1998) was approximately $28.6 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12 and 13 hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 EXPLANATORY NOTE This Annual Report on Form 10-K contains forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Registrant that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, changes in general, economic and market, legislative and regulatory conditions, the development of an adverse interest rate environment that adversely affects the interest rate spread or other income anticipated from the Registrant's operations and investments, the ability of the Registrant to originate loans with attractive terms and acceptable credit quality, and the ability of the Registrant to realize cost efficiencies. ITEM 1. BUSINESS. GENERAL Carver Bancorp, Inc. Carver Bancorp, Inc. (the "Holding Company"), a Delaware corporation, is the holding company for Carver Federal Savings Bank (the "Bank" or "Carver Federal"), a federally chartered savings bank. Collectively, the Holding Company and the Bank are referred to herein as the "Company" or "Carver." On October 17, 1996, the Bank completed its reorganization into a holding company structure (the "Reorganization") and became the wholly owned subsidiary of the Holding Company. Pursuant to an Agreement and Plan of Reorganization, dated May 21, 1996, each share of the Bank's outstanding common stock was exchanged for one share of common stock of the Holding Company. At this time, the Holding Company conducts business as a unitary savings and loan holding company and the principal business of the Holding Company consists of the operation of its wholly-owned subsidiary, the Bank. The Holding Company's executive offices are located at the home office of the Bank at 75 West 125th Street, New York, New York 10027. The Holding Company's telephone number is (212) 876-4747. Carver Federal Savings Bank The Bank was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally chartered mutual savings and loan association, at 53 West 125th Street in New York City, at which time, the Bank obtained federal deposit insurance and became a member of the Federal Home Loan Bank of New York ("FHLB"). The Bank converted to a federal savings bank in 1986 and changed its name at that time to Carver Federal Savings Bank. On October 24, 1994, the Bank converted from mutual to stock form and issued 2,314,375 shares of its common stock, par value $0.01 per share. Carver Federal was founded to provide an African-American operated institution where residents of under-served communities could invest their savings and obtain credit. Carver Federal's principal business consists of attracting passbook and other savings accounts through its branch offices and investing those funds in mortgage loans and other investments permitted to federal savings banks. Beginning in the fiscal year which ended on March 31, 1997, Carver began a restructuring of its balance sheet placing primary emphasis on increasing its whole loan portfolio through direct lending, as well as the purchase of whole loans and decreasing its investment in mortgage-backed and other investment securities (the "Restructuring"). As a result of this effort, Carver's loan portfolio has substantially increased as a percentage of total assets. Therefore, Carver's future earnings will likely be derived more from direct lending and purchase activities than from investing in securities. Carver is also continuing its strategy of growth by leveraging its strong capital position through increased average borrowings to fund increases in average interest-earning assets. Based on asset size as of March 31, 1998, Carver Federal is the largest minority-run financial institution in the United States. LENDING ACTIVITIES General. Carver's principal lending activity is the origination of residential mortgage loans for the purpose of purchasing or refinancing one- to four-family and multi-family residential properties. Carver also originates or participates in loans for the construction or renovation of commercial property and residential 1 3 housing developments and occasionally originates permanent financing upon completion. In addition, Carver originates consumer loans secured by deposits, second mortgages on residential property, or automobiles, as well as unsecured personal loans and occasionally originates loans secured by commercial and nonresidential real estate. During the past fiscal year Carver has continued to increase its lending activities with emphasis placed on mortgage lending. Carver has continued to originate fixed-rate, one- to four-family mortgage loans to service its retail customers. To compliment this activity and as part of Carver's overall strategy to increase its loan portfolio as a percentage of total assets, Carver has continued to engage in loan purchases during the past fiscal year. At the close of the twelve month period ended March 31, 1998 ("fiscal 1998"), one- to four-family mortgage loans totaled $188.8 million, or 66.85%, of Carver's total gross loan portfolio, multi-family loans totaled $49.3 million or 17.46% of the total gross loans, non-residential real estate loans totaled $12.8 million or 4.53% of total gross loans and construction loans totaled $16.0 million or 5.66% of total gross loans. Net loans receivable increased by $77.0 million or 38.92% to $275.0 million at March 31, 1998, compared to $197.9 million at March 31, 1997. During the past fiscal year Carver increased its consumer lending with primary focus on indirect auto loans. At March 31, 1998 gross consumer loans increased by $7.0 million or 94.63% to $15.5 million or 5.50% of gross loans of which $4.3 million were auto loans. Carver's net loan portfolio as a percentage of total assets increased to 62.95% at March 31, 1998 from 46.72% at March 31, 1997. Loan Portfolio Composition. The following table sets forth selected data relating to the composition of Carver's loan portfolio by type of loan at the dates indicated. During fiscal 1998, multifamily real estate loans increased by $29.4 million to $49.3 million at March 31, 1998. This increase reflects the origination of approximately $31.2 million of multi-family real estate loans combined with the reclassification of approximately $7.0 million of loans formerly carried as non-residential offset by repayments of approximately $8.8 million. In addition, non-residential real estate loans decreased by $9.63 million or 42.94% during fiscal 1998, primarily reflecting the aforementioned reclassification. Student loans decreased by approximately $800,000 reflecting the sale of loans to the Student Loan Marketing Association. Other consumer loans (gross) increased by approximately $7.0 million or 94.63%. This increase primarily reflects a $1.7 million increase in personal loans and a $4.1 million increase in auto loans. See "Consumer Lending." 2 4
AT MARCH 31, --------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------ ------------------ ----------------- ----------------- ----------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT -------- ------- -------- ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Real estate loans: One- to four-family........ $188,761 66.85% $139,961 67.94% $58,547 69.23% $31,572 61.63% $32,302 59.93% Multi-family......... 49,289 17.46 19,936 9.68 2,490 2.94 2,165 4.23 2,384 4.42 Nonresidential....... 12,789 4.53 22,415 10.88 11,138 13.18 8,660 16.90 8,862 16.45 Construction......... 15,993 5.66 14,386 6.98 6,971 8.24 3,179 6.21 3,932 7.30 Consumer and commercial business loans: Savings accounts..... 998 .35 955 .46 1,011 1.20 1,099 2.14 1,209 2.24 Student.............. 174 .06 975 .48 1,162 1.37 1,346 2.63 1,457 2.70 Other(1)............. 14,364 5.09 7,380 3.58 3,244 3.84 3,209 6.26 3,749 6.96 -------- ------ -------- ------ ------- ------ ------- ------ ------- ------ $282,368 100.00% $206,008 100.00% $84,563 100.00% $51,230 100.00% $53,895 100.00% ====== ====== ====== ====== ====== Add: Premium on loans..... 1,555 1,805 882 366 537 Less: Loans in process(2)......... (4,752) (6,854) (1,406) (1,853) (1,911) Deferred fees and loan Discounts..... (1,080) (795) (225) (208) (233) Allowance for loan Losses............. (3,137) (2,246) (1,206) (1,075) (1,268) -------- -------- ------- ------- ------- Total.............. $274,954 $197,918 $82,608 $48,460 $51,020 ======== ======== ======= ======= =======
- --------------- (1) Other loans include second mortgage, home equity, personal, auto, credit cards and commercial business loans. (2) Represents undisbursed funds under construction loans. One- to Four-Family Residential Lending. Traditionally, Carver's lending activity has been the origination of loans secured by first mortgages on existing one- to four-family residences in Carver's market area. The Company periodically purchases portfolios of first mortgages on existing one- to four-family residences to augment originations. See "-- Purchases of Loans." Carver originates and purchases one- to four-family residential mortgage loans in amounts that range between $28,000 and $1,000,000 per loan. At March 31, 1998, $188.8 million, or 66.84%, of Carver's total loans were secured by one- to four-family residences. Carver's one-to four-family residential mortgage loan portfolio consisted of approximately 88.0% purchased loans and approximately 12.0% originated loans of which approximately 93.0% had adjustable rates and approximately 7.0% had fixed rates. Carver's one- to four-family residential mortgage loans generally are for terms of 25 to 30 years, amortized on a monthly basis, with principal and interest due each month. Residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms. These loans customarily contain "due-on-sale" clauses which permit the Bank to accelerate repayment of a loan upon transfer of ownership of the mortgaged property. Also, borrowers may refinance or prepay loans at their option without penalty. The Bank's lending policies generally limit the maximum loan-to-value ratio ("LTV") on one- to four-family residential mortgage loans secured by owner-occupied properties to 95% of the lesser of the appraised value or purchase price, with private mortgage insurance required on loans with LTV ratios in excess of 80%. The maximum LTV ratio on mortgage loans secured by non-owner-occupied properties is limited to 80%. Under a special loan program the LTV ratio may go to 100%. This special loan program consists of loans originated and sold to State of New York Mortgage Agency ("SONYMA") secured by detached single family homes purchased by first time home buyers. 3 5 Carver's fixed-rate, one- to four-family residential mortgage loans are underwritten in accordance with applicable guidelines and requirements for sale to Federal National Mortgage Association ("Fannie Mae") or SONYMA in the secondary market. The Bank originates fixed-rate loans that qualify for sale, and from time to time has sold such loans, to Fannie Mae since 1993 and to SONYMA since 1984. The Bank also originates, to a limited extent, loans underwritten according to Federal Home Loan Mortgage Corporation ("FHLMC") standards. Loans are sold with limited recourse, on a servicing retained basis to Fannie Mae and on a servicing released basis to SONYMA. All loans, whether held in portfolio or serviced after sale, are serviced by an outside sub-servicer. At March 31, 1998, the Company, through its sub-servicer, was servicing approximately $4.3 million of loans for Fannie Mae and FHLMC. Carver offers one-year, three-year, five/one and five/three-year adjustable-rate, one- to- four-family residential mortgage loans. These loans are indexed to the weekly average rate on the one-year, three-year and five-year U.S. Treasury securities, respectively, adjusted to a constant maturity (usually, one year), plus a margin of 275 basis points. The rates at which interest accrues on these loans are adjustable every one or three years, generally with limitations on adjustments of two percentage points per adjustment period and six percentage points over the life of the one-year adjustable-rate mortgage and five percentage points over the life of a three-year adjustable-rate mortgage. The retention of adjustable-rate loans in the Company's portfolio helps reduce the Bank's exposure to increases in prevailing market interest rates. However, there are unquantifiable credit risks resulting from potential increases in costs to borrowers in the event of upward repricing of adjustable-rate loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate loans may increase due to increases in interest costs to borrowers. Further, adjustable-rate loans which provide for initial rates of interest below the fully indexed rates may be subject to increased risk of delinquency or default as the higher, fully indexed rate of interest subsequently replaces the lower, initial rate. In order to mitigate such risk, the Bank qualifies borrowers at a rate equal to two percentage points above any discounted introductory rate on one year adjustable rate mortgage loans ("ARMs"), one percentage point above any discounted introductory rate on three-year ("ARMs") and at the discounted introductory rate on five/three ("ARMs"). In addition, although adjustable-rate loans allow the Bank to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limitations and the ability of borrowers to convert the adjustable-rate loans to fixed-rate. Accordingly, there can be no assurance that yields on the Bank's adjustable-rate loans will fully adjust to compensate for increases in the Bank's cost of funds. Finally, adjustable-rate loans increase the Bank's exposure to decreases in prevailing market interest rates, although decreases in the Bank's cost of funds would tend to offset this effect. Multi-Family Real Estate Lending. During fiscal 1998, multi-family real estate loans increased by $29.4 million or 147.24% to $49.3 million at March 31, 1998 compared to $19.9 million at March 31, 1997. See "--Loan Portfolio Composition." At March 31, 1998, multi-family loans totaled $49.3 million and comprised 17.35% of Carver's gross loan portfolio. The largest of such loans outstanding was a $4.2 million loan on a 230 unit, multi-family apartment building located in the Hempstead, Long Island, New York. This loan was performing at March 31, 1998. Carver increased its origination of multi-family real estate loans in order to benefit from the higher origination fees and interest rates, as well as, shorter terms to maturity and repricing, than could be obtained from one- to four-family mortgage loans. The Bank has emphasized a highly competitive multi-family mortgage loan product, which has enabled the Bank to expand its presence in the multi-family lending market in the New York City area. Carver offers competitive rates with flexible terms which make the product very attractive. These factors have combined for substantial growth in this loan category. Multi-family property lending, however, entails additional risks compared with one- to four-family residential lending. For example, such loans typically involve large loan balances to single borrowers or groups of related borrowers, the payment experience on such loans typically is dependent on the successful operation of the real estate project, and these risks can be significantly impacted by supply and demand conditions in the market for multi-family residential units. To obtain the highest asset quality in its multi-family lending activities Carver has established conservative underwriting guidelines. Carver originates the bulk of its multi-family residential mortgage loans 4 6 for apartment buildings of 15 units or more and 5-10 unit owner occupied residential properties. Carver originates multi-family mortgage loans for smaller buildings on a case by case basis. Pursuant to regulation, Carver's maximum loan amount for an individual loan is $4.6 million. In many cases on five to ten unit properties, the Company requires that the borrower reside in the subject property. Carver's multi-family product guidelines require: a low LTV, typically not in excess of 65%, and in the case of 5-10 unit properties, the maximum LTV does not generally exceed 75%. The Bank requires a high debt coverage ratio ("DCR"), which requires the properties to generate cash flow after expenses and allowances in excess of the principal and interest payment. Carver's underwriting guidelines stipulate a minimum DCR of 1.30% for all multi-family loans. The product is designed for, and the Company seeks to lend to borrowers that are experienced in real estate management. On a case by case basis, the Company will consider loan requests from inexperienced borrowers who are purchasing a multi-family property as their primary residence. In these instances the borrowers are required to take a Bank approved property management course prior to closing. Carver originates multi-family mortgage loans that generally amortize on the basis of a 15-, 20-, 25- or 30-year period but require a balloon payment after the first five years. If a ballooning multi-family mortgage has performed according to the loan agreement and the property value has not decreased, Carver's practice is to extend an opportunity for the borrower to roll-over the outstanding balance at the current rate for another five-year period. The Bank on a case by case basis originates fifteen-year fixed rate loans. Commercial Real Estate Lending (Nonresidential). At March 31, 1998, non-residential real estate mortgage loans (including loans to churches) totaled $25.7 million, or 9.0% of the gross loan portfolio. At March 31, 1998, the largest non residential loan outstanding was a $4.0 million loan secured by an office building located in the New York City borough of Manhattan. This loan was performing at March 31, 1998. Carver's nonresidential real estate lending activity is predominantly loans for the purpose of refinancing of commercial office, retail space and churches in its immediate service area. Commercial (non-residential) lending, however, entails additional risks compared with one- to four-family residential lending. For example, such loans typically involve large loan balances to single borrowers or groups of related borrowers and the payment experience on such loans typically is dependent on the successful operation of the real estate project. Carver originates commercial (non residential) real estate first mortgage loans in its service area. These mortgages are predominantly on the well established larger office buildings and retail properties in the communities in which the Bank's offices are located. In certain instances Carver originates loans which are secured by mixed use real estate. In such cases, Carver requires that the borrower maintain some form of occupancy at the subject property, either in the form of operating their primary business from the subject property or residing in the subject property. Carver's maximum LTV on commercial real estate mortgage loans is 65%. The minimum DCR is 1.30%. The Bank requires properties must be managed and operated by an established professional commercial real estate property manager. In addition, Carver requires the assignment of rents of all tenants leasing in the subject property. Church Lending. Historically, Carver has been a New York City area leader in the origination of loans to churches. At March 31, 1998, permanent loans to churches totaled $5.5 million, or approximately 2.0% of the Bank's gross loan portfolio. These loans generally have 5-, 7- or 10-year terms with 15-, 20- or 25-year amortization periods and a balloon payment due at the end of the term, and generally have no greater than a 60% loan- to-value ratio. The largest permanent church loan was a $1.7 million loan to a church located in Mt. Vernon, New York. This loan was performing according to the terms of the loan at March 31, 1998. The Bank provides construction financing for churches and generally provides permanent financing upon completion. Under the Bank's current loan policy, the maximum loan amount for such lending is $1.0 million, but larger loan amounts are considered on a case by case basis. Loans to churches generally average approximately $310,000. Loans secured by real estate owned by religious organizations generally are larger and involve greater risks than one- to four-family residential mortgage loans. Because payments on loans secured by such properties are often dependent on voluntary contributions by members of the church's congregation, repayment of such loans may be subject to a greater extent to adverse conditions in the economy. The Bank seeks to minimize these risks in a variety of ways, including reviewing the church's financial condition, limiting 5 7 the size of such loans and establishing the quality of the collateral securing the loan. The Bank determines the appropriate amount and type of security for such loans based in part upon the governance structure of the particular organization, the length of time the church has been established in the community and a cash flow analysis of the church to determine its ability to service the proposed loan. As a general matter, Carver will obtain a first mortgage on the underlying real property and personal guarantees of key members of the congregation and or key person life insurance on the pastor of the congregation and may also require the church to obtain key person life insurance on specific members of the church's leadership. Asset quality in the church loan category has been exceptional throughout Carver's history. Management believes that Carver remains a leading lender to churches in its market area. Construction Lending. The Bank currently originates construction loans primarily for the construction of churches, multi-family buildings, planned residential developments, community service facilities and affordable housing programs. Carver also offers construction loans to qualified developers for construction of one- to four-family residences in the Bank's market area. The Bank does not lend to private developers for speculative single-family housing construction. The Bank's construction loans generally have adjustable interest rates and are underwritten in accordance with the same standards as the Bank's mortgages on existing commercial properties, except the loans generally provide for disbursement in stages during a construction period from 12 to 24 months, during which period the borrower is required to make monthly payments of accrued interest on the outstanding loan balance. Construction loans generally have a maximum LTV of 70%. Borrowers must satisfy all credit requirements which would apply to the Bank's permanent mortgage loan financing for the subject property. While the Bank's construction loans generally require repayment in full upon the completion of construction, the Bank typically makes construction loans with the intent to convert to permanent loans following completion of construction. Construction financing generally is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. The ability of a developer to sell developed lots or completed dwelling units will depend on, among other things, demand, pricing, availability of comparable properties and economic conditions. The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers in the Bank's market area limiting the aggregate amount of outstanding construction loans and imposing a stricter LTV ratio requirement than required for one- to four-family mortgage loans. At March 31, 1998, the Bank had $16.0 (including $4.8 million of undisbursed funds) million in construction loans outstanding, comprising 5.66% of the Bank's gross loan portfolio. The largest construction loan was to a church for $2.0 million located in the New York City borough of Manhattan. At March 31, 1998, this loan was performing according to its terms. The second largest of such loans outstanding was a $1.8 million loan to a developer, secured by a residential development which contains 22 2-family homes which are substantially completed and ready for occupancy and are located in the New York City borough of Brooklyn. This loan was not performing at March 31, 1998. See "Asset Quality -- Nonperforming Assets." Consumer Lending. During fiscal 1998, Carver refocused and increased consumer lending through its wholly-owned subsidiary, CFSB Credit Corp. The Bank's consumer loans primarily consist of automobile loans, personal loans, home equity loans or second mortgages on single-family residences limited to 75% of the appraised value of the residence in the Company's market area and, to a lesser extent loans secured by deposit accounts at the Bank, government-guaranteed loans to finance higher education (most of which are sold in the secondary market). At March 31, 1998, the Bank had approximately $13.4 million in consumer loans, or 4.74% of the Bank's gross loan portfolio. Carver originates indirect automobile loans to consumers through Carver's agreements with automobile dealers. These loans are primarily secured by used automobiles. The 6 8 interest rate on such loans varies according to the credit of the consumer, and range from 10-14 1/2%. The average term on such loans is 48 months. At March 31, 1998, the Bank had $4.3 million of such loans. Carver grants loans secured by deposits for up to 90% of the amount of the deposit. The interest rate on these loans generally is 10.00%, and interest is billed on a quarterly basis. These loans are payable on demand, and the deposit account must be pledged as collateral to secure the loan. The Bank originates unsecured personal loans based on, but not limited to, an analysis of the borrowers credit history, income, and ability to repay. At March 31, 1998 the Bank had $896,000 in unsecured personal loans or .32% of the Bank's gross loan portfolio. Carver has participated in the Federal Family Education Loan Program since 1964. The Bank's student loans are guaranteed by the New York Higher Education Service Corporation, an independent agency of the State of New York. At March 31, 1998, the student loan portfolio totaled approximately $174,000. During fiscal 1998 the Bank sold approximately $801,000 in student loans to the Student Loan Marketing Association to refocus on more profitable operations. On March 1, 1996, Carver began its credit card operations subsidiary, CFSB Credit Corp., issuing both secured, unsecured and business Visa-cards and MasterCard-cards. The interest rate on these credit cards is generally 4.50% above the Wall Street Journal Published Prime Lending Rate. As of March 31, 1998 the Bank had over 2,500 cards issued with lines of credit outstanding and an aggregate outstanding balance of $4.3 million. During the fourth quarter of fiscal 1998 the Bank discontinued the direct issuance of unsecured credit cards except for a limited number of credit cards which were issued based on applications received by the Bank prior to the decision of the Board of Directors. The Company continues to issue secured credit cards. See "Asset Quality -- Nonperforming Assets." Consumer loans generally involve more risk than first mortgage loans. Repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance as a result of damage, loss or depreciation, and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Further, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered. These loans may also give rise to claims and defenses by a borrower against Carver, and a borrower may be able to assert claims and defenses against Carver which it has against the seller of the underlying collateral. In underwriting consumer loans, Carver considers the borrower's credit history, an analysis of the borrower's income, expenses and ability to repay the loan and the value of the collateral. The Bank's risks associated with consumer loans are further minimized by the modest amount of consumer loans made by the Bank that are not secured by certificates of deposit or otherwise guaranteed as to repayment. Commercial Business Loans. The Bank also makes a limited number of commercial business loans, which may be secured in full by passbook and/or certificate of deposit accounts. In addition, other commercial business loans were granted that may be secured in part by government guarantees or other collateral. From time to time, on a case-by-case basis, the Bank also makes unsecured commercial business loans. At March 31, 1998, the Bank had approximately $2.1 million in commercial business loans outstanding, of which the largest loan was to a church for $600,000 secured in full by a $600,000 certificate of deposit. This loan was performing according to the terms of the loan at March 31, 1998. Other loans were granted to individual businesses under the SBA program for $411,000 which have an 80% federal government guarantee. See "Asset Quality -- Nonperforming Assets." Loan Processing and Approval. Carver loan originations are derived from a number of sources, including referrals by realtors, builders, depositors, borrowers and mortgage brokers, as well as walk-in customers. Loans are originated by the Bank's personnel who receive either salary, salary plus commission or commissions. Loan application forms are available at each of the Bank's offices. Carver also originates mortgage loans from its loan center located next to the Bank's St. Albans office. 7 9 All applications are forwarded to the processing department located in the main office. Applications for all fixed-rate one- to four-family real estate loans are underwritten in accordance with Fannie Mae and SONYMA guidelines. All loan applications for other types of loans are underwritten in accordance with the Bank's own comparable guidelines. Upon receipt of a completed loan application from a prospective borrower, a credit report and verifications are ordered to verify specific information relating to the loan applicant's employment, income and credit standing. It is the Bank's policy to obtain an appraisal of the real estate intended to secure a proposed mortgage loan from a fee appraiser approved by the Bank. It is Carver's policy to record a lien on the real estate securing the loan and to obtain a title insurance policy which insures that the property is free of prior encumbrances. Borrowers must also obtain hazard insurance policies prior to closing and, when the property is in a flood plain as designated by the Department of Housing and Urban Development, paid flood insurance policies. Most borrowers are also required to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes and hazard insurance. The Board of Directors has the overall responsibility and authority for general supervision of Carver loan policies. The Board has established written lending policies for the Bank. The Bank's Chief Lending Officer has authority to approve all consumer loans below $50,000, the President has authority to approve such loans below $100,000, and the executive committee of the Board of Directors must approve loans at or above $100,000. The managing director of CFSB Credit Corp. has authority to approve credit limits up to $50,000. All mortgage loans that conform to FANNIE MAE standards and limits can be approved by the Chief Lending Officer. The Management Lending Committee composed of the President, the Chief Lending Officer and the Acting Chief Financial Officer, approves non-conforming loans up to $750,000. Loans above $750,000 must be approved by the executive committee of the Board of Directors, and loans above $1,000,000 must be approved by the full Board of Directors. It has been management's experience that substantially all approved loans are funded. Originations and Sales of Loans. Originations of one- to four-family real estate loans are generally within the New York City metropolitan area, although Carver does occasionally fund loans to other surrounding areas. All such loans, however, satisfy the Company's underwriting criteria regardless of location. In fiscal 1998, Carver increased its emphasis on multi-family and non residential lending. The Bank continues to offer one-to-four family fixed-rate mortgage loans in response to consumer demand but requires that such loans satisfy guidelines of either Fannie Mae or SONYMA to ensure subsequent sale in the secondary market as required to manage interest rate risk exposure. Under the loans-to-one-borrower limits of the Office of Thrift Supervision ("OTS"), with certain limited exceptions, loans and extensions of credit to a single or related group of borrowers outstanding at one time generally shall not exceed 15% of the unimpaired capital and surplus of a savings bank. Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired capital and surplus. At March 31, 1998, the Bank had no lending relationships in excess of the OTS loans-to-one-borrower limits. Purchases of Loans. To supplement its origination of one- to four-family first mortgage loans and consistent with its business strategy, during fiscal 1998, Carver purchased a total of $80.2 million performing one- to four-family adjustable rate mortgage loans which loans represented 28.40% of Carver's gross loan portfolio at March 31, 1998. The Company purchases loans in order to increase interest income and to manage its interest rate risk. Approximately $32.0 million were purchased for settlement on April 1, 1997 in connection with the Restructuring. The $80.2 million in performing one- to four-family adjustable rate mortgages purchased during the fiscal year consist of: $5.0 million of 1Year adjustable-rate mortgage loans ("ARMs"), $34.5 million of 3/1Year ARMs, $10.3 million of 5/1Year ARMs and $30.4 million of 7/1Year ARMs. The properties securing these loans are located in 34 states, none of which has loans secured by properties located therein in an amount in excess of 5% of Carver's total gross loan portfolio, with the exception of loans secured by properties located in California, which amount to approximately $61.4 million. At March 31, 1998, loans secured by properties located in California represented 21.74% of the Company's gross loans. 8 10 The following table sets forth certain information with respect to Carver's loan originations, purchases and sales during the periods indicated.
YEAR ENDED MARCH 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (DOLLARS IN THOUSANDS) Loans originated: One- to four-family................................. $ 7,235 $ 8,103 $ 8,162 Multi-family........................................ 31,248 15,138 1,720 Nonresidential...................................... 3,300 16,855 1,953 Construction........................................ 4,226 11,207 828 Consumer............................................ 8,999 4,775 734 ------- ------- ------- Total loans originated.............................. $55,008 $56,078 $13,397 ======= ======= ======= Loans purchased(1).................................... $80,175 $83,026 $26,333 ======= ======= ======= Loans sold(2)......................................... $ 1,459 $ -- $ 1,948 ======= ======= =======
- --------------- (1) Comprised solely of one- to four-family loans, with loans purchased with servicing released. (2) Comprised of one- to four-family loans and student loans, with loans sold with servicing released. Loans purchased by the Company entail certain risks not necessarily associated with loans the Company originates. The Company's purchased loans are generally acquired without recourse and in accordance with the Company's underwriting criteria for originations. In addition, the purchased loans have a variety of terms, including maturities, interest rate caps and indices for adjustment of interest rates that may differ from those offered at the time by the Company in connection with the loans the Company originates. Finally, the market areas in which the properties which secure the purchased loans are located are subject to economic and real estate market conditions that may significantly differ from those experienced in Carver's market area. There can be no assurance that economic conditions in these out of state areas will not deteriorate in the future resulting in increased loan delinquencies and loan losses among the loans secured by property in these areas. In an effort to reduce these risks, with its existing personnel and through the use of a quality control firm, the Bank has sought to ensure that purchased loans satisfy the Bank's underwriting standards and do not otherwise have a higher risk of collection or loss than loans originated by the Bank although specific rates and terms may differ from those offered by the Bank. A Company officer monitors the inspection and confirms the review of each purchased loan. The Company is dependent on the seller or originator of the loans for ongoing collection efforts and collateral review. Carver also requires appropriate documentation and further seeks to reduce its risk by requiring, in each buy/sell agreement a series of warranties and representations as to the underwriting standards and the enforceability of the legal documents. The warrant and representations remain in effect for the life of the loan. Any misrepresentation must be cured within ninety (90) days of discovery or trigger certain repurchase provisions in the buy/sell agreement. Interest Rates and Loan Fees. Interest rates charged by Carver on mortgage loans are primarily determined by competitive loan rates offered in its market area and minimum yield requirements for loans purchased by the Fannie Mae and SONYMA. Mortgage loan rates reflect factors such as prevailing market interest rate levels, the supply of money available to the savings industry and the demand for such loans. These factors are in turn affected by general economic conditions, the monetary policies of the federal government, including the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the general supply of money in the economy, tax policies and governmental budget matters. Carver charges fees in connection with loan commitments and originations, rate lock-ins, loan modifications, late payments and changes of property ownership and for miscellaneous services related to its loans. Loan origination fees are calculated as a percentage of the loan principal. The Company typically receives fees of between zero and three points (one point being equivalent to 1% of the principal amount of the loan) in connection with the origination of fixed-rate and adjustable-rate residential mortgage loans. The loan 9 11 origination fee, net of certain direct loan origination expenses, is deferred and accreted into income over the contractual life of the loan using the interest method. If a loan is prepaid, refinanced or sold, all remaining deferred fees with respect to such loan are taken into income at such time. In addition to the foregoing fees, Carver receives fees for servicing loans for others, which in turn generally are subserviced for Carver by a third party servicer. Servicing activities include the collection and processing of mortgage payments, accounting for loan repayment funds and paying real estate taxes, hazard insurance and other loan-related expenses out of escrowed funds. Loan servicing fees usually are charged as a percentage (usually, between 1/4% and 3/8%) of the outstanding balance of the loans being serviced. Income from these activities varies from period to period with the volume and type of loans originated, sold and purchased, which in turn is dependent on prevailing market interest rates and their effect on the demand for loans in the Company's market area. Loan Maturity Schedule. The following table sets forth information at March 31, 1998 regarding the dollar amount of loans maturing in Carver's portfolio, including scheduled repayments of principal, based on contractual terms to maturity. Demand loans, loans having no schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. The table below does not include any estimate of prepayments, which significantly shorten the average life of all mortgage loans and may cause Carver's actual repayment experience to differ from that shown below.
DUE AFTER DUE AFTER DUE AFTER DUE DURING THE YEAR ENDING 3 THROUGH 5 THROUGH 10 THROUGH DUE AFTER MARCH 31, 5 YEARS AFTER 10 YEARS AFTER 20 YEARS AFTER 20 YEARS AFTER --------------------------- MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1999 2000 2001 1998 1998 1998 1998 TOTAL ------- ------- ------- -------------- -------------- -------------- -------------- -------- (DOLLARS IN THOUSANDS) Real Estate loans: One- to four-family........ $ 9,632 $10,203 $ 6,700 $18,380 $ 4,359 $10,918 $128,569 $188,761 Multi-family......... 125 59 591 34,280 6,650 7,316 269 49,289 Nonresidential....... 216 783 437 3,699 3,165 4,489 -- 12,789 Construction......... 15,993 -- -- -- -- -- -- 15,993 Consumer and commercial business loans: Savings accounts..... 998 -- -- -- -- -- -- 998 Student.............. -- -- -- 174 -- -- -- 174 Other................ 3,481 6,189 4,593 -- -- -- -- 14,364 ------- ------- ------- ------- ------- ------- -------- -------- Total.............. $30,446 $17,333 $12,321 $56,533 $14,174 $22,723 $128,838 $282,368 ======= ======= ======= ======= ======= ======= ======== ========
The following table sets forth, at March 31, 1998, the dollar amount of loans maturing subsequent to the year ending March 31, 1999 which have predetermined interest rates and floating or adjustable interest rates.
PREDETERMINED FLOATING OR RATE ADJUSTABLE RATES TOTAL ------------- ---------------- -------- (DOLLARS IN THOUSANDS) Real estate loans: One-to four-family............................. $33,439 $145,690 $179,129 Multi-family................................... 47,596 1,568 49,164 Nonresidential................................. -- 12,573 12,573 Construction................................... -- -- -- Consumer and commercial business loans: Savings accounts............................... -- -- -- Student........................................ 174 -- 174 Other.......................................... 10,859 23 10,882 ------- -------- -------- Total....................................... $92,068 $159,854 $251,922 ======= ======== ========
10 12 Scheduled contractual principal repayments of loans do not necessarily reflect the actual life of such assets. The average life of long-term loans is substantially less than their contractual terms due to prepayments. In addition, due-on-sale clauses in mortgage loans generally give Carver the right to declare a conventional loan due and payable in the event, among other things, that a borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and tends to decrease when current mortgage loan market rates are substantially lower than rates on existing mortgage loans. ASSET QUALITY Nonperforming Assets. When a borrower fails to make a payment on a mortgage loan, immediate steps are taken by Carver's sub-servicers to have the delinquency cured and the loan restored to current status. With respect to mortgage loans, once the payment grace period has expired (in most instances 15 days after the due date), a late notice is mailed to the borrower within two business days, and a late charge is imposed, if applicable. If payment is not promptly received, the borrower is contacted by telephone, and efforts are made to formulate an affirmative plan to cure the delinquency. Additional calls are made by the 20th and 25th day of the delinquency. If a mortgage loan becomes 30 days in default, a letter is mailed to the borrower requesting payment by a specified date. If a loan becomes 60 days past due, Carver seeks to make personal contact with the borrower and also has the collateral property inspected. If a mortgage becomes 90 days past due, a letter is sent to the borrower demanding payment by a certain date and indicating that a foreclosure suit will be filed if the deadline is not met. If payment is still not made, management may pursue foreclosure or other appropriate action. When a borrower fails to make a payment on a consumer loan, immediately steps are taken by C.F.S.B. Credit Corp. sub-servicer to have the delinquency cured and the loan restored to current status. With the exception for indirect automobile loans, once the payment grace period has expired (10 days after the due date) a late notice is mailed to the borrower immediately and a late charge is imposed if applicable. If payment is not promptly received the borrower is contacted by telephone, and efforts are made to formulate an affirmative plan to cure the delinquency. If payment still has not been received, additional telephone calls are made by the 20th and 25th day of the delinquency. If a consumer becomes thirty days in default a letter is mailed to the borrower requesting payment by a specified date. If the loan becomes 60 days past due a second letter goes to the borrower and the co-borrower (if any) demanding payment by a specified date outlining the seriousness of the problem. If the loan becomes 90 days in default a final warning letter is sent to the borrower and the co-borrower, and the account is placed for collection. If an indirect automobile loan borrower fails to make a payment on a loan, immediate steps are taken by C.F.S.B. Credit Corp's sub-servicer to have the delinquency cured and the loan restored to current status. Once the payment grace period has expired (10 days after the due date), a late notice is mailed to the borrower immediately and a late charge is imposed if applicable. If payment is not promptly received the borrower is contacted by telephone, with a follow-up letter requesting payment. By the 25th day of the delinquency, if payment is not received, repossession efforts begin. Once the vehicle is repossessed, the borrower has a 30 day right of redemption. In order for the borrower to exercise this right, one of the following must occur: 1. The borrower must make all delinquent payments plus two advance monthly payments, coupled with repossession and storage charges. In addition, the borrower must show proof that the vehicle is fully insured and that C.F.S.B. Credit Corp. is the loss payee. 2. If C.F.S.B. Credit Corp. reasonably believes that something seriously affects the collectability of the monies owed under the installment loan note and the security agreement or the value of the collateral, the full unpaid balance plus accrued interest, late charges and other fees become immediately payable in order for the vehicle to be released to the borrower. 11 13 The following table sets forth information with respect to Carver's nonperforming assets at the dates indicated. Loans generally are placed on non-accrual status when they become 90 days past due.
AT MARCH 31, ---------------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Loans accounted for on a non-accrual basis(1) Real estate One- to four-family...................... $1,134 $1,791(2) $ 672 $ 520 $1,027 Multi-family............................. 258 -- 478 -- -- Nonresidential........................... -- 284 284 339 893 Construction............................. 3,089 954 521 521 -- Consumer and commercial.................. 1,087 256 79 152 283 ------ ------ ------ ------ ------ Total.................................. $5,568 $3,285 $2,034 $1,532 $2,203 ====== ====== ====== ====== ====== Accruing loans contractually past due 90 days or more: Real Estate One- to four-family...................... 1,049 279 4 -- -- Multi-family............................. -- 373 55 -- 85 Nonresidential........................... -- -- 217 -- 291 Construction............................. -- 2,069 611 -- 992 Consumer and commercial.................. 226 400 334 208 57 ------ ------ ------ ------ ------ Total.................................. $1,275 $3,121 $1,221 $ 208 $1,425 ====== ====== ====== ====== ====== Total of non-accrual and accruing 90 day past due loans........................... $ 6843 $6,406 $3,255 $1,740 $3,628 ------ ------ ------ ------ ------ Other nonperforming assets(3): Real estate: One- to four-family...................... 82 82 285 273 50 Multi-family............................. -- -- -- -- 140 Nonresidential........................... -- -- 29 29 -- ------ ------ ------ ------ ------ Total other nonperforming assets....... 82 82 314 302 190 ------ ------ ------ ------ ------ Total nonperforming assets............. $6,925 $6,488 $3,569 $2,041 $3,818 ====== ====== ====== ====== ====== Non-accrual and accruing 90 day past due loans to total loans.............................. 2.47% 3.15% 3.85% 4.20% 6.73% Nonperforming assets to total assets.......... 1.58% 1.53% 0.97% 0.56% 1.24% Troubled debt restructurings(4): Real estate Multi-family and commercial.............. $ 807 $ 413 $ -- $1,468 $1,758 ====== ====== ====== ====== ======
- --------------- (1) Non-accrual status denotes any loan where the delinquency exceeds 90 days past due and in the opinion of management the collection of additional interest is doubtful. After a careful review of individual loan history and related collateral by management, the loan may be designated as an accruing loan that is contractually past due 90 days or more or if in the opinion of management, the collection of additional interest is doubtful, the loan will remain in non-accrual status. Payments received on a non-accrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on assessment of the ability to collect on the loan. During the year ended March 31, 1998, gross interest income of $762,000 would have been recorded on loans accounted for on a non-accrual basis at the end of 12 14 the year if the loans had been current throughout the year. Instead, interest on such loans included in income during the period amounted to $285,000. (2) Includes $1.1 million of participation interests in pools of one-to four-family mortgage loans. These pools where created by the Thrift Association Service Corporation ("TASCO"), a lending consortium formed by New York State thrift institutions to facilitate their participation in larger real estate development projects, in loans secured by low-income housing projects located in New York City. (3) Other nonperforming assets represents property acquired by the Company in settlement of loans (i.e., through foreclosure or repossession or as an in-substance foreclosure). These assets are recorded at the lower of their fair value or the unpaid principal balance plus unpaid accrued interest of the related loans. (4) Troubled debt restructurings, as defined under Statement of Financial Accounting Standards ("SFAS") No. 15, are loans where the creditor has, for economic or legal reasons, granted concessions to the debtor that the creditor would not otherwise consider. At March 31, 1998, Carver had $807,000 in restructured loans. During the year ended March 31, 1998, the Bank would have recorded interest income of $93,000 on restructured loans had such loans been performing in accordance with the original terms. The Bank did not receive any interest income in accordance with the restructuring terms during fiscal 1998. During fiscal 1998, Carver experienced an increase in nonperforming assets. The increase is principally attributable to an increase in consumer and commercial loans accounted for as non-accruing coupled with an increase in one-to-four family loans accounted for as accruing contractually 90 days or more past due. Loans accounted for on a non-accrual basis increased by $2.3 million primarily due to the reclassification of one construction loan previously accounted for as an accruing loan contractually 90 days or more past due. Loans accounted for as accruing contractually 90 days or more past due decreased by $1.8 million primarily due to the aforementioned reclassification offset in part by an increase in one-to-four family mortgage loans. During fiscal 1998, non-accrual and accruing loans to total loans decreased from 3.15% at March 31, 1997 to 2.47% at March 31, 1998, in part reflecting Carver's increase in loans receivable during such period. See "Lending Activities -- General." During the fourth quarter of fiscal 1998 in response to an increase in non performing consumer loans, the Company resolved to discontinue the direct issuance of unsecured credit cards through the Bank's wholly-owned subsidiary, CFSB Credit Corp. During fiscal 1998 the Company established an allowance of $742,000 for the subsidiary and charged off approximately $368,000 in non performing loans. At March 31, 1998 the Bank maintained $374,000 specific allowance in connection with credit card lines. The Company has been proactive and instituted a reorganization of the consumer lending activities of the subsidiary. At March 31, 1998 the Bank was negotiating to sell the remaining credit card portfolio and enter into an agent bank relationship with an established credit card issuer and servicer. Carver serves as the lead lender for a construction loan for the development of 22 2-family units of affordable housing. The project is being developed under a New York City new homes program. The total development cost of the project is $4.8 million. The project has received a substantial subsidy from state and local housing agencies. The construction loan for the project is $2.9 million. The Bank holds a participation interest in the construction loan of $1.7 million (60%), of which $1.4 million has been disbursed, and has sold a non-recourse participation interest in the loan of $1.2 million (40%) to another New York area lender. At March 31, 1998, the loan was classified as non accruing reflecting certain construction delays in connection with the completion of the project. At March 31, 1998, construction on the project was more than 95% complete and there were 15 homes under contract of sale to prospective homeowners. Subsequent to March 31, 1998, the general contractor received certificates of occupancy for the 22 units and 4 homes have been delivered to purchasers resulting in a $416,000 reduction in the loan balance. Carver is in first position as a lien holder with an LTV based on the market value approach of 51% and believes that the remaining units will be sold and delivered. The Bank has established a specific reserve of 20% of the outstanding balance of the loan. Accordingly, Carver does not anticipate incurring a loss on the loan in excess of the provision. In 1991 Carver purchased an $893,000 participation in a $2.4 million loan to finance the first construction phase of a project to renovate a historic theater into office space. The lead lender on this project subsequently 13 15 went into receivership with the FDIC and the FDIC assumed the lead position on the loan. The first phase of the renovation has been completed and leased out, the borrower is currently in bankruptcy and rents are being paid into the bankruptcy court. The balance of the loan had been written down to $413,000, and this amount was classified as non-accrual because it was not performing according to its terms. During fiscal 1997, Carver negotiated the purchase of the FDIC's interest in the loan for $395,000. At March 31, 1998, the Bank held a 100% interest in the total original loan of $2.4 million and carried it on the books at a value of $807,000. The Company is currently involved in legal action to vacate the stay placed by the bankruptcy court on the collateral in order to proceed with legal recourse which may include foreclosing on the property. Asset Classification and Allowances for Losses. Federal regulations require savings institutions to classify their assets on the basis of quality on a regular basis. An asset is classified as "substandard" if it is determined to be inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. An asset is classified as "doubtful" if full collection is highly questionable or improbable. An asset is classified as "loss" if it is considered uncollectible, even if a partial recovery could be expected in the future. The regulations also provide for a "special mention" designation, described as assets which do not currently expose a savings institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention. Assets classified as substandard or doubtful require a savings institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, a savings institution must either establish specific allowances for loan losses in the amount of the portion of the asset classified loss, or charge off such amount. Federal examiners may disagree with a savings institution's classifications. If a savings institution does not agree with an examiner's classification of an asset, it may appeal this determination to the OTS Regional Director. At March 31, 1998, Carver Federal had $1.7 million of assets classified as substandard (including $82,000 of real estate acquired in settlement of loans), $3.9 million of assets classified as doubtful, and $870,000 of assets classified as loss. The aggregate of the aforementioned classifications and designations totaled $6.5 million, which represented 1.48% of the Bank's total assets and 21.02% of the Bank's tangible regulatory capital, at March 31, 1998. The OTS, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management has analyzed all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary. Federal examiners may disagree with the savings institution as to the appropriate level of the institution's allowance for loan losses. While management believes Carver has established its existing loss allowances in accordance with generally accepted accounting principles, there can be no assurance that regulators, in reviewing Carver's assets, will not require Carver to increase its loss allowance, thereby negatively affecting Carver's reported financial condition and results of operations. Carver's methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific loans as well as losses that have not been identified but can be expected to occur. Further, management reviews the ratio of allowances to total loans (including projected growth) and recommends adjustments to the level of allowances accordingly. Management conducts monthly reviews of the Bank's loans and evaluates the need to establish general and specific allowances on the basis of this review. In addition, management actively monitors Carver's asset quality and charges off loans and properties acquired in settlement of loans against the allowances for losses on loans and such properties when appropriate and provides specific loss reserves when necessary. Although management believes it uses the best information available to make determinations with respect to the allowances for losses, future 14 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 Board of Directors of the Bank has designated the Internal Auditor to perform quarterly reviews of the Bank's asset quality and his report is submitted to the Board for review and approval prior to implementation of any classification. In originating loans, Carver recognizes that credit losses will occur and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. It is management's policy to maintain a general allowance for loan losses based on, among other things, regular reviews of delinquencies and loan portfolio quality, character and size, the Company's and the industry's historical and projected loss experience and current and forecasted economic conditions. In addition, considerable uncertainty exists as to the future improvement or deterioration of the real estate markets in various states, or of their ultimate impact on Carver as a result of its purchased loans in such states. See "Purchases of Loans". Carver increases its allowance for loan losses by charging provisions for possible losses against the Company's income. General allowances are established by the Board of Directors on at least a quarterly basis based on an assessment of risk in the Bank's loans taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, the state of the real estate market and economic conditions generally. Specific allowances are provided for individual loans, or portions of loans, when ultimate collection is considered improbable by management based on the current payment status of the loan and the fair value or net realizable value of the security for the loan. At the date of foreclosure or other repossession or at the date the Company determines a property is an impaired property, the Company transfers the property to real estate acquired in settlement of loans at the lower of cost or fair value, less estimated selling costs. Fair value is defined as the amount in cash or cash-equivalent value of other consideration that a real estate parcel would yield in a current sale between a willing buyer and a willing seller. At March 31, 1998, the Bank held $82,000, net of loss allowance, in real estate acquired in settlement of loans. Any amount of cost in excess of fair value is charged-off against the allowance for loan losses. Carver records an allowance for estimated selling costs of the property immediately after foreclosure. Subsequent to acquisition, the property is periodically evaluated by management and an allowance is established if the estimated fair value of the property, less estimated costs to sell, declines. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of real estate is recorded. See Note 1 of Notes to Consolidated Financial Statements. 15 17 The following table sets forth an analysis of Carver's allowance for loan losses for the periods indicated.
YEAR ENDED MARCH 31, ---------------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Balance at beginning of period................ $2,246 $1,206 $1,075 $1,268 $1,597 Loans charged-off(1) Real estate One- to four-family...................... -- -- -- 43 21 Multi-family............................. -- -- -- -- 276 Commercial............................... -- 624 -- 481 -- Consumer................................. 367 75 -- 3 52 ------ ------ ------ ------ ------ Total charge-offs...................... 367 699 -- 527 349 ------ ------ ------ ------ ------ Recoveries: Construction................................ -- 50 19 -- 1 ------ ------ ------ ------ ------ Total recoveries....................... -- 50 19 -- 1 ------ ------ ------ ------ ------ Net loans charged-off/(Recoveries)............ 367 649 (19) 527 348 ------ ------ ------ ------ ------ Provision for losses........................ 1,259 1,689 150 334 19 ------ ------ ------ ------ ------ Balance at end of period.................... $3,138 $2,246 $1,206 $1,075 $1,268 ====== ====== ====== ====== ====== Ratio of net charge-offs to average loans outstanding.............................. .15% 0.69% --% 1.06% 0.65% Ratio of allowance to total loans............. 1.11% 1.09% 1.42% 2.10% 2.35% Ratio of allowance to nonperforming loans..... 45.30% 35.06% 37.05% 61.79% 34.95% Ratio of allowance to nonaccrual loans........ 56.34% 68.37% 59.29% 70.17% 57.56%
- --------------- (1) Loans are charged-off when management determines that they are uncollectible. The following table allocates the allowance for loan losses by asset category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
AT MARCH 31, ------------------------------------------------------------------------ 1998 1997 1996 1995 ------------------- ------------------- ------------------- ------ PERCENT OF PERCENT OF PERCENT OF LOANS IN LOANS IN LOANS IN EACH EACH EACH CATEGORY CATEGORY CATEGORY TO TOTAL TO TOTAL TO TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT ------ ---------- ------ ---------- ------ ---------- ------ (DOLLARS IN THOUSANDS) Loans: Real estate One- to four-family....... $1,691 53.91% $1,065 47.40% $ 165 69.23% $ 165 Multi-family........ 400 12.75 264 11.76 75 2.94 75 Nonresidential...... 111 3.54 414 18.44 616 13.18 616 Construction........ 340 10.84 212 9.44 15 8.24 15 Consumer, commercial and other................. 596 18.97 291 12.96 335 6.41 204 ------ ------ ------ ------ ------ ------ ------ Total allowance for loan losses................ $3,138 100.00% $2,246 100.00% $1,206 100.00% $1,075 ====== ====== ====== ====== ====== ====== ====== AT MARCH 31, -------------------------------- 1995 1994 ---------- ------------------- PERCENT OF PERCENT OF LOANS IN LOANS IN EACH EACH CATEGORY CATEGORY TO TOTAL TO TOTAL LOANS AMOUNT LOANS ---------- ------ ---------- (DOLLARS IN THOUSANDS) Loans: Real estate One- to four-family....... 64.80% $ 231 63.97% Multi-family........ 4.23 49 4.42 Nonresidential...... 16.90 782 16.44 Construction........ 6.20 15 7.30 Consumer, commercial and other................. 7.87 191 7.87 ------ ------ ------ Total allowance for loan losses................ 100.00% $1,268 100.00% ====== ====== ======
16 18 MORTGAGE-BACKED AND RELATED SECURITIES Carver maintains a significant portfolio of mortgage-backed securities in the form of Government National Mortgage Association ("GNMA") pass-through certificates, FANNIE MAE and FHLMC participation certificates and collateralized mortgage obligations ("CMOs"). GNMA pass-through certificates are guaranteed as to the payment of principal and interest by the full faith and credit of the U.S. Government, while FANNIE MAE and FHLMC certificates are each guaranteed by their respective agencies as to principal and interest. Mortgage-backed securities generally entitle Carver to receive a pro rata portion of the cash flows from an identified pool of mortgages. CMOs are securities issued by special purpose entities generally collateralized by pools of mortgage-backed securities. The cash flows from such pools are segmented and paid in accordance with a predetermined priority to various classes of securities issued by the entity. Carver's CMOs are primarily adjustable-rate CMOs issued by the Resolution Trust Corporation ("RTC"). Carver also invests in pools of loans guaranteed as to principal and interest by the Small Business Administration ("SBA"). Although mortgage-backed securities generally yield from 60 to 100 basis points less than whole loans, they present substantially lower credit risk and are more liquid than individual mortgage loans and may be used to collateralize obligations of the Company. Because Carver receives regular payments of principal and interest from its mortgage-backed securities, these investments provide more consistent cash flows than investments in other debt securities which generally only pay principal at maturity. Mortgage-backed securities also help the Bank meet certain definitional tests for favorable treatment under federal banking and tax laws. See "Regulation and Supervision -- Regulation of Federal Savings Associations -- QTL" and "Federal and State Taxation." The Bank seeks to avoid interest rate risk by investing in adjustable-rate mortgage-backed securities, which at March 31, 1998 constituted 55.73% of the mortgage-backed securities portfolio. Mortgage-backed securities, however, expose Carver to certain unique risks. In a declining rate environment, accelerated prepayments of loans underlying these securities expose Carver to the risk that it will be unable to obtain comparable yields upon reinvestment of the proceeds. In the event the mortgage-backed security has been funded with an interest-bearing liability with a maturity comparable to the original estimated life of the mortgage-backed security, the Bank's interest rate spread could be adversely affected. Conversely, in a rising interest rate environment, the Bank may experience a lower than estimated rate of repayment on the underlying mortgages, effectively extending the estimated life of the mortgage-backed security and exposing the Bank to the risk that it may be required to fund the asset with a liability bearing a higher rate of interest. The increased effort by Carver to originate and purchase loans has shifted the emphasis away from the use of mortgage-backed securities as the Company's primary interest earning asset. Over the last fiscal year repayments received from mortgage-backed securities have been reinvested in residential mortgage loans. This has resulted in a significant decrease in Carver's investment in mortgage-backed securities and a reduction in the percentage of mortgage-backed securities to total assets. At March 31, 1998, mortgage-backed securities constituted 27.32% of total assets, as compared to 46.42% at March 31, 1997, and 54.58% at March 31, 1996. 17 19 The following table sets forth the carrying value of Carver's investments at the dates indicated.
YEAR ENDED MARCH 31, -------------------------------- 1998 1997 1996 -------- -------- -------- (DOLLARS IN THOUSANDS) HELD TO MATURITY GNMA..................................................... $ 8,855 $ 11,689 $ 13,297 FANNIE MAE............................................... 36,685 41,344 46,246 FHLMC.................................................... 35,901 44,890 55,420 SBA...................................................... 1,770 2,249 2,603 RTC...................................................... 6,565 8,354 11,137 FHLMC.................................................... 1,340 1,690 1,703 FANNIE MAE............................................... -- -- -- Other.................................................... -- 637 699 -------- -------- -------- Total CMOs............................................ 7,905 10,681 13,539 -------- -------- -------- Total Held to Maturity........................... 91,116 110,853 131,105 -------- -------- -------- AVAILABLE-FOR-SALE: GNMA..................................................... 15,192 16,907 23,058 FANNIE MAE............................................... 8,541 9,176 10,433 FHLMC.................................................... 4,674 6,622 8,239 -------- -------- -------- Total Available-for-Sale.............................. 28,407 32,705 41,730 -------- -------- -------- Total Mortgage-Backed Securities................. $119,523 $143,558 $172,836 ======== ======== ========
- --------------- (1) Equity securities were classified as available-for-sale at March 31, 1998, 1997 and 1996. The following table sets forth the scheduled maturities, carrying values, market values and average yields for Carver's mortgage-backed securities at March 31, 1998. Expected maturities will differ from contractual maturities due to scheduled repayments and because borrowers may have the right to call or prepay obligations with or without prepayment penalties. The following table does not take into consideration the effects of scheduled repayments or the effects of possible prepayments.
ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS TOTAL INVESTMENT PORTFOLIO ------------------ ------------------ -------------------- ----------------------------- CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE VALUE YIELD VALUE YIELD VALUE YIELD VALUE VALUE YIELD -------- ------- -------- ------- --------- -------- -------- -------- ------- (DOLLARS IN THOUSANDS) GMNA(1).............. $ -- --% $ -- --% $ 24,047 6.61% $ 24,047 $ 24,119 6.61% FANNIE MAE(2)........ -- -- 9,816 6.12 35,410 6.50 45,226 44,904 6.31 FHLMC(3)............. 6,514 6.99 1,780 6.96 32,282 6.58 40,576 40,046 6.84 SBA.................. -- -- -- -- 1,770 6.62 1,770 1,807 6.62 CMO: RTC................ -- -- -- -- 6,564 6.60 6,564 6,447 6.60 FHLMC.............. 1,340 6.42 -- -- -- -- 1,340 1,329 6.42 ------- ------- -------- -------- -------- TOTAL............ $ 7,854 $11,596 $100,073 $119,523 $118,652 ======= ======= ======== ======== ========
- --------------- (1) Includes $15.2 million in securities available for sale. (2) Includes $8.5 million in securities available for sale. (3) Includes $4.7 million in securities available for sale. 18 20 INVESTMENT ACTIVITIES Carver is permitted under federal law to make certain investments, including investments in securities issued by various federal agencies and state and municipal governments, deposits at the FHLB, certificates of deposit in federally insured institutions, certain bankers' acceptances and federal funds. The Bank may also invest, subject to certain limitations, in commercial paper having one of the two highest investment ratings of a nationally recognized credit rating agency, and certain other types of corporate debt securities and mutual funds. Federal regulations require the Bank to maintain an investment in FHLB stock and a minimum amount of liquid assets which may be invested in cash and specified securities. From time to time, the OTS adjusts the percentage of liquid assets which savings banks are required to maintain. For additional information, see "Regulation and Supervision -- Regulation of Federal Savings Associations -- Liquidity." During the fourth quarter of fiscal 1997, Carver sold a significant portion of its mutual fund portfolio. On April 1, 1997, the Bank sold the remaining $49.0 million that it held in mutual funds in order to purchase higher yielding mortgage loans pursuant to Carver's strategy to restructure the balance sheet. These actions were in accordance with the Company's investment strategy which was modified in the year ended March 31,1996 ("fiscal 1996") and fiscal 1997. 19 21
AT MARCH 31, -------------------------- 1998 1997 1996 ------ ------- ------- (IN THOUSANDS) HELD TO MATURITY: Debt securities: U.S. government and agency securities..................... $ -- $ 1,675 $ 8,937 Other investments FHLB stock................................................ 5,755 5,535 3,120 ------ ------- ------- Total held to maturity................................. 5,755 7,210 12,057 ------ ------- ------- AVAILABLE FOR SALE: Equity securities: Capstone Government Investment Fund....................... -- 49,008 63,619 Federated ARMs Fund -- Institutional Shares............... -- -- 6,789 Asset Management Fund Adjustable-Rate Mortgage Portfolio Share Funds............................................ -- 100 99 Common and preferred stocks............................... -- 2,050 2,090 Other investments: Federal funds sold........................................ 3,000 -- 6,800 ------ ------- ------- Total available for sale............................... 3,000 51,158 79,397 ------ ------- ------- Total investment securities....................... $8,755 $58,368 $91,454 ====== ======= =======
- --------------- (1) Equity securities were classified as available-for-sale at March 31, 1998, 1997 and 1996. The following table sets forth the scheduled maturities, carrying values, market values and average yields for Carver's investments at March 31, 1998.
ONE YEAR OR LESS ONE TO FIVE YEARS TOTAL INVESTMENT PORTFOLIO ------------------ ------------------ --------------------------- CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE VALUE YIELD VALUE YIELD VALUE VALUE YIELD -------- ------- -------- ------- -------- ------ ------- (DOLLARS IN THOUSANDS) U.S. government and Agency securities..................... $ -- --% $-- --% $ -- $ -- --% Federal funds sold............... 3,000 5.25 -- -- 3,000 3,000 5.25 Equity securities................ -- -- -- -- -- -- -- Common and preferred stock....... -- -- -- -- -- -- -- FHLB stock....................... 5,755 6.35 -- -- 5,755 5,755 6.35 ------ -- ------ ------ Total investments........... $8,755 $0 $8,755 $8,755 ====== == ====== ======
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS General. Deposits are the primary source of Carver's funds for lending and other investment purposes. In addition to deposits, Carver derives funds from loan principal repayments, interest payments and maturing investments. Loan repayments and interest payments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by prevailing market interest rates and money market conditions. Borrowing may be used to supplement the Company's available funds, and from time to time the Company has borrowed funds from the FHLB and through reverse repurchase agreements. Deposits. Carver attracts deposits principally from within its market area by offering a variety of deposit instruments, including passbook and statement accounts and certificates of deposit which range in term from 91 days to seven years. Deposit terms vary, principally on the basis of the minimum balance required, the length of time the funds must remain on deposit and the interest rate. Carver also offers Individual Retirement Accounts ("IRAs"). Carver's policies are designed primarily to attract deposits from local residents through 20 22 the Company's branch network rather than from outside the Company's market area. Carver also holds deposits from various governmental agencies or authorities. Carver does not accept deposits from brokers due to the interest rate sensitivity of such deposits. The Bank's interest rates, maturities, service fees and withdrawal penalties on deposits are established by management on a periodic basis. Management determines deposit interest rates and maturities based on the Company's funds acquisition and liquidity requirements, the rates paid by the Company's competitors, the Company's growth goals and applicable regulatory restrictions and requirements.
WEIGHTED PERCENTAGE AVERAGE MINIMUM MINIMUM AGGREGATE OF TOTAL INTEREST RATE TERM CATEGORY BALANCE BALANCE DEPOSITS - ------------- ------------ -------- ------- --------- ---------- (IN THOUSANDS) 2.23% None NOW Accounts $ 500 $ 19,230 6.99% 2.50 None Savings and club 300 145,448 52.91 3.22 None Money market savings accounts 500 21,496 7.82 -- None Other demand accounts 500 9,687 3.52 -------- ------ Total Savings accounts 195,861 71.25 -------- ------ CERTIFICATES OF DEPOSIT ----------------------------- 4.13 91 days Fixed-term, fixed rate 2,500 2,199 .80 4.58 182-365 days Fixed-term, fixed rate 2,500 14,384 5.23 5.33 1-2 years Fixed-term, fixed rate 1,000 26,706 9.72 5.36 2-3 years Fixed-term, fixed rate 1,000 11,899 4.33 4.40 3-4 years Fixed-term, fixed rate 1,000 18 .01 4.55 4-5 years Fixed-term, fixed rate 1,000 11 .00 5.77 5-10 years Fixed-term, fixed rate 500 16,634 6.05 5.80 30 days Negotiable 80,000 7,182 2.61 -------- ------ Total Certificates of Deposit 79,033 28.75 -------- ------ Total Deposits $274,894 100.00% ======== ======
The following table sets forth the change in dollar amount of deposits in the various types of accounts offered by Carver between the dates indicated.
BALANCE AT PERCENTAGE BALANCE AT PERCENTAGE BALANCE AT PERCENTAGE MARCH 31, OF TOTAL INCREASE MARCH 31, OF TOTAL INCREASE MARCH 31, OF TOTAL 1998 DEPOSITS (DECREASE) 1997 DEPOSITS (DECREASE) 1996 DEPOSITS ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Savings and club.......... $145,448 52.91% $2,495 $142,953 53.65% $1,080 $141,873 55.21% Money market savings...... 21,496 7.82 418 21,078 7.91 1,634 19,444 7.57 NOW and demand accounts... 28,917 10.52 2,662 26,255 9.85 3,293 22,962 8.94 Certificates of deposit... 79,033 28.75 2,423 76,185 28.59 3,512 72,673 28.28 -------- ------ ------ -------- ------ ------ -------- ------ Total deposits........ $274,894 100.00% $8,423 $266,471 100.00% $9,519 $256,952 100.00% ======== ====== ====== ======== ====== ====== ======== ======
21 23 The following table sets forth the average balances and interest rates based on month end balances for certificates of deposit and non-certificate accounts as of the dates indicated.
YEAR ENDED MARCH 31, ----------------------------------------------------------------- 1998 1997 1996 ------------------- ------------------- ------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE -------- ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Non-interest-bearing demand.... $ 8,625 0.00% $ 4,774 0.00% $ 4,761 0.00% Savings and club............... 144,466 2.49 142,410 2.49 140,204 2.50 Certificates................... 76,990 5.13 74,583 5.15 74,060 5.36 Money market savings accounts..................... 21,514 3.22 20,398 3.23 18,770 3.19 NOW accounts................... 18,725 1.89 19,909 1.56 15,539 2.02 -------- -------- -------- Total..................... $270,320 $262,074 $253,334 ======== ======== ========
The following table sets forth time deposits in specified weighted average interest rate categories as of the dates indicated.
AT MARCH 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (DOLLARS IN THOUSANDS) 2%-3.99%.............................................. $ -- $ 1 $ 1,686 4%-5.99%.............................................. 78,958 61,674 58,950 6%-7.99%.............................................. 75 14,510 12,037 8%-9.99%.............................................. -- -- -- ------- ------- ------- Total............................................ $79,033 $76,185 $72,673 ======= ======= =======
The following table sets forth the amount and maturities of time deposits in specified weighted average interest rate categories at March 31, 1998.
AMOUNT DUE ---------------------------------------------- LESS THAN AFTER RATE ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL ---- --------- --------- --------- ------- ------- (DOLLARS IN THOUSANDS) 2%-3.99%........................ $ -- $ -- $ -- $ -- $ -- 4%-5.99%........................ 23,765 26,704 11,899 16,590 23,765 6%-7.99%........................ 2 73 75 ------- ------- ------- ------- ------- Total...................... $23,765 $26,706 $11,899 $16,663 $79,033 ======= ======= ======= ======= =======
The following table indicates the amount of Carver's certificates of deposit of $100,000 or more by time remaining until maturity as of March 31, 1998.
CERTIFICATES MATURITY PERIOD OF DEPOSIT --------------- -------------- (IN THOUSANDS) Three months or less........................................ $ 3,678 Three through six months.................................... 3,572 Six through 12 months....................................... 1,582 Over 12 months.............................................. $ 2,793 ------- Total.................................................. $11,625 =======
22 24 The following table sets forth Carver's deposit reconciliation for the periods indicated.
YEAR ENDED MARCH 31, -------------------------------- 1998 1997 1996 -------- -------- -------- (DOLLARS IN THOUSANDS) Deposits at beginning of period............................ $266,471 $256,952 $248,446 Net increase (decrease) before interest credited........... (173) 1,137 134 Interest credited.......................................... 8,596 8,382 8,372 -------- -------- -------- Deposits at end of period.................................. $274,894 $266,471 $256,952 ======== ======== ========
Borrowing. Savings deposits historically have been the primary source of funds for Carver's lending, investment and general operating activities. Carver is authorized, however, to use advances and securities sold under agreement to repurchase ("Repos") from the FHLB and approved primary dealers to supplement its supply of funds and to meet deposit withdrawal requirements. The FHLB functions as a central bank providing credit for savings institutions and certain other member financial institutions. As a member of the FHLB system, Carver is required to own stock in the FHLB and is authorized to apply for advances. Advances are made pursuant to several different programs, each of which has its own interest rate and range of maturities. Advances from the FHLB are secured by Carver's stock in the FHLB and a blanket pledge of Carver's mortgage loan and mortgage-backed securities portfolios. One of the elements of Carver's investment strategy is to leverage the balance sheet by increasing the level of advances and Repos and investing borrowed funds into adjustable rate mortgage loans. The Bank seeks to match as closely as possible the term of borrowing with the repricing cycle of the mortgage loans on the balance sheet. To accomplish the leveraging objective the Bank increased borrowing during fiscal 1998 and reinvested the proceeds in primarily adjustable rate mortgages. At March 31, 1998, Carver had $36.7 million in advances and $87.0 million in securities sold under agreements to repurchase outstanding. The following table sets forth certain information regarding Carver's short-term borrowing at the dates and for the periods indicated:
AT OR FOR THE YEAR ENDED MARCH 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (DOLLARS IN THOUSANDS) Amounts outstanding at end of period: FHLB advances............................................... $36,742 $45,400 $25,400 Securities sold under agreements to repurchase.............. 87,020 74,335 47,000 Weighted average rate paid at period end: FHLB advances............................................... 5.82% 6.93% 6.84% Securities sold under agreements to repurchase.............. 5.85% 5.67% 5.60% Maximum amount of borrowing outstanding at any month end: FHLB advances............................................... $39,744 $45,400 $62,400 Securities sold under agreements to repurchase.............. 93,673 74,335 47,000 Approximate average amounts outstanding for period: FHLB advances............................................... $31,273 $26,250 $45,538 Securities sold under agreements to repurchase.............. 78,310 42,398 25,654 Approximate weighted average rate paid during period (1): FHLB advances............................................... 5.96% 6.05% 7.52% Securities sold under agreements to repurchase.............. 5.79% 5.61% 6.36%
- --------------- (1) The approximate weighted average rate paid during the period was computed by dividing the average amounts outstanding into the related interest expense for the period. 23 25 SUBSIDIARY ACTIVITIES As a federally chartered savings institution, Carver Federal is permitted to invest up to 2% of its assets in subsidiary service corporations plus an additional 1% in subsidiaries engaged in specified community purposes. At March 31, 1998, the net book value of the Bank's service corporations investments was $601,000 which includes Carver's investment in a captive insurance corporation. Carver Federal is also authorized to make investments of any amount in operating subsidiaries that engage solely in activities that federal savings institutions may conduct directly. On March 8, 1995, the Bank formed CFSB Realty Corp. as a wholly-owned subsidiary which holds real estate acquired through foreclosure pending eventual disposition. At March 31, 1998, this subsidiary had $317,000 in total capital and net operating expenses of $15,000. On September 19, 1996, the Bank formed CFSB Credit Corp., ("CCC") as a wholly-owned subsidiary to undertake Carver's credit card issuance. During the fourth quarter of fiscal 1997, the Bank transferred all consumer lending activities to CCC. During the fourth quarter of fiscal 1998, in response to delinquencies in the credit card portfolio the Board of Directors directed the discontinuance of the direct issuance of unsecured credit cards. At March 31, 1998, this subsidiary had negative equity of approximately $2,000 in total capital and net operating expense of $1,274,000, and a revolving line of credit of $15.0 million. MARKET AREA AND COMPETITION General. The Company's primary market area for deposits consists of the areas served by its seven branches and the Bank considers its lending market to include Bronx, Kings, New York, Queens and Richmond counties, together comprising New York City, and Lower Westchester and Nassau Counties, New York. The Company has entered into on agreement to sell its branch located in Nassau County, New York. See "-- Branch Sale Agreement." Carver's branches are primarily located in economically disadvantaged areas of New York City which have traditionally been characterized by high unemployment, low income and low levels of home ownership. The majority of the Company's branches are located in areas where the number of persons below the poverty line is greater than 27% of the population and constitutes as much as 41% of the population in some areas according to 1990 census figures. The number of persons on some form of public assistance exceeds 30% of the population in these areas according to the same census. Although the New York metropolitan area enjoys a fairly diversified economy, the manufacturing base which has traditionally provided jobs to residents of the communities served by Carver has been steadily shrinking and the other sectors of the economy have failed to provide comparable employment opportunities. Although Carver's branches are located in areas that have been historically underserved by other financial institutions, Carver is facing increasing competition for deposits and residential mortgage lending in its immediate market areas. Management believes that this competition has become more intense as a result of an increased examination emphasis by federal banking regulators on financial institutions' fulfillment of their responsibilities under the Community Reinvestment Act ("CRA"). Many of Carver's competitors have substantially greater resources than Carver and offer a wider array of financial services and products than Carver. At times, these larger commercial banks and thrifts may offer below market interest rates on mortgage loans and above market interest rates for deposits. These pricing concessions combined with a larger presence in the New York market add to the challenges Carver faces in expanding its current market share. The Bank believes that it can compete with these institutions by offering a competitive range of services as well as through the personalized attention and community commitment which has always been Carver's hallmark. Branch Sale Agreement. On January 28, 1998, the Company announced that it had entered into a definitive agreement to sell the Bank's branch office located in Roosevelt, New York to City National Bank of New Jersey. The Roosevelt branch office is located in Nassau County and has deposits of approximately $10 million. Due to certain regulatory issues, the transaction, that was expected to close by March 31, 1998, has not yet been consummated. EMPLOYEES As of March 31, 1998, Carver had 108 full-time equivalent employees, none of whom was represented by a collective bargaining agreement. 24 26 REGULATION AND SUPERVISION GENERAL The Bank is subject to extensive regulation, examination, and supervision by the OTS, as its chartering agency, and the FDIC, as its deposit insurer. The Bank's deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") administered by the FDIC, and it is a member of the FHLB. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, and it must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The OTS and the FDIC conduct periodic examinations to assess the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings association can engage and is intended primarily for the protection of the insurance fund and depositors. The Company, as a savings association holding company, is required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and of the Securities and Exchange Commission (the "SEC") under the federal securities laws. The OTS and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC, or the Congress, could have a material adverse impact on the Company, the Bank, and the operations of both. The following discussion is intended to be a summary of the material statutes and regulations applicable to savings associations, and it does not purport to be a comprehensive description of all such statutes and regulations. REGULATION OF FEDERAL SAVINGS ASSOCIATIONS Business Activities. The Bank derives its lending and investment powers from the Home Owner's Loan Act, as amended ("HOLA"), and the regulations of the OTS thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. These investment powers are subject to various limitations, including (a) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four highest rating categories; (b) a limit of 400% of an association's capital on the aggregate amount of loans secured by non-residential real estate property; (c) a limit of 20% of an association's assets on commercial loans, with the amount of commercial loans in excess of 10% of assets being limited to small business loans; (d) a limit of 35% of an association's assets on the aggregate amount of consumer loans and acquisitions of certain debt securities; (e) a limit of 5% of assets on nonconforming loans (loans in excess of the specific limitations of HOLA); and (f) a limit of the greater of 5% of assets or an association's capital on certain construction loans made for the purpose of financing what is or is expected to become residential property. Loans to One Borrower. Under HOLA, savings associations are generally subject to the same limits on loans to one borrower as are imposed on national banks. Generally, under these limits, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral. Such collateral is defined to include certain debt and equity securities and bullion, but generally does not include real estate. At March 31, 1998, the Bank's limit on loans to one borrower was $4.6 million. At March 31, 1998, the Bank's largest aggregate amount of loans to one borrower was $4.2 million and the second largest borrower had an aggregate balance of $4.0 million. 25 27 QTL Test. HOLA requires a savings association to meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" in at least nine months of the most recent twelve-month period. "Portfolio assets" means, in general, an association's total assets less the sum of (a) specified liquid assets up to 20% of total assets, (b) certain intangibles, including goodwill and credit card rights, and (c) the value of property used to conduct the association's business. "Qualified thrift investments" includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage backed and related securities, and consumer loans. At March 31, 1998, the Bank maintained approximately 81.88% of its portfolio assets in qualified thrift investments. The Bank had also met the QTL test in each of the prior 12 months and was, therefore, a qualified thrift lender. A savings association that fails the QTL test must either operate under certain restrictions on its activities or convert to a bank charter. The initial restrictions include prohibitions against (a) engaging in any new activity not permissible for a national bank, (b) paying dividends not permissible under national bank regulations, (c) obtaining new advances from any FHLB, and (d) establishing any new branch office in a location not permissible for a national bank in the association's home state. In addition, within one year of the date a savings association ceases to meet the QTL test, any company controlling the association would have to register under, and become subject to the requirements of, the Bank Holding Company Act of 1956 ("BHC Act"), as amended. If the savings association does not re-qualify under the QTL test within the three-year period after it failed the QTL test, it would be required to terminate any activity and to dispose of any investment not permissible for a national bank and would have to repay as promptly as possible any outstanding advances from an FHLB. A savings association that has failed the QTL test may re-qualify under the QTL test and be free of such limitations, but it may do so only once. Capital Requirements. The OTS regulations require savings associations to meet three minimum capital standards: a tangible capital ratio requirement of 1.5% of total assets as adjusted under the OTS regulations, a leverage ratio requirement of 3% of core capital to such adjusted total assets, and a risk-based capital ratio requirement of 8% of core and supplementary capital to total risk-based assets. In determining the amount of risk weighted assets for purposes of the risk-based capital requirement, a savings association must compute its risk-based assets by multiplying its assets and certain off balance sheet items by riskweights, which range from 0% for cash and obligations issued by the United States Government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulation based on the risks OTS believes are inherent in the type of asset. The OTS and the federal banking regulators have proposed amendments to their minimum capital regulations to provide that the minimum leverage capital ratio for a depository institution that has been assigned the highest composite rating of 1 under the Uniform Financial Institutions Rating System will be 3% and that the minimum leverage capital ratio for any other depository institution will be 4%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution. Tangible capital is defined, generally, as common stockholder's equity (including retained earnings), certain noncumulative perpetual preferred stock and related earnings, minority interests in equity accounts of fully consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital is defined similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital currently includes cumulative preferred stock, longterm perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, and the allowance for loan and lease losses. The allowance for loan and lease losses included in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets, and the amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital. The OTS has adopted regulations to require a savings association to account for interest rate risk when determining its compliance with the risk-based capital requirement, a savings association with "above normal" interest rate risk is required to deduct a portion of its total capital to account for any "above normal" interest rate risk. A savings association's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and 26 28 offbalance sheet contracts) resulting from a hypothetical 2% increase or decrease in market rates of interest, divided by the estimated economic value of the association's assets, as calculated in accordance with guidelines set forth by the OTS. At the times when the 3 month Treasury bond equivalent yield falls below 4%, an association may compute its interest rate risk on the basis of a change equal to half of that Treasury rate rather than on the basis of 2%. A savings association whose measured interest rate risk exposure exceeds 2% would be considered to have "above normal" risk. The interest rate risk component is an amount equal to half of the difference between the association's measured interest rate risk and 2%, multiplied by the estimated economic value of the association's assets. That dollar amount is deducted from an association's total capital in calculating compliance with its risk based capital requirement. Any required deduction for interest rate risk becomes effective on the last day of the third quarter following the reporting date of the association's financial data on which the interest rate risk was computed. The OTS has indefinitely deferred the implementation of the interest rate risk component in the computation of an institution's risk-based capital requirements. The OTS continues to monitor the interest rate risk of individual institutions and retains the right to impose additional capital requirements on individual institutions. At March 31, 1998, the Bank met each of its capital requirements. The table below presents the Bank's regulatory capital as compared to the OTS regulatory capital requirements at March 31, 1998:
CAPITAL BANK REQUIREMENTS EXCESS CAPITAL ------- ------------ -------------- (IN THOUSANDS) Tangible capital................................ $30,201 $ 6,562 $23,639 Core capital.................................... 30,249 13,124 17,125 Risk-based capital.............................. 31,731 15,856 15,875
A reconciliation between regulatory capital and GAAP capital at March 31, 1998 in the accompanying financial statements is presented below:
TANGIBLE CAPITAL CORE CAPITAL RISK BASED CAPITAL ----------------- ------------ ------------------ (IN THOUSANDS) GAAP capital........................... 31,434 31,434 31,434 Unrealized loss on securities available-for-sale, net.............. 13 13 13 General valuation allowances........... -- -- 1,522 Qualifying intangible assets........... 48 48 Goodwill............................... (1,246) (1,246) (1,246) Excess of net deferred tax............. -- -- -- Assets required to be deducted......... -- -- (40) ------ ------ ------ Regulatory capital..................... 30,201 30,249 31,731 ====== ====== ====== Minimum cap requirement................
Limitation on Capital Distributions. OTS regulations currently impose limitations upon capital distributions by savings associations, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cashout merger, and other distributions charged against capital. At least 30-days written notice must be given to the OTS of a proposed capital distribution by a savings association, and capital distributions in excess of specified earnings or by certain institutions are subject to approval by the OTS. An association that has capital in excess of all fully phased in regulatory capital requirements before and after a proposed capital distribution and that is not otherwise restricted in making capital distributions, could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of (a) 100% of its net earnings to date during the calendar year plus the amount that would reduce by half its "surplus capital ratio" (the excess capital over its fully phased in capital requirements) at the beginning of the calendar year, or (b) 75% of its net earnings for the previous four quarters. Any additional capital distributions would require prior OTS approval. In addition, the OTS can prohibit a proposed capital distribution, otherwise permissible under the regulation, if the OTS 27 29 has determined that the association is in need of more than normal supervision or if it determines that a proposed distribution by an association would constitute an unsafe or unsound practice. Furthermore, under the OTS prompt corrective action regulations, the Bank would be prohibited from making any capital distribution if, after the distribution, the Bank failed to meet its minimum capital requirements, as described above. See "-- Prompt Corrective Regulatory Action." The OTS has proposed amendments of its capital distribution regulations to reduce regulatory burdens on savings associations. If adopted as proposed, certain savings associations will be permitted to pay capital distributions within the amounts described above for Tier 1 institutions without notice to, or the approval of, the OTS. However, a savings association subsidiary of a savings and loan holding company, such as the Bank, will continue to have to file a notice unless the specific capital distribution requires an application. Liquidity. The Bank is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, specified United States Government, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to a specified percentage of the average daily balance of its net withdrawal deposit accounts plus short-term borrowing for the preceeding calendar quarter or the balance of such items at the end of the preceding calendar quarter. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions, and is currently 4%. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Bank's average liquidity ratio for the year ended March 31, 1998 was 12.26%, which exceeded the applicable requirements. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements. Assessments. Savings associations are required by OTS regulation to pay assessments to the OTS to fund the operations of the OTS. The general assessment, paid on a quarterly basis, is computed upon the savings association's total assets, including consolidated subsidiaries, as reported in the association's latest quarterly Thrift Financial Report. During fiscal 1998, the Bank paid an assessment of $122,000. Branching. Subject to certain limitations, HOLA and the OTS regulations permit federally chartered savings associations to establish branches in any state of the United States. The authority to establish such a branch is available (a) in states that expressly authorize branches of savings associations located in another state and (b) to an association that qualifies as a "domestic building and loan association" under the Internal Revenue Code of 1986 (the "Code"), which imposes qualification requirements similar to those for a "qualified thrift lender" under HOLA. See "QTL Test." The authority for a federal savings association to establish an interstate branch network would facilitate a geographic diversification of the association's activities. This authority under HOLA and the OTS regulations preempts any state law purporting to regulate branching by federal savings associations. Community Reinvestment. Under the CRA, as implemented by OTS regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings association, to assess the association's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA regulations establish an assessment system that bases an association's rating on its actual performance in meeting community needs. In particular, the assessment system focuses on three tests: (a) a lending test, to evaluate the institution's record of making loans in its assessment areas; (b) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and (c) a service test, to evaluate the institution's delivery of services through its branches, ATMs, and other offices. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating in its most recent examination. 28 30 Transactions with Related Parties. The Bank's authority to engage in transactions with its "affiliates" is limited by the OTS regulations and by Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an affiliate of the Bank is any company that controls the Bank or any other company that is controlled by a company that controls the Bank, excluding the Bank's subsidiaries other than those that are insured depository institutions. The OTS regulations prohibit a savings association (a) from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies under Section 4(c) of the BHC Act and (b) from purchasing the securities of any affiliate other than a subsidiary. Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings association and also limits the aggregate amount of transactions with all affiliates to 20% of the savings association's capital and surplus. Extensions of credit to affiliates are required to be secured by collateral in an amount and of a type described in Section 23A, and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the association as those prevailing at the time for comparable transactions with nonaffiliated companies. In the absence of comparable transactions, such transactions may only occur under terms and circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies. The Bank's authority to extend credit to its directors, executive officers, and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board thereunder. Among other things, these provisions require that extensions of credit to insiders (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the association's capital. In addition, extensions of credit in excess of certain limits must be approved by the association's board of directors. Enforcement. Under the Federal Deposit Insurance Act ("FDI Act"), the OTS has primary enforcement responsibility over savings associations and has the authority to bring enforcement action against all "institution affiliated parties," including any controlling stockholder or any shareholder, attorney, appraiser and accountant who knowingly or recklessly participates in any violation of applicable law or regulation or breach of fiduciary duty or certain other wrongful actions that causes or is likely to cause a more than a minimal loss or other significant adverse effect on an insured savings association. Civil penalties cover a wide range of violations and actions and range from $5,000 for each day during which violations of law, regulations, orders, and certain written agreements and conditions continue, up to $1 million per day for such violations if the person obtained a substantial pecuniary gain as a result of such violation or knowingly or recklessly caused a substantial loss to the institution. Criminal penalties for certain financial institution crimes include fines of up to $1 million and imprisonment for up to 30 years. In addition, regulators have substantial discretion to take enforcement action against an institution that fails to comply with its regulatory requirements, particularly with respect to its capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to receivership, conservatorship, or the termination of deposit insurance. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS that enforcement action be taken with respect to a particular savings association. If action is not taken by the Director of the OTS, the FDIC has authority to take such action under certain circumstances. Standards for Safety and Soundness. Pursuant to the FDI Act, as amended by FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994, the OTS and the federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The 29 31 guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the OTS adopted regulations pursuant that authorize, but do not require, the OTS to order an institution that has been given notice by the OTS that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the "prompt corrective action" provisions of FDICIA. If an institution fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties. Prompt Corrective Regulatory Action. FDICIA established a system of prompt corrective action to resolve the problems of undercapitalized depository institutions. Under this system, the federal banking regulators are required to take certain supervisory actions against undercapitalized institutions, the severity of which depends on the institution's degree of capitalization. For this purpose, a savings association would be placed in one of five categories based on the association's capital. Generally, a savings association is treated as "well capitalized" if its ratio of total capital to risk-weighted assets is at least 10.0%, its ratio of core capital to risk weighted assets is at least 6.0%, its ratio of core capital to total assets is at least 5.0%, and it is not subject to any order or directive by the OTS to meet a specific capital level. A savings association will be treated as "adequately capitalized" if its ratio of total capital to risk-weighted assets is at least 8.0%, its ratio of core capital to risk weighted assets is at least 4.0%, and its ratio of core capital to total assets is at least 4.0% (3.0% if the association receives the highest rating on the Uniform Financial Institutions Rating System). A savings association that has a total risk based capital of less than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if the association receives the highest rating on the Uniform Financial Institutions Rating System) is considered to be "undercapitalized." A savings association that has a total risk based capital of less than 6.0% or a Tier 1 risk based capital ratio or a leverage ratio of less than 3.0% is considered to be "significantly undercapitalized." A savings association that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." The elements of an association's capital for purposes of the prompt corrective action regulations are defined generally as they are under the regulations for minimum capital requirements. See "Regulation of Federal Savings Associations -- Capital Requirements." When appropriate, the OTS can require corrective action by a savings association holding company under the "prompt corrective action" provisions of FDICIA. Insurance of Deposit Accounts. The Bank is a member of the SAIF of the FDIC, and the Bank pays its deposit insurance assessments to the SAIF of the FDIC. The FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures the deposits of banks and state chartered savings banks. Pursuant to FDICIA, the FDIC established a new risk based assessment system for determining the deposit insurance assessments to be paid by insured depository institutions. Under the new assessment system, which began in 1993, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of the reporting period ending seven months before the assessment period. The three capital categories consist of (a) well capitalized, (b) adequately capitalized, or (c) undercapitalized. The FDIC also assigns an institution to one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the regulation, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Assessment rates currently range from 0.0% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.27% of deposits for an institution in the lowest 30 32 category (i.e., undercapitalized and substantial supervisory concern). The Bank's annual assessment rate for the first half of 1998 was 0.00% of deposits. The FDIC is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of 1.25%. As a result of the Deposit Insurance Funds Act of 1996 (the "Funds Act"), both the BIF and the SAIF currently satisfy the reserve ratio requirement. If the FDIC determines that assessment rates should be increased, institutions in all risk categories could be affected. The FDIC has exercised this authority several times in the past and could raise insurance assessment rates in the future. If such action is taken by the FDIC, it could have an adverse effect on the earnings of the Bank. In addition, the Funds Act expanded the assessment base for the payments on the bonds ("FICO bonds") issued in the late 1980s by the Financing Corporation to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. Beginning January 1, 1997, the deposits of both BIF- and SAIF-insured institutions were assessed for the payments on the FICO bonds. Until December 31, 1999, or such earlier date on which the last savings association ceases to exist, the rate of assessment for BIF-assessable deposits shall be one-fifth of the rate imposed on SAIF-assessable deposits. The annual rate of assessments on SAIF-assessable deposits for the payments on the FICO bonds for the semi-annual period beginning on January 1, 1997 was 0.0648%, for the quarterly period beginning on October 1, 1997, the annual rate was 0.0622%, and the rate of assessment for the period ended March 31, 1998 was 0.0622%. The Funds Act also provides for the merger of the BIF and SAIF on January 1, 1999, with such merger being conditioned upon the prior elimination of the thrift charter. The Funds Act required the Secretary of the Treasury to conduct a study of relevant factors with respect to the development of a common charter for all insured depository institutions and the abolition of separate charters for banks and thrifts and to report the Secretary's conclusions and the findings to the Congress. The Secretary of the Treasury has recommended that the separate charter for thrifts be eliminated only if other legislation is adopted that permits bank holding companies to engage in certain non-financial activities. Absent legislation permitting such non-financial activity, the Secretary of the Treasury recommended retention of the thrift charter. The Secretary of the Treasury also recommended the merger of the BIF and the SAIF irrespective of whether the thrift charter is eliminated. Other proposed legislation has been introduced in Congress that would require thrift institutions to convert to bank charters. However, the current version of bank modernization legislation, The Financial Services Act of 1998, H.R. 10, which was passed by the U.S. House of Representatives in May 1998 and is currently being considered by the U.S. Senate, does not require thrift institutions to convert to bank charter. Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. Federal Home Loan Bank System. The Bank is a member of the FHLB, which is one of the regional FHLBs composing the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in the FHLB in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year or 1/20 of its advances (borrowing) from the FHLB. The Bank was in compliance with this requirement with an investment in the capital stock of the FHLB at March 31, 1998, of $5.8 million. Any advances from a FHLB must be secured by specified types of collateral, and all longterm advances may be obtained only for the purpose of providing funds for residential housing finance. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. The FHLB paid dividends to the Bank of $358,000 for the twelve months ended March 31, 1998 and dividends of $182,000 for the prior fiscal year. If dividends were reduced, or interest on future FHLB advances increased, the Bank's net interest income would likely also be reduced. 31 33 Federal Reserve System. The Bank is subject to provisions of the FRA and the Federal Reserve Board's regulations pursuant to which depositary institutions may be required to maintain noninterest-earning reserves against their deposit accounts and certain other liabilities. Currently, reserves must be maintained against transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained in the amount of 3% of the aggregate of transaction accounts up to $47.8 million. The amount of aggregate transaction accounts in excess of $47.8 million are currently subject to a reserve ratio of 10%, which ratio the Federal Reserve Board may adjust between 8% and 12%. The Federal Reserve Board regulations currently exempt $4.7 million of otherwise reservable balances from the reserve requirements, which exemption is adjusted by the Federal Reserve Board at the end of each year. The Bank is in compliance with the foregoing reserve requirements. Because required reserves must be maintained in the form of either vault cash, a noninterestbearing account at a Federal Reserve Bank, or a passthrough account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the OTS. FHLB System members are also authorized to borrow from the Federal Reserve "discount window," but Federal Reserve Board regulations require such institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. FEDERAL AND STATE TAXATION FEDERAL TAXATION General. The Holding Company and the Bank currently file consolidated federal income tax returns, report their income for tax return purposes on the basis of a taxable-year ending March 31st, using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's tax reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Holding Company. Bad Debt Reserves. The Bank, as a "small bank" (one with assets having an adjusted tax basis of $500 million or less) is permitted to maintain a reserve for bad debts with respect to "qualifying loans," which, in general, are loans secured by certain interests in real property, and to make, within specified formula limits, annual additions to the reserve which are deductible for purposes of computing the Bank's taxable income. Pursuant to the Small Business Job Protection Act of 1996, the Bank is now recapturing (taking into income) over a multi-year period a portion of the balance of its bad debt reserve as of March 31, 1997. Distributions. To the extent that the Bank makes "nondividend distributions" to shareholders, such distributions will be considered to result in distributions from the Bank's "base year reserve," i.e., its reserve as of March 31, 1998, to the extent thereof and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in the Bank's taxable income. Nondividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not constitute nondividend distributions and, therefore, will not be included in the Bank's income. The amount of additional taxable income created from a nondividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately one and one-half times the nondividend distribution would be includable in gross income for federal income tax purposes, assuming a 34% federal corporate income tax rate. Corporate Alternative Minimum Tax. The Code imposes a tax ("AMT") on alternative minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased by certain preference items. Only 90% of 32 34 AMTI can be offset by net operating loss carryovers. AMTI is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Thus, the Company's AMTI is increased by an amount equal to 75% of the amount by which the Company's adjusted current earnings exceeds its AMTI (determined without regard to this adjustment and prior to reduction for net operating losses). Although the corporate environmental tax of 0.12% of the excess of AMTI (with certain modifications) over $2.0 million has expired, under current Administration proposals, such tax will be retroactively reinstated for taxable years beginning after December 31, 1997 and before January 2009. Dividends-Received Deduction and Other Matters. The Holding Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Holding Company and the Bank will not file a consolidated tax return, except that if the Holding Company or the Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted. STATE AND LOCAL TAXATION State of New York. The Bank and the Holding Company are subject to New York State franchise tax on net income or one of several alternative bases, whichever results in the highest tax. "Net income" means federal taxable income with adjustments. The Bank and the Holding Company file combined returns and are subject to taxation in the same manner as other corporations with some exceptions, including the Bank's deductions for additions to its reserve for bad debts. The New York State tax rate for fiscal years 1997 and 1998 was 10.755% and 10.53%, respectively (including Metropolitan Commuter Transportation District Surcharge) of net income. In general, the Holding Company is not be required to pay New York State tax on dividends and interest received from the Bank or on gains realized on the sale of Bank stock. New York State has enacted legislation that enabled the Bank to avoid the recapture of the New York State tax bad debt reserves that otherwise would have occurred as a result of the changes in federal law and to continue to utilize either the federal method or a method based on a percentage of its taxable income for computing additions to its bad debt reserve. New York City. The Bank and the Holding Company are also subject to a similarly calculated New York City banking corporation tax of 9% on income allocated to New York City. In this connection, legislation was recently enacted regarding the use and treatment of tax bad debt reserves that is substantially similar to the New York State legislation described above. Delaware Taxation. As a Delaware holding company not earning income in Delaware, the Holding Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the state of Delaware. EXECUTIVE OFFICERS OF THE HOLDING COMPANY The name, position, term of office as officer and period during which he or she has served as an officer is provided below for each executive officer of the Holding Company. Each of the persons listed below is an executive officer of the Holding Company and the Bank, except for Walter T. Bond and Guy Brea, who are executive officers of the Bank, and as such, are deemed to be executive officers of the Holding Company pursuant to SEC regulations. 33 35
NAME AGE POSITION ---- --- -------- Thomas L. Clark, Jr. ..................... 54 President and Chief Executive Officer, Director Howard R. Dabney.......................... 55 Senior Vice President and Chief Lending Officer Raymond L. Bruce.......................... 46 Senior Vice President, Corporate Counsel and Corporate Secretary Walter T. Bond............................ 39 Vice President and Acting Chief Financial Officer Guy Brea.................................. 56 Vice President and Branch Operations Coordinator
THOMAS L. CLARK, JR., is currently President and Chief Executive Officer, a position he assumed on February 1, 1995. Mr. Clark is also a member of the Bank's Board of Directors. Prior to assuming his current position, Mr. Clark was employed by the New York State Banking Department from 1976 until 1995 and from 1987 until 1995, served as Deputy Superintendent of Banks for New York State Banking Board. In addition, Mr. Clark serves on the Thrift Institutions Advisory Panel of the Federal Reserve Bank of New York; as Chairman of the Community Investment and Affordable Housing Committee of the Community Bankers of New York State and Chairman of the American League of Financial Institutions, the national trade association representing minority savings institutions, (based in Washington, D.C.); Mr. Clark also serves on the Boards of Directors of the New York City Partnership and Chamber of Commerce, Inc., and the New York City Housing Partnership, and is a member of the Advisory Board of Small Business Development Centers of New York State. HOWARD R. DABNEY is Senior Vice President and Chief Lending Officer of the Bank, formerly, Vice President/Loan Officer positions he has held since joining the Bank in 1982. Mr. Dabney currently serves on the board of directors of the Latimer Wood Economic Development Corporation and on the advisory board of Bridge Street Community Development Center. He is a member of the Community Bankers Association of New York State (Mortgages and Real Estate Committee), Mortgage Bankers Association of America and Metropolitan Mortgage Officers Society of New York. RAYMOND L. BRUCE, ESQ. is Senior Vice President, Corporate Counsel and Corporate Secretary, and oversees the Bank's litigation, contracts, compliance and other legal concerns. Prior to joining Carver in April of 1995, Mr. Bruce was an Assistant Counsel at the New York State Banking Department (from 1992 to 1995), which is responsible for regulating New York State-chartered banking organizations. From 1988 to 1992, Mr. Bruce served as Counsel both to Assemblyman Herman D. Farrell, Jr. (then Chairman to the Assembly Banks Committee) and to the New York State Assembly Banks Committee. There, he was responsible for the planning, development and management of New York State legislation which addressed an assortment of critical issues in the banking industry. Mr. Bruce is a member of the Banking Committee of the Association of the Bar of the City of New York and a member of the Regulatory Committee of the Community Bankers Association of New York State. In addition, he is an Advisor to the Tioga-Carver Community Foundation. WALTER T. BOND is Vice President and Acting Chief Financial Officer. Mr. Bond joined the Bank in February 1993, as Assistant Vice President, Mortgage Lender. Mr. Bond was assigned to the position of Investment Officer in November 1995 and promoted to his current position in September 1997. Mr. Bond is Chairman of the Bank's Investment Committee and serves as the Company's Investor Relations Officer. Mr. Bond is a member of the New York Society of Securities Analyst and the Financial Managers Society. GUY BREA is the Vice President and Branch Operations Coordinator. Mr. Brea joined the Bank in December 1972 as a Management Trainee. Since 1972 he has managed various branch offices of the Bank. Mr. Brea was promoted to Assistant Vice President, Branch Coordinator in April 1981 and in that capacity has overseen the acquisition of various branches, changes of systems and the development of various new products and services. Mr. Brea also serves as the Bank's security director and fraud prevention officer. Mr. Brea serves on the Community Bankers' Association of the New York State Bank Operations Committee and the Group IV, V, VI Depositor Service Committee. 34 36 ITEM 2. PROPERTIES. The following table sets forth certain information regarding Carver's offices and other material properties at March 31, 1998.
LEASE NET BOOK YEAR OWNED OR EXPIRATION VALUE AT OPENED LEASED DATE MARCH 31, 1998 ------ --------- ----------- -------------- (DOLLARS IN THOUSANDS) MAIN OFFICE: 75 West 125th Street 1996 Owned -- $ 7,987 New York, New York BRANCH OFFICES: 2815 Atlantic Avenue 1990 Owned -- 447 Brooklyn, New York (East New York Office) 1281 Fulton Street 1989 Owned -- 1,399 Brooklyn, New York (Bedford-Stuyvesant Office) 1009-1015 Nostrand Avenue 1975 Owned -- 694 Brooklyn, New York (Crown Heights Office) 261 8th Avenue 1964 Leased 10/31/04 -- New York, New York (Chelsea Office) 115-02 Merrick Boulevard 1982 Leased 02/28/11 -- Jamaica, New York (St. Albans Office) 302 Nassau Road 1985 Leased 06/30/05 Roosevelt, New York (Roosevelt Office) LOAN CENTER 1997 Leased 11/30/97 49 Gramatan Ave. Mt. Vernon, New York (Mt. Vernon Loan Center) ------- Total $10,527 =======
The net book value of Carver's investment in premises and equipment totaled approximately $11.5 million at March 31, 1998. ITEM 3. LEGAL PROCEEDINGS From time to time, Carver Federal is a party to various legal proceedings incident to its business. At March 31, 1998, except as set forth below, there were no legal proceedings to which the Bank or its subsidiaries was a party, or to which any of their property was subject, which were expected by management to result in a material loss. On January 2, 1996, the United States District Court for the Southern District of New York dismissed the class action encaptioned Dougherty v. Carver Federal Savings Bank for lack of subject matter jurisdiction. The class action alleged that the offering circular, used by Carver to sell its stock in its public offering, contained material misstatements and omissions. Further, the complaint alleged that the Bank's shares were not appraised by an independent appraiser. By separate order on the same date, the court made its ruling 35 37 applicable to Gomberg v. Carver Federal Savings Bank and Uminer v. Carver Federal Savings Bank, two other class actions filed in the Southern District of New York which asserted claims essentially identical to those asserted in the Dougherty suit. The plaintiffs filed a consolidated notice of appeal on January 29, 1996 with the United States Court of Appeals for the Second Circuit. In April 1997 the Circuit Court concluded that the District had subject matter jurisdiction over the plaintiffs' complaint, the Circuit Court reversed and remanded the case back to the District Court. On July 10, 1997, upon request of all counsel, the trial judge directed that discovery be completed by March 31, 1998 and that the case be ready for trial in May of 1998. As of the date hereof, no trial date has been set by the court. Carver believes that the allegations made in this action are without merit and intends to aggressively defend its interest with respect to this matter. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended March 31, 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET FOR THE COMMON STOCK The Common Stock is listed on the American Stock Exchange under the symbol "CNY." Prior to May 21, 1997, the Common Stock traded on the National Market of The Nasdaq Stock Market under the symbol "CARV." As of June 30, 1998, there were 2,314,275 shares of the Common Stock outstanding, held by approximately 1,200 holders of record. The following table shows the high and low per share sales prices of the Common Stock. CLOSING SALES PRICE QUARTER ENDED (1)
HIGH LOW ---- --- Year Ended March 31, 1998 First Quarter................. $11 3/4 $ 9 5/8 Second Quarter................ $12 5/8 $12 3/8 Third Quarter................. $17 5/8 $12 3/4 Fourth Quarter................ $15 1/8 $14 1/4
HIGH LOW ---- --- Year Ended March 31, 1997 First Quarter................. $ 9 $ 7 5/8 Second Quarter................ $ 9 $ 7 3/4 Third Quarter................. $ 8 5/8 $ 7 3/4 Fourth Quarter................ $10 5/8 $ 8 1/4
- --------------- (1) Prior to October 18, 1996, the prices indicated are for the common stock of Carver Federal Savings Bank. On that date, the Holding Company became the parent company of the Bank and each outstanding share of the Bank's common stock was converted into one share of the Holding Company's common stock. The Board of Directors declared Carver's first cash dividend of $0.05 (five cents) per share on June 17, 1997 for stockholders of record on July 2, 1997. The Board has not determined to establish a regular dividend at this time, but will review the Company's position after the quarter ended December 31, 1997, for the possible declaration of additional dividends. The timing and amount of future dividends will be within the discretion of Carver's Board of Directors and will depend on the earnings of the Company and its subsidiaries, their financial condition, liquidity and capital requirements, applicable governmental regulations and policies and other factors deemed relevant by the Board of Directors. The Bank will not be permitted to pay dividends to the Holding Company on its capital stock if its stockholders' equity would be reduced below applicable regulatory capital requirements or the amount required to be maintained for the liquidation account. The OTS capital distribution regulations applicable to savings institutions (such as the Bank) that meet their regulatory capital requirements, generally limit dividend payments in any year to the greater of (i) 100% of year-to-date net income plus an amount that 36 38 would reduce surplus capital by one-half or (ii) 75% of net income for the most recent four quarters. Surplus capital is the excess of actual capital at the beginning of the year over the institution's minimum regulatory capital requirement. For information concerning the Bank's liquidation account, see Note 2 of the Notes to Financial Statements. Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the payment of dividends to its stockholders, although the source of such dividends will be dependent on the net proceeds retained by the Holding Company and earnings thereon and may be dependent, in part, upon dividends from the Bank. The Holding Company is subject to the requirements of Delaware law, which generally limit dividends to an amount equal to the excess of the net assets of the Company (the amount by which total assets exceed total liabilities) over its statutory capital, or if there is no such excess, to its net profits for the current and/or immediately preceding fiscal year. ITEM 6. SELECTED FINANCIAL DATA.
AT MARCH 31, -------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- FINANCIAL CONDITION DATA: TOTAL AMOUNT OF: Assets.............................. $437,458 $423,614 $367,657 $367,962 $308,507 Loans, net.......................... 274,954 197,918 82,608 48,460 51,020 Mortgage-backed securities.......... 119,523 110,853 131,105 181,134 153,843 Investment securities............... 0 1,675 8,937 18,035 12,018 Securities available for sale(1).... 28,407 83,863 114,328 93,328 71,572 Excess of cost over assets acquired.......................... 1,246 1,456 1,669 1,899 2,141 Cash and cash equivalents........... 15,120 4,231 10,026 11,818 9,053 Deposits............................ 274,894 266,471 256,952 248,446 252,474 Borrowed funds...................... 124,946 121,101 73,948 82,318 39,930 Stockholders' equity................ 35,534 33,984 34,765 34,801 14,170 NUMBER OF: Deposit accounts.................... 51,550 49,142 45,815 44,324 44,593 Offices............................. 7 7 8 8 8
37 39
YEAR ENDED MARCH 31, -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ------------- ------------- ------------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA: Interest income.............. $ 27,828 $ 22,847 $ 23,529 $ 19,750 $ 17,464 Interest expense............. 15,019 12,483 13,594 10,532 10,167 ---------- ---------- ---------- ---------- --------- Net interest income.......... 12,809 10,364 9,935 9,218 7,297 Provision for loan losses.... 1,260 1,690 131 334 19 ---------- ---------- ---------- ---------- --------- Net interest income after provision for loan losses..................... 11,549 8,764 9,804 8,884 7,278 ---------- ---------- ---------- ---------- --------- Non-interest income: Gain (loss) on sales of asset...................... 188 (927) -- -- 1,127 Other........................ 2,163 845 608 576 565 ---------- ---------- ---------- ---------- --------- Total non-interest income.... 2,351 113 608 576 1,692 ---------- ---------- ---------- ---------- --------- Non-interest expenses: Loss on sale of foreclosed real estate................ 0 38 77 34 159 Other........................ 11,651 11,764 8,976 7,907 7,690 ---------- ---------- ---------- ---------- --------- Total non-interest expense... 11,651 11,802 9,053 7,941 7,849 ---------- ---------- ---------- ---------- --------- Income loss before income taxes, Extraordinary income and cumulative effect of change in accounting principle.................. 2,249 (3,015) 1,359 1,519 1,121 ---------- ---------- ---------- ---------- --------- Income taxes................. (1,203) (1,275) 606 674 613 ---------- ---------- ---------- ---------- --------- Income loss before extraordinary income and cumulative effect of change in accounting principle.... 1,046 (1,740) 753 845 508 Extraordinary income, net of income taxes............... -- -- -- -- 323 ---------- ---------- ---------- ---------- --------- Income before cumulative effect of change in accounting principle....... 1,046 (1,740) 753 845 831 Cumulative effect of change in accounting principle.... -- -- -- -- 252 ---------- ---------- ---------- ---------- --------- Net income (loss)............ $ 1,046 $ (1,740) $ 753 $ 845 $ 1,083 ========== ========== ========== ========== ========= Net (loss) income per common share...................... 0.48 (0.80) $ 0.35 $ 0.40(1) $ NA Weighted average number of common shares outstanding................ 2,187,619 2,156,346 2,169,276 2,136,615 NA
- --------------- (1) Historical net income per common share for fiscal 1995 is based on net income from October 24, 1994 (the date of the Bank's conversion to stock form) to March 31, 1995 was $0.17.24, 1994 (the date of the Bank's conversion to stock form) to March 31, 1995 was $0.17. 38 40
AT OR FOR THE YEAR ENDED MARCH 31, ----------------------------------------- 1998 1997 1996 1995 1994 ----- ----- ----- ----- ----- KEY OPERATING RATIOS: Return on average assets(1)(2)..................... .25% (0.47)% 0.21% 0.25% 0.35% Return on average equity(2)(3)..................... 3.00 (5.00) 2.16 3.61 7.88 Interest rate spread(4)............................ 3.14 2.90 2.57 2.74 2.38 Net interest margin(5)............................. 3.27 3.04 2.85 2.91 2.43 Operating expenses to average assets(2)(6)......... 2.80 3.22 2.48 2.38 2.46 Equity-to-assets(7)................................ 8.12 8.03 9.45 9.46 4.59 Efficiency Ratio(2)(8)............................. 76.85 96.78 85.87 81.08 87.32 Average interest-earning assets to average Interest-bearing liabilities..................... 1.03x 1.04x 1.07x 1.05x 1.02x ASSET QUALITY RATIOS: Non-performing assets to total assets(9)........... 1.58% 1.52% 0.97% 0.56% 1.24% Non-accrual loans and accruing loans 90 days or more past due to total loans..................... 2.47 3.11 3.85 3.39 6.73 Allowance for loan losses to total loans........... 1.11 1.09 1.42 2.10 2.35 Allowance for loan losses to non-performing loans............................................ 45.30 35.06 37.05 61.79 34.95 Allowance for loan losses to non-accrual loans..... 56.34 68.38 59.29 70.17 57.56 Net loan charge-offs to average loans.............. .15 0.69 0.00 1.06 0.65
- --------------- (1) Net income divided by average total assets. (2) Excluding the SAIF assessment the return on average assets, return on average equity, operating expenses to average assets and net interest income to operating expenses for the fiscal year ended March 31, 1998 were (0.022%), (2.29%), 2.77% and 1.02x, respectively. (3) Net income divided by average total equity. (4) Combined weighted average interest rate earned less combined weighted average interest rate cost. (5) Net interest income divided by average interest-earning assets. (6) Non-interest expenses less loss on foreclosed real estate, divided by average total assets. (7) Total equity divided by assets at period end. (8) Efficiency ratio represents operating expenses divided by the sum of net interest income plus operating income. (9) Non-performing assets consist of non-accrual loans, accruing loans 90 days or more past due and property acquired in settlement of loans. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Carver's net income is dependent primarily on its net interest income, which is the difference between interest income earned on its loan, investment and mortgage-backed securities portfolios and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Carver has undertaken a restructuring of its balance sheet and is now placing primary emphasis on its whole loan portfolio through the origination of loans, as well as the purchase of whole loans. As a result of this effort, the loan portfolio has substantially increased as a percentage of total assets. In addition, Carver is placing increased emphasis on the origination of consumer loans. Therefore, Carver's future earnings will be derived from direct lending and purchase activities replacing investing in securities. During fiscal 1998, Carver's net income was also increased by the generation of non-interest income, such as loan fees and service charges. In addition, net income is affected by the level of provision for loan losses, as well as operating expenses. 39 41 The operations of the Bank and the entire thrift industry are significantly affected by prevailing economic conditions, competition and the monetary and fiscal policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flow and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities, and the levels of personal income and savings nationwide. RECAPITALIZATION OF THE SAVINGS ASSOCIATION INSURANCE FUND (SAIF) During the second quarter of fiscal 1997, Carver experienced a one time pre-tax assessment of $1.6 million for recapitalization of the SAIF pursuant to legislation which was signed into law in September of 1996. The legislation to recapitalize the SAIF was anticipated by the industry and reduced Carver Federal's deposit insurance premium from 23 basis points, on insured deposits of approximately $248.4 million, to 6.5 basis points effective January 1, 1997. As a result of the legislation, Carver's deposit insurance premium decreased by $356,000 or 73.94% to $126,000 for the twelve month period ended March 31, 1998 ("fiscal 1998") compared to $482,000 for the twelve month period ended March 31, 1997 ("fiscal 1997"). RESTRUCTURING OF BALANCE SHEET During fiscal 1998, Carver continued to pursue the strategy designed by the Board of Directors in December 1996 to reallocate the Company's assets by increasing loans and decreasing the Company's portfolio of investment securities (the "Restructuring"). As a result of the Restructuring, the Company's loan portfolio increased by 140% from $82.6 million at March 31, 1996, to $197.9 million at March 31, 1997, an increase of $115.3 million. During fiscal 1998, the Company continued to reallocate assets into loans. At March 31, 1998 the loan portfolio totaled $275.0 million or 62.85% of total assets. Carver added approximately $1.6 million to its provisions for loan losses during the fourth quarter of fiscal 1997 and an additional $1.3 million during fiscal 1998 in order to maintain the allowance for loan losses at an adequate level consistent with the Bank's policies. At March 31, 1998, the allowance for loan losses as a percentage of total loans was 1.11% as compared to 1.09% at March 31, 1997. See "Comparison of Operating Results for the Years Ended March 31, 1998 and 1997 -- Provision for Loan Losses." ASSET/LIABILITY MANAGEMENT Net interest income, the primary component of Carver's net income, is determined by the difference or "spread" between the yield earned on interest-earning assets and the rates paid on its interest-bearing liabilities and the relative amounts of such assets and liabilities. Because Carver's interest-bearing liabilities consist primarily of shorter term deposit accounts, Carver's interest rate spread can be adversely affected by changes in general interest rates if its interest-earning assets are not sufficiently sensitive to changes in interest rates. Management has sought to reduce Carver's exposure to changes in interest rates by more closely matching the effective maturities and repricing periods of its interest-earning assets and interest-bearing liabilities through a variety of strategies, including the origination and purchase of adjustable-rate loans for its portfolio, investment in adjustable-rate and shorter-term mortgage-backed securities and the sale of all long-term fixed-rate loans originated into the secondary market. Carver Federal has also reduced interest rate risk through its origination and purchase of primarily adjustable rate mortgage loans. During fiscal year 1998, loan portfolio increased by $77.0 million, or 38.92%. The growth in the loan portfolio was funded primarily by matched funding from FHLB advances and reverse repurchase agreements. See "-- Restructuring of Balance Sheet." DISCUSSION OF MARKET RISK -- INTEREST RATE SENSITIVITY ANALYSIS As a financial institution, the Company's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large 40 42 portion of the Company's assets and liabilities, and the market value of all interest-earning assets, other than those which possess a short term to maturity. Since all of the Company's interest-bearing liabilities and virtually all of the Company's interest-earning assets are located at the Bank, virtually all of the Company's interest rate risk exposure lies at the Bank level. As a result, all significant interest rate risk management procedures are performed at the Bank level. Based upon the Bank's nature of operations, the Bank is not subject to foreign currency exchange or commodity price risk. The Bank does not own any trading assets. The Company seeks to manage its interest risk by monitoring and controlling the variation in repricing intervals between its assets and liabilities. To a lesser extent, the Company also monitors its interest rate sensitivity by analyzing the estimated changes in market value of its assets and liabilities assuming various interest rate scenarios. As discussed more fully below, there are a variety of factors which influence the repricing characteristics of any given asset or liability. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate-sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific period of time and the amount of interest-bearing liabilities repricing within that same time period. A gap is considered positive when the amount of rate-sensitive assets exceeds the amount of rate-sensitive liabilities and is considered negative when the amount of interest rate sensitive liabilities exceed the amount of rate-sensitive assets. Generally, during a period of falling interest rates a negative gap could result in an increase in net interest income, while a positive gap could adversely affect net interest income, and during a period of rising interest rates a negative gap could adversely affect net interest income, while a positive gap could result in an increase in net interest income. As illustrated below, Carver had a negative one-year gap equal to 5.54% of total rate-sensitive assets at March 31, 1998, as a result of which its net interest income could be adversely affected by rising interest rates, and positively affected by falling interest rates. 41 43 The following table sets forth information regarding the projected maturities, prepayments and repricing of the major rate-sensitive asset and liability categories of Carver as of March 31, 1998. Maturity repricing dates have been projected by applying the assumptions set forth below to contractual maturity and repricing dates. The information presented in the following table is derived from data incorporated in "Schedule CMR: Consolidated Maturity and Rate," which is part of the Bank's quarterly reports filed with OTS. The repricing and other assumptions are not necessarily representative of the Bank's actual results. Classifications of items in the table below are different from those presented in other tables and the financial statements and accompanying notes included herein and do not reflect non-performing loans.
THREE OVER ONE OR FOUR TO THROUGH OVER THREE OVER FIVE OVER LESS TWELVE THREE THROUGH THROUGH TEN MONTHS MONTHS MONTHS YEARS FIVE YEARS TEN YEARS YEARS TOTAL - ------ ------- -------- -------- ---------- --------- ------- -------- (DOLLARS IN THOUSANDS) RATE-SENSITIVE ASSETS: Loans................................. $79,737 $ 57,740 $ 46,742 $ 38,493 $ 32,995 $19,247 $274,954 Federal Funds Sold.................... $ 3,000 -- -- -- -- -- 3,000 Investment Securities(1).............. -- -- -- -- -- -- -- Mortgage-Backed Securities............ -- 6,506 -- -- 11,585 101,432 119,523 Total................................. 82,737 64,246 46,742 38,493 44,580 120,679 397,477 RATE-SENSITIVE LIABILITIES: Deposits.............................. 30,238 46,731 57,728 38,486 60,477 41,234 274,894 Borrowings............................ 27,700 64,320 31,000 373 -- 369 123,762 Other Borrowings...................... -- -- -- -- 1,184 -- 1,184 Total................................. 57,938 111,051 88,728 38,859 61,661 41,603 399,840 Interest Sensitivity Gap.............. $24,799 $(46,805) $(41,986) $ (366) $(17,081) $79,076 $ (2,363) Cumulative Interest Sensitivity Gap... $24,799 $(22,006) $(63,992) $(64,358) $(81,439) $(2,363) -- Ratio of Cumulative Gap to Total Rate- Sensitive Assets.................... 6.24% (5.54)% (16.10)% (16.19)% (20.49)% (0.59)%
- --------------- (1) Includes securities available-for-sale. The preceding table was prepared utilizing certain assumptions regarding prepayment and decay rates as determined by the OTS for savings associations nationwide as of December 31, 1995. While management does not believe that these assumptions will be materially different from Carver's actual experience, the actual interest rate sensitivity of the Bank's assets and liabilities could vary significantly from the information set forth in the table due to market and other factors. The following assumptions were used: (i) adjustable-rate first mortgage loans will prepay at the rate of 6% per year; and (ii) fixed-rate first mortgage loans will prepay annually as follows:
ANNUAL PREPAYMENT RATE ---------------------------------- COUPON RATE 30-YEAR 15-YEAR 5-YEAR BALLOON ----------- ------- ------- -------------- 6.50%.................................................. 9.00% 8.00% 13.00% 7.00................................................... 9.00 9.00 16.00 7.50................................................... 11.00 11.00 19.00 8.00................................................... 13.00 14.00 25.00 8.50................................................... 16.00 -- -- 9.00................................................... 20.00 -- -- 9.50................................................... 25.00 -- -- 10.00.................................................. 28.00 -- --
In addition, it is assumed that fixed maturity deposits are not withdrawn prior to maturity, transaction accounts will decay at a rate of 37.00% in the first year and passbook accounts will decay at a rate of 17.00% in the first year, and money market accounts will reflect a 79.00% decay rate in year one. 42 44 Certain shortcomings are inherent in the method of analysis presented in the table above. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in the market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, generally have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Additionally, an increased credit risk may result as the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. Virtually all of the adjustable-rate loans in Carver's portfolio contain conditions which restrict the periodic change in interest rate. The ratio of cumulative gap to total rate sensitivity assets was negative 5.54% at March 31, 1998 compared to negative 9.95% at March 31, 1997. Adjustable rate assets represented 65.96% of the Bank's total interest sensitive assets at March 31, 1998. NPV Analysis. As part of its efforts to maximize net interest income and manage the risks associated with changing interest rates, management uses the "market value of portfolio equity" ("NPV") methodology which the OTS has adopted as part of its capital regulations. Under this methodology, interest rate risk exposure is assessed by reviewing the estimated changes in Net Interest Income ("NII") and NPV which would hypothetically occur if interest rates rapidly rise or fall all along the yield curve. Projected values of NII and NPV at both higher and lower regulatory defined rate scenarios are compared to base case values (no change in rates) to determine the sensitivity to changing interest rates. Presented below, as of March 31, 1998, is an analysis of the Bank's interest rate risk ("IRR") as measured by changes in NPV and NII for instantaneous and sustained parallel shifts of 100 basis points in market interest rates. Such limits have been established with consideration of the impact of various rate changes and the Bank's current capital position. The information set forth below relates solely to the Bank; however, because virtually all of the Company's interest rate risk exposure lies at the Bank level, management believes the table below also accurately reflects an analysis of the Company's IRR. INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
NET PORTFOLIO VALUE NPV AS % OF PV OF ASSETS ------------------------------ ------------------------ CHANGE IN RATE $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE - -------------- -------- -------- -------- ----------- ---------- +400 bp 38,137 (10,025) (21)% 8.85 (189) bp +300 bp 42,534 (5,627) (12) 9.73 (101) bp +200 bp 46,036 (2,125) (4) 10.41 (34) bp +100 bp 48,128 (33) -- 10.78 4 bp -- bp 48,161 10.74 (100) bp 48,634 473 +1 10.79 5 bp (200) bp 50,044 1,882 +4 11.01 27 bp (300) bp 51,695 3,534 +7 11.28 54 bp (400) bp 54,299 6,138 +13 11.73 99 bp
3/31/98 12/31/97 3/31/97 ------- -------- ------- RISK MEASURES: 200 BP RATE SHOCK Pre-Shock NPV Ratio: NPV as % of PV of Assets............... 10.74% 9.43% 9.76% Post-Shock NPV Ratio........................................ 10.41 9.26 7.36 Sensitivity Measure; Decline in NPV Ratio................... 34 bp 17 bp 240 bp
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV 43 45 Table presented assumes that the composition of the Company's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV Table provides an indication of the Company's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Company's net interest income and will differ from actual results. AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES The following table sets forth certain information relating to Carver's average interest-earning assets and average interest-bearing liabilities and reflects the average yield on assets and the average cost of liabilities for the years indicated. Such yields and costs are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods shown. Average balances are derived from average month-end balances, except for federal funds which are derived from daily balances. Management does not believe that the use of average monthly balances instead of average daily balances on all other accounts has caused any material difference in the information presented. The table also presents information for the years indicated with respect to the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, or "interest rate spread," which savings institutions have traditionally used as an indicator of profitability. Another indicator of an institution's net interest income is its "net interest margin," which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. 44 46
AT MARCH 31, YEAR ENDED MARCH 31, ------------------ ------------------------------------------------------------- 1998 1998 1997 ------------------ ----------------------------- ----------------------------- AVERAGE AVERAGE AVERAGE YIELD AVERAGE YIELD AVERAGE YIELD BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST -------- ------- -------- -------- ------- -------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS: Loans(1)............................. $274,954 7.54% $242,948 $18,311 7.54% $ 94,346 7,844 8.31% Investment Securities(2)............. 5,795 7.04 12,117 671 5.54 85,040 4,742 5.25 Mortgage-Backed Securities(3)........ 119,523 6.35 130,927 8,523 6.51 156,454 9,979 6.38 Federal Funds Sold................... 3,000 5.50 5,735 323 5.63 5,202 282 5.42 -------- ---- -------- ------- ----- -------- ------- ------ Total Interest-earning assets........ 403,272 7.16% 391,727 27,828 7.10 341,042 22,847 6.70 ------- Non Interest Earning Assets.......... 34,186 23,746 25,453 -------- -------- -------- Total Assets......................... $437,458 $415,473 $366,495 ======== ======== ======== INTEREST-BEARING LIABILITIES: Deposits DDA................................ $ 9,687 0.00% $ 8,625 $ 0 0.00% $ 4,774 $ -- $ -- Now.................................. 19,230 2.23 18,725 354 1.89 19,909 311 1.56 Savings and Clubs.................... 145,448 2.50 144,466 3,601 2.49 142,410 3,542 2.49 Money Market Accounts................ 21,496 3.22 21,514 692 3.22 20,398 658 3.23 Certificate of deposits.............. 79,033 5.24 76,990 3,949 5.13 74,583 3,844 5.15 -------- ---- -------- ------- ----- -------- ------- ------ Total deposits....................... 274,894 3.24 270,320 8,596 3.18 262,074 8,355 3.19 Borrowed money....................... 124,946 5.87% 108,970 6,423 5.89 66,403 4,128 6.22 -------- ---- -------- ------- ----- -------- ------- ------ Total interest-bearing Liabilities... 399,840 4.06% 379,290 15,019 3.96 328,477 12,483 3.80 ------- ------- Non-interest-bearing Liabilities..... 2,083 1,310 3,239 -------- -------- -------- Total liabilities.................... 401,923 380,600 331,716 Stockholders' equity................. 35,535 34,873 34,779 -------- -------- -------- Total liabilities and Stockholders' equity............................. $437,458 $415,473 366,495 ======== ======== ======== Net interest income.................. $12,809 $10,364 ======= ======= Interest rate spread................. 3.10% 3.14% 2.90% ==== ===== ====== Net interest margin.................. 3.27% 3.04% ===== ====== Ratio of average interest-earning assets to average interest-bearing liabilities........................ 1.03x 1.04x ===== ====== YEAR ENDED MARCH 31, ----------------------------- 1996 ----------------------------- AVERAGE AVERAGE YIELD BALANCE INTEREST COST -------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS: Loans(1)............................. $ 58,136 $ 4,800 8.26% Investment Securities(2)............. 91,639 5,807 6.34 Mortgage-Backed Securities(3)........ 188,136 12,217 6.49 Federal Funds Sold................... 11,949 705 5.90 -------- ------- ----- Total Interest-earning assets........ 349,860 23,529 6.73 ------- Non Interest Earning Assets.......... 13,977 -------- Total Assets......................... $363,837 ======== INTEREST-BEARING LIABILITIES: Deposits DDA................................ $ 4,761 $ -- $ -- Now.................................. 15,539 314 2.02 Savings and Clubs.................... 140,204 3,507 2.50 Money Market Accounts................ 18,770 599 3.19 Certificate of deposits.............. 74,060 3,970 5.36 -------- ------- ----- Total deposits....................... 253,334 8,390 3.31 Borrowed money....................... 73,253 5,204 7.10 -------- ------- ----- Total interest-bearing Liabilities... 326,587 13,594 4.16 ------- Non-interest-bearing Liabilities..... 2,230 -------- Total liabilities.................... 328,817 Stockholders' equity................. 35,020 -------- Total liabilities and Stockholders' equity............................. $363,837 ======== Net interest income.................. $ 9,935 ======= Interest rate spread................. 2.57% ===== Net interest margin.................. 2.85% ===== Ratio of average interest-earning assets to average interest-bearing liabilities........................ 1.07x =====
- --------------- (1) Includes non-accrual loans (2) Includes FHLB stock and fair value of investments available for sale of $5.8 million at March 31, 1998. (3) Includes fair value of mortgage-backed securities available for sale of 28.4 million at March 31, 1998. 45 47 RATE/VOLUME ANALYSIS The following table sets forth information regarding the extent to which changes in interest rates and changes in volume of interest related assets and liabilities have affected Carver's interest income and expense during the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided for changes attributable to (i) changes in volume (changes in volume multiplied by new rate), (ii) changes in rates (change in rate multiplied by old volume), and (iii) total change. Changes in rate/volume (changes in rate multiplied by the changes in volume) are allocated proportionately between changes in rate and changes in volume.
YEAR ENDED MARCH 31, -------------------------------------------------------- 1998 VS. 1997 1997 VS. 1996 INCREASE (DECREASE) INCREASE (DECREASE) DUE TO DUE TO --------------------------- ------------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL ------- ----- ------- ------ ----- ------ (DOLLARS IN THOUSANDS) Interest-earning assets: Loans............................... $11,201 $(734) $10,468 $3,013 $ 31 $3,044 Investment securities(1).............. (4,040) (34) (4,074) (335) (730) (1,065) Mortgage-backed securities(1)....... (1,674) 219 (1,455) Securities.......................... -- -- -- (2,024) (214) (2,238) Federal funds sold.................... 30 11 41 (441) 18 (423) ------- ----- ------- ------ ----- ------ Total interest-earning assets.................... 5,517 (538) 4,979 213 (895) (682) ------- ----- ------- ------ ----- ------ Interest-bearing liabilities: NOWs................................ (22) 68 45 4 (7) (3) Savings and Clubs................... 52 0 52 49 (14) 35 Money Market Accounts............... 36 (2) 34 66 (7) 59 Certificate of Deposits............. 123 (15) 109 (92) 36 (56) ------- ----- ------- ------ ----- ------ Total Deposits.............. 189 51 239 27 8 35 Borrowed money...................... 2,507 (212) 2,295 638 438 1,076 ------- ----- ------- ------ ----- ------ Total interest-bearing liabilities............... 2,696 (162) 2,534 665 446 1,111 ------- ----- ------- ------ ----- ------ Net change in net interest income..... $ 2,821 $(376) $ 2,445 $ 878 $(449) $ 429 ======= ===== ======= ====== ===== ======
- --------------- (1) Includes securities available for sale. COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND 1997 At March 31, 1998 total assets increased by $13.8 million, or 3.27% to $437.5 million compared to $423.6 million at March 31, 1997. The increase in total assets was primarily attributable to increases in cash and equivalents, loans receivable net, and other assets which include accounts receivable, loan clearing accounts, offset in part by decreases in securities available for sale and mortgage-backed securities ("MBS") held to maturity. Securities held as available for sale decreased by $55.5 million, or 66.14%, to $28.4 million at March 31, 1998 compared to $83.9 million at March 31, 1997. The decrease was primarily due to the sale of $49.0 million of mutual funds, the maturity of investment securities, and the principal repayments on MBS securities held as available for sale. The balance of this portfolio at the end of fiscal 1998 consisted solely of mortgage-backed securities held as available for sale. Mortgage-backed securities held to maturity decreased by $19.7 million, or 17.8%, to $91.1 million at March 31, 1998, from $110.9 million at March 31, 1997, primarily due to principal repayments. Investment securities held to maturity decreased by $1.7 million due to the maturation of such securities; at March 31, 1998 the Bank held no securities in this category. Carver's loans receivable at March 31, 1998 increased by $77.0 million or 38.92% to $275.0 million compared to $197.9 million at March 31, 1997. In fiscal 1998, Carver Federal purchased $80.2 million of one- to four- 46 48 family mortgage loans. These shifts in the Company's balance sheet reflect the ongoing Restructuring. See "Restructuring of Balance Sheet." Carver's total liabilities increased by $12.3 million, or 3.16%, to $401.9 million at March 31, 1998 compared to $389.6 million at March 31, 1997. The increase was due to a $8.4 million or 3.16% increase in total deposits coupled with a $3.8 million or 3.17% increase in total borrowings. At March 31, 1998, the Bank's Federal Home Loan Bank of New York ("FHLB") advances decreased by $8.7 million, or 19.07%, to $36.7 million, compared to $45.4 million at March 31, 1997. At March 31, 1998 securities sold under agreements to repurchase ("reverse repurchases") increased $12.7 million or 17.06%, to $87.0 million compared to $74.3 million at March 31, 1997. The Company reduced its FHLB advances and increased reverse repurchases to reduce the cost of borrowings. Carver used the additional borrowings to fund loan originations and loan purchases. During fiscal 1998, deposits increased from $266.5 million to $274.9 million primarily due to interest credited to depositors. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 Net Income (Loss) The Company reported net income for the fiscal year ended March 31, 1998 of $1.0 million or $.48 per share, compared to a net loss of $1.7 million or $.80 per share for the fiscal year ended March 31, 1997. Earnings for fiscal 1997 were adversely affected by three unusual events. During the second quarter of fiscal 1997, Carver experienced a one time pre-tax assessment of $1.6 million for the recapitalization of the Savings Association Insurance Fund ("SAIF") pursuant to legislation which was enacted in September of 1996. During the fourth quarter of fiscal 1997, Carver experienced a one time pre-tax charge of $1.0 million as a result of the disposition of approximately $72 million of money market rate investment securities, or mutual funds. Carver's operating results for the year were also impacted by increases in net interest income, provision for loan losses, and non-interest expense. Interest Income Interest income increased by $5.0 million or 21.80% to $27.8 million for the twelve months ended March 31, 1998 compared to $22.8 million for the twelve months ended March 31, 1997. The increase in interest income was primarily attributable to a $50.7 million or 14.86% increase in average balance of interest earning assets to $391.7 million for the twelve months ended March 31, 1998 compared to $341.0 million for twelve months ended March 31, 1997, coupled with a 40 basis point increase in the yield on average interest earning assets to 7.10% the twelve months ended March 31, 1998 compared to 6.70% for the same period last year. The growth in total interest earning assets was concentrated interest income received from loans. Interest income on loans increased by $10.5 million, or 133.45%, to $18.3 million for the twelve months ended March 31, 1998 compared to $7.8 million for the same period last year. The increase in interest income from loans reflects a $148.8 million or 157.51% increase in the average balance of loans to $243.0 million at March 31, 1998 compared to $94.3 million at March 31, 1997 was partially offset by a 77 basis point decrease from 8.31% to 7.54% in the average yield on loans due to lower market rates of interest. Interest income on mortgage-backed securities held to maturity and MBS available for sale decreased by $1.5 million or 14.59% to $8.5 million for the twelve months ended March 31, 1998 compared to $10.0 million for the same period last year reflecting a decrease of $25.5 million in the average balance of total MBS and a three basis point decrease in the average yield on MBS. Interest income on investment securities decreased by approximately $4.1 million or 85.84% to $671,000 for the twelve months ended March 31, 1998 compared to $4.4 million for the same period last year. The decrease in interest income on investment securities is primarily due to $72.9 million or 85.75% decrease in the average balance of investment securities to $12.1 million for the twelve months ended March 31, 1998 compared to $85.0 million for the same period last year. The declines in the average balances of investment securities and MBS reflect the Company's strategy to shift assets into higher yielding loans. 47 49 Interest Expense. Total interest expense increased by $2.5 million or 20.32% to $15.0 million for the twelve months ended March 31, 1998 compared to $12.5 million for the same period last year. The increase in interest expense reflects a $50.8 million or 15.47% increase in the average balance of interest bearing liabilities coupled with a 16 basis point increase in the average cost of such liabilities. This increase reflects the use of borrowings primarily to fund the origination and purchase of loans. Interest expense on deposits increased by $241,000 or 2.89% to $8.6 million for the twelve months ended March 31, 1998 compared to $8.4 million for the same period last year primarily due to an $8.2 million or 3.15% increase in the average balance of deposits to $270.3 million, offset in part by a 1 basis point decrease in the cost of deposits. Interest expense on borrowings increased by $2.3 million or 55.60% to $6.4 million for the twelve months ended March 31, 1998 compared to $4.1 million for the same period last year. The increase in interest expense on borrowings reflects a $42.6 million or 64.10% increase in the average balance of borrowings to $109.0 for the twelve months ended March 31, 1998 compared to $66.4 million for the same period last year partially offset by a 33 basis point decrease in the average cost of borrowings from 6.22% to 5.89%. Net Interest Income. Net interest income before provision for loan losses for the year ended March 31, 1998, increased $2.4 million, or 23.59%, to $12.8 million compared to $10.4 million for the same period last year. The increase was primarily attributable to a 24 basis point increase in the Company's interest rate spread for the twelve months ended March 31, 1998 to 3.14 % from 2.90%, coupled with a $50.7 million increase in the balance of average interest earning assets offset in part by a $50.8 million increase in the average balance of interest bearing liabilities. The Company's net interest margin increased by 23 basis points to 3.27 % from 3.04%, however, average interest-earning assets to interest-bearing liabilities decreased to 1.03x for the twelve months 1998, from 1.04x for the same period last year. Provision for Loan Losses. The provision for loan losses decreased by $430,000 to $1.3 million, for the year ended March 31, 1998, from $1.7 million for the year ended March 31, 1997. When determining the provision for loan losses, management assesses the risk inherent in its loan portfolio based on the information available at such time relating to trends in the local and national economy, trends in the real estate market and the Company's level on non performing loans and assets and net charge offs. Non performing loans increased from $6.4 million at March 31, 1997 to $6.8 million at March 31, 1998 and net charge-offs decreased from $649,000 to $368,000 over the same period. The net effect of the increased provision and the charge-offs for fiscal 1998 was an increase in the allowance for loan losses from $2.2 million at March 31, 1997, to $3.1 million at March 31, 1998. The allowance for loan losses equaled 1.11% of the gross loan portfolio at March 31, 1998 compared 1.09% at March 31, 1997. Non-Interest Income. Non-interest income is composed of loan fees and service charges, gains or (losses) from the sale of securities, and fee income for banking services. Non-interest income increased by $2.2 million to $2.4 million for the twelve month period ended March 31, 1998 compared to $113,000 the twelve month period ended March 31, 1997. Non interest income for the period ended March 31, 1997 was reduced by approximately $927,000 as the result of a loss on the sale of securities related to the Restructuring. Non interest income increased by $1.3 million or 126.06% for the twelve month period ended March 31, 1998 compared to the same period last year before posting the loss on the sale of securities. The increase in non interest income reflects a gain of $184,000 on the sale of securities held as available for sale during the fourth quarter combined with an increase of $2.1 million in other income which consist of fees for banking services and products. 48 50 Non-Interest Expense. Non interest expense for the twelve month period ended March 31, 1998 was $11.7 million. Non-interest expense for fiscal 1997, contained a one-time pre-tax assessment of $1.6 million for the recapitalization of SAIF, pursuant to the Funds Act. Excluding the SAIF assessment, total non-interest expense would have been $10.2 million for fiscal 1997. Non interest expense increased by $1.5 million or 14.71% for the twelve month period ended March 31, 1998 compared to the same period last year before posting the SAIF assessment. During the twelve month period ended March 31, 1998 the Company continued to invest substantially in improving its infrastructure. These investments encompassed upgrading technology, increasing staff and expanding marketing efforts. These investments increased operating expenses for the fiscal year 1998. Salaries and employee benefits for fiscal year 1998 increased by $694,000, or 17.17%, to $4.7 million from $4.0 million for fiscal 1997. This increase was primarily due to a general increase in staff, incentive compensation and ESOP expense. Equipment expense for fiscal 1998 increased by $167,000, or 15.35%, to $1.3 million from $1.1 million in fiscal 1997, reflecting the increased depreciation and maintenance cost for new furniture, fixtures and computers for Carver's headquarters and certain branches. Legal expenses increased by $214,000 or 136.54% to $371,000 for fiscal 1998 compared to $157,000 for fiscal 1997. Bank charges increased by $74,000 or 21.67% to $415,000 for fiscal 1998 compared to $341,000 for fiscal 1997. These increases in non-interest expenses were offset in part by a $356,000 or 73.94% decrease in deposit insurance premiums to $135,000 for fiscal 1998 compared to $482,000 for fiscal 1997. Income Tax Expense. Income tax expense totaled $1.2 million for fiscal year 1998, compared to a benefit of $1.3 million for fiscal year 1997. The Company's effective tax rates were 45.7% and 42.3% for the years then ended March 31, 1998 and 1997, respectively. COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND 1996 Carver's total assets increased by $56.0 million, or 15.23%, from $367.6 million at March 31, 1996 to $423.6 million at March 31, 1997. The increase in assets was primarily due to the restructuring of the investment and loan portfolios and leveraging the Company's balance sheet. Carver's portfolio of securities available for sale decreased by $30.5 million, or 26.68%, to $83.8 million at March 31, 1997, from $114.3 million at March 31, 1996. The reason for this significant change in the portfolio was the sale of the Company's portfolio of mutual funds (which was included in securities available for sale), in accordance with the Company's restructuring program. Accordingly the balance of this portfolio at year end consisted of mortgage-backed securities available for sale. Mortgage-backed securities held to maturity decreased by $20.3 million, or 15.48%, to $110.8 million at March 31, 1997, from $131.1 million at March 31, 1996, primarily due to principal repayments. Investment securities held to maturity decreased by $7.3 million, or 82.02%, to $1.6 million at March 31, 1997, from $8.9 million at March 31, 1996. This decrease in investment securities was due primarily to the call back of certain bonds totaling $7.0 million. Carver's loans receivable increased to $197.9 million at March 31, 1997, as compared to $82.6 million at March 31, 1996. In fiscal year 1997, Carver Federal purchased $83.0 million of one- to four-family mortgage loans. See "Restructuring of Balance Sheet." Carver's total liabilities increased by $56.8 million, or 17.07%, from $332.8 million at March 31, 1996, to $389.6 million at March 31, 1997, as a result of an increase in borrowings as well as increased deposits. At March 31, 1997, the Bank's FHLB advances were $45.4 million, an increase of $20.0 million, or 78.74%, as compared to advances of $25.4 million at March 31, 1996. Securities sold under agreements to repurchase increased $27.3 million, or 58.09%, to $74.3 million at March 31, 1997, from $47.0 million at March 31, 1996. Carver used the proceeds from the principal payments of securities to decrease its borrowings and thereby reduce the cost of funds. 49 51 COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1997 AND 1996 Net Income (Loss). For fiscal 1997, the Company experienced a net loss of $1.7 million, as compared to net income of $753,000 for the year ended March 31, 1996. Earnings for fiscal 1997 were adversely affected by three unusual events. During the second quarter of fiscal 1997, Carver experienced a one time pre-tax assessment of $1.6 million for the recapitalization of the Savings Association Insurance Fund ("SAIF") pursuant to legislation which was enacted in September of 1996. During the fourth quarter of fiscal 1997, Carver experienced a one time pre-tax charge of $1.0 million as a result of the disposition of approximately $72 million of money market rate investment securities, or mutual funds. During the fourth quarter of fiscal 1997, the Company added approximately $1.6 million to its provision for loan losses. Carver's operating results for the year were also impacted by an increase in net interest income and an increase in non-interest expense. Net Interest Income. Net interest income before provision for loan losses for the year ended March 31, 1997, increased $429,000, or 4.32%, to $10.3 million as compared to $9.9 million for the year ended March 31, 1996 ("fiscal 1996"). Carver's interest rate spread widened from 2.57% in fiscal 1996 to 2.90% in fiscal 1997, and its interest margin increased from 2.85% in fiscal 1996, to 3.04% in fiscal 1997. These increases in interest rate spread and net interest margin resulted in part from the decreased cost of deposits and borrowed money. These increases also reflect the replacement of certain investment and mortgage-backed securities with higher yielding loans. The ratio of the Company's average interest-earning assets to interest-bearing liabilities decreased to 1.04x in fiscal 1997, from 1.07x in fiscal 1996. The changes in this ratio primarily reflects the increase in average interest earning assets. Interest Income. Carver's interest income for the fiscal year ended March 31, 1997, decreased by $682,000, or 2.90%, to $22.8 million as compared to $23.5 million for the fiscal year ended March 31, 1996. The decrease in interest income resulted primarily from a 3 basis point decrease in the average yield on interest-bearing assets, from 6.73% during fiscal year 1996, to 6.70% during fiscal year 1997 and a decline of $8.8 million in the average balance of interest-earning assets. The decline in average yield resulted from a lower interest rate environment. The decrease in interest income resulted in part from a $2.2 million, or 18.31%, decrease in income from mortgage-backed securities, reflecting a decrease of 11 basis points in the average yield to 6.38% in fiscal 1997 from 6.49% in fiscal 1996. The decrease in interest income also resulted in part from a $1.1 million or an 18.33% decrease in interest income from investment securities, primarily due to a decrease of 76 basis points in the average yield to 5.58% during fiscal 1997 from 6.34% during fiscal 1996. A decline in the general level of interest rates lead these assets, which are primarily adjustable rate, to reprice to lower yields during fiscal 1997. The decline in average yields resulted in a decline in interest income. The impact of these declines in the average yields was offset in part by a shift in Carver's interest earning assets. The shift was reflected in the declines in the average balances of investment securities and mortgage-backed securities which were offset by a significant increase in the average balance of higher yielding mortgage loans. In addition, the average yield on mortgage loans increased slightly from 8.26% for fiscal 1996 to 8.31% during fiscal 1997. Interest Expense. Total interest expense decreased by $1.1 million, or 8.18%, to $12.4 million for fiscal 1997, as compared to $13.5 million for fiscal 1996. The decrease was primarily attributable to a decrease of 88 basis points in the average cost of borrowings during the fiscal 1997 as well as a decrease in average balance on borrowings, of $6.8 million, or 9.29%, to $66.4 million for fiscal 1997, as compared to $73.2 million for fiscal 1996. The interest expense on deposits for the year ended March 31, 1997, decreased nominally by $35,000, or 0.42%, from $8.39 million for the year ended March 31, 1996 to $8.36 million for the year ended March 31, 1997 despite an increase in average deposits of $8.7 million, or 3.43% to $262.0 million for fiscal year 1997, as compared to $253.3 million for fiscal 1996. The decrease in average balance was offset by a 12 basis point 50 52 decrease in the average cost of deposits, from 3.31% for the year ended March 31, 1996 to 3.19% for fiscal year 1997. The increase in deposits costs is due principally to a decline in the average cost of certificate of deposit accounts in the lower interest rate environment. Provision for Loan Losses. The provision for loan losses increased by $1.6 million from $131,000, for the year ended March 31, 1996, to $1.7 million for the year ended March 31, 1997. In addition, the decision to increase the provision reflects the increase in non-performing loans from $3.3 million at March 31, 1996 to $6.4 million at March 31, 1997, net charge-offs of $649,000 during fiscal 1997, compared to a net recovery of $19,000 in fiscal 1996, and the increase in the loan portfolio to $197.8 million at March 31, 1997 from $82.6 million at March 31, 1996. The net effect of the increased provision and the charge-offs for fiscal 1997 was an increase in the allowance for loan losses from $1.2 million at March 31, 1996, to $2.2 million at March 31, 1997, and equaled 1.09% of the gross loan portfolio compared to 1.42% at March 31, 1996. The decline in the ratio of allowances to total loans is the result of the significant increase in gross loans at March 31, 1997. In determining its provision for loan losses, management establishes specific loss allowances on identified problem loans and general loss allowance on the remainder of the loan portfolio. Non-Interest Income. Non-interest income is composed of loan fees and service charges, gains or (losses) from the sale of securities, and fee income for banking services. Non-interest income for fiscal year 1997, decreased by $495,000, or 81.44%, to $113,000, from $608,000 for fiscal year 1996. The decrease was due to loss of $1.0 million on the sale of Carver's mutual fund investments, as part of the asset restructuring during fiscal 1997 substantially offset by increased loan and fee services, charges, and other fees loan fee and service charge income increased by $116,000 or 149.33% due a substantial increase in loan obligations. Fee income for banking services increased by $315,000 or 59.53%, primarily due to an increase in the fees charged for selected services and income from automatic teller machines. Non-Interest Expense. Non-interest expense increased by $2.7 million, or 30.37%, to $11.8 million for fiscal 1997, as compared to $9.1 million for fiscal year 1996. This increase was primarily attributable to a one-time pre-tax assessment of $1.6 million for the recapitalization of SAIF, pursuant to the Funds Act. Excluding the SAIF assessment, total non-interest expense would have been $10.2 million for fiscal 1997. During the fiscal year 1997 Carver invested substantially in improving its infrastructure. These investments encompassed upgrading technology, increasing staff and expanding marketing efforts. These investments increased operating expenses for the fiscal year 1997. Salaries and employee benefits for fiscal year 1997 increased by $562,000, or 16.13%, to $4.0 million from $3.4 million for fiscal year 1996. This increase was primarily due to a general increase in staff, incentive compensation and ESOP expense. Equipment expense for fiscal 1997 increased by $403,000, or 58.72%, to $1.1 million from $686,000 in fiscal year 1996, reflecting the increased depreciation and maintenance cost for new furniture, fixtures and computers for Carver's new headquarters and certain branches. Net occupancy expense for fiscal year 1997 increased by $136,000, or 13.92%, to $1.1 million from $976,000 in fiscal year 1996. Increase in rent, cleaning expenses and depreciation of leasehold expenses account for the increase in occupancy expense. These increases in non-interest expenses were offset in part by decreased deposit insurance premiums from $618,000 during fiscal 1996 to $482,000 for fiscal 1997. This $137,000 or 22.9%, decrease was due to decreased assessment rates which became effective as of the fourth quarter of fiscal 1997. See "Impact of Recent Legislation -- Recapitalization of the Savings Association Insurance Fund SAIF." Legal expenses during fiscal year 1997, decreased by $194,000, or 55.26%, to $157,000 from $351,000 during fiscal year 1996. The decrease in legal cost was due mainly to capitalization of the costs incurred in connection with the Reorganization of approximately $225,000. This amount is being depreciated on a straight line basis over sixty months. Other non-interest expense increased $314,000, or 16.33%, due to increases on a variety of miscellaneous expense categories, including, among other items, travel and expense, employee training and charitable contribution expenses. 51 53 Income Tax Expense. Income tax expense (benefit) for fiscal year 1997, was a benefit of $1.2 million, compared to $606,000 for fiscal year 1996, due to the net loss for fiscal 1977. The Company's effective tax rates were 42.3% and 44.59% for the years then ended March 31, 1997 and 1996, respectively LIQUIDITY AND CAPITAL RESOURCES Carver Federal's primary sources of funds are deposits, FHLB advances, and proceeds from principal and interest payments on loans, mortgage-backed securities. While maturities and scheduled amortization of loans and investments are predictable sources of funds, deposit flow and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank is required to maintain an average daily balance of liquid assets and short term liquid assets as a percentage of net withdrawable deposit accounts plus short-term borrowings as defined by OTS regulation. The minimum required liquidity and short-term liquidity ratio is 4%. The Bank's liquidity ratios were 12.26% and 21.86% at March 31, 1998 and 1997, respectively. The Bank's most liquid assets are cash and short-term investments. The level of these assets are dependent on the Bank's operating, financing lending and investing activities during any given period. At March 31,1998, and 1997, assets qualifying for short-term liquidity, including cash and short-term investments, totaled $21.5 million and $83.2 million, respectively. The primary investment activity of the Bank is the origination and purchase of loans and, to a lesser extent, purchase of investment and mortgage-backed securities. During fiscal year 1998, Carver purchased $80.2 million in whole loan mortgages, $6.4 million in investment securities and mortgage-backed securities, and sold $5.0 million in investment securities and mortgage-backed securities. During fiscal year 1997 the Bank purchased $84.7 million of whole loan mortgages and originated $51.3 million mortgage and other loans. During fiscal year 1997 no securities were purchased. During fiscal years 1998 and 1997, the Bank received $38.3 million and $27.5 million, respectively, in principal payments. During fiscal year 1998 there was a cash flow of $2.0 million due to call back of government agency preferred stock. At March 31, 1998, the Bank had outstanding loan commitments of $9.6 million. Certificates of deposit which are scheduled to mature in one year or less from March 31, 1998 totaled $23.8 million. Management believes that a significant percentage of such deposits will remain with the Bank. THE YEAR 2000 PROBLEM The Year 2000 Problem centers on the inability of computer systems to recognize the year 2000. Many existing computer programs and systems were originally programmed with six digit dates that provided only two digits to identify the calendar year in the date field, without considering the upcoming change in the century. With the impending millennium, these programs and computers will recognize "00" as the year 1900 rather than the year 2000. Like most financial providers, the Company and its operations may be significantly affected by the Year 2000 Problem due to the nature of financial information. Software, hardware, and equipment both within and outside the Company's direct control and with whom the Company electronically or operationally interfaces (e.g. third party vendors providing data processing, information system management, maintenance of computer systems and credit bureau information) are likely to be affected. Furthermore, if computer systems are not adequately changed to identify the year 2000, many computer applications could fail or create erroneous results. As a result, many calculations which rely on the date field information, such as interest, payment or due dates and other operating functions, will generate results which could be significantly misstated, and the Company could experience a temporary inability to process transactions, send invoices or engage in similar normal business activities. In addition, under certain circumstances, failure to adequately address the Year 2000 Problem could adversely affect the viability of the Company's suppliers and creditors and the creditworthiness of its borrowers. Thus, if not adequately addressed, the Year 2000 Problem could result in a significant adverse impact on the Company's products, services and competitive condition. 52 54 The OTS and the other federal banking regulators have issued guidelines to be followed by insured depository institutions, such as the Bank, to assure resolution of any Year 2000 problems. Any institution's failure to address appropriately the Year 2000 Problem could result in supervisory action. The Company recently received a "Satisfactory" rating in a review of its Year 2000 Problem compliance by the OTS, which represents the highest possible rating eligible to be received. The Company is currently scheduled to begin testing on its loan and deposit systems beginning in July, 1998, and is currently in the process of obtaining software modifications deemed necessary for compliance in all other systems. The Company has initiated formal communications with all of its significant suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to resolve their own Year 2000 Problem. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 Problem will be mitigated without causing a material adverse effect on the operations of the Company. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Problem could have an impact on the Company's operations. At this time, management believes that any such impact and any resulting costs will not be material. Monitoring and managing the Year 2000 Problem will result in additional direct and indirect costs to the Company. Direct costs include potential charges by third party software vendors for product enhancements, costs involved in testing software products for Year 2000 compliance and any resulting costs for developing and implementing contingency plans for critical software products which are not enhanced. Indirect costs will principally consist of the time devoted by existing employees in monitoring software vendor progress, testing enhanced software products and implementing any necessary contingency plans. Such costs have not been material to date. The Company believes that any such costs to be incurred in the future will not have a material effect on its results of operations. Both direct and indirect costs of addressing the Year 2000 Problem will be charged to earnings as incurred. REGULATORY CAPITAL POSITION The Bank must satisfy three minimum capital standards established by the OTS. For a description of the OTS capital regulation, see "Regulation and Supervision -- Regulation of Savings Associations -- Capital Requirements." The Bank presently exceeds all capital requirements as currently promulgated. At March 31, 1998, the Bank had tangible, core, and Tier 1 to risk-weighted assets, and risk-based capital ratios of 6.90%, 6.91%, 6.93% and 16.00% respectively. 53 55 The following table reconciles the Bank's stockholders equity at March 31, 1998, under generally accepted accounting principles to regulatory capital requirements:
REGULATORY CAPITAL REQUIREMENTS ---------------------------------------------- GAAP TANGIBLE TIER/CORE RISK-BASED CAPITAL CAPITAL CAPITAL CAPITAL ------- -------- --------- ---------- (IN THOUSANDS) Stockholders' Equity at March 31, 1998(1)................................. $31,434 $31,434 $31,434 $31,434 Add: Unrealized loss on securities available for sale, net........................ 13 13 13 General valuation allowances............ -- -- 1,522 Qualifying intangible assets............ -- 48 48 Deduct:................................. -- -- -- Goodwill................................ (1,246) (1,246) (1,246) Excess of net deferred tax assets.... -- -- (40) ------- ------- ------- Asset required to be deducted........... -- -- -- Regulatory capital...................... 30,201 30,249 31,731 Minimum capital requirement............. 6,562 13,124 $15,856 ------- ------- ------- Regulatory capital excess............... $23,639 $17,125 $15,875 ======= ======= =======
- --------------- (1) Reflects Bank only. The Bank presently exceeds all capital requirements as currently promulgated. At March 31, 1998, the Bank had tangible, core, and Tier 1 to risk-weighted assets, and risk-based capital ratios of 6.90%, 6.91%, 6.93% and 16.00%, respectively. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and accompanying notes appearing elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of Carver's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on Carver's performance than do the effects of the general level of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. IMPACT OF RECENT LEGISLATION SAIF Recapitalization. For the period from January 1, through September 30, 1996, there existed a disparity of 23 cents per $100 of deposits in the minimum deposit insurance assessment rates applicable to deposits insured by the Bank Insurance Fund ("BIF") and the higher assessment rates applicable to deposits insured by the Savings Association Insurance Fund ("SAIF"). In response to this disparity, on September 30, 1996 the Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted into law. The Funds Act authorized the Federal Deposit Insurance Corporation ("FDIC") to impose a special assessment on all financial institutions with SAIF-assessable deposits in the amount necessary to recapitalize the SAIF. Pursuant to such authority, the FDIC imposed a special assessment of 65.7 basis points per $100 of an institution's SAIF-assessable deposits held on March 31, 1995. The Company's special SAIF assessment of $1.6 million was charged to expense in September 1996 and paid in November 1996. In view of the recapitalization of the SAIF, the FDIC reduced the assessment rates for SAIF-assessable deposits. For the calendar year 1997, the SAIF assessment rates range from 0 to 27 basis points, which is the same range of rates applicable to the BIF. Prior to the SAIF recapitalization, all SAIF-insured institutions were subject to a 54 56 minimum assessment of 23 basis points. The Funds Act also expanded the assessment base to include BIF-insured, as well as SAIF-insured, institutions to fund payments on the bonds issued by the Financing Corporation ("FICO bonds") to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. In order to fund such interest payments, a separate assessment of 1.3 basis points for BIF-assessable deposits and 6.48 basis points for SAIF-assessable deposits became effective on January 1, 1997. The Funds Act requires that, until December 31, 1999 or such earlier date on which the last savings association ceases to exist, the rates of assessment for FICO bond payments imposed on BIF-assessable deposits will be one-fifth of the rate imposed on SAIF-assessable deposits. As a result of the lower overall assessment rates, the Company's non-interest expense for the year justify months ended March 31, 1998 was reduced by $137,000 compared to the same period in 1996. The Funds Act also provides for the merger of the BIF and SAIF on January 1, 1999, with such merger being conditioned upon the prior elimination of the thrift charter. The Funds Act required the Secretary of Treasury to conduct a study of relevant factors with respect to the development of a common charter for all insured depository institutions and the abolition of separate charters for banks and thrifts and to report the Secretary's conclusions and the findings to Congress. The Secretary of the Treasury has recommended that the separate charter for thrifts be eliminated only if other legislation is adopted that permits bank holding companies to engage in certain non-financial activities. Absent legislation permitting such non-financial activity, the Secretary of the Treasury recommended retention of the thrift charter. Other proposed legislation has been introduced in Congress that would require thrift institutions to convert to bank charters. The Secretary of the Treasury also recommended that the BIF and the SAIF be merged irrespective of the elimination of the thrift charter. Tax Bad Debt Reserves. Federal tax law changes were enacted in August 1996 to eliminate the "thrift bad debt" method of calculating bad debt deductions for tax years after 1995 and to require thrifts to recapture into taxable income (over a six-year period) all bad debt reserves accumulated after 1987. Since the Bank's federal bad debt reserves approximated the 1987 base-year amounts, this recapture requirement had no significant impact. The tax law changes also provide that taxes associated with the recapture of pre-1988 bad debt reserves would become payable under more limited circumstances than under prior law. For example, such taxes would no longer be payable in the event that the thrift charter is eliminated and the Bank is required to convert to a bank charter. Amendments to the New York state and New York City tax laws redesignate the Bank's state and New York City bad debt reserves at December 31, 1995 as the base-year amount and also provide for future additions to each of the base-year reserve using the percentage-of-taxable-income method. This change eliminated the excess New York state and New York City reserves for which the Company had recognized a deferred tax liability. Management does not expect these changes to have a significant impact on the Bank. Taxes associated with the recapture of the and New York City state base-year reserve would still become payable under various circumstances, including conversion to a bank charter or failure to meet various thrift definition tests. RECENT ACCOUNTING PRONOUNCEMENTS In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-retirement Benefits," which provides improved disclosures about pensions and other post-retirement benefits. The disclosures will provide information that is more comparable, understandable and concise, and that would better serve users' needs. This statement is effective for fiscal years beginning after December 15, 1997. The adoption of this statement is not anticipated to have a material impact on Carver's financial position or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and for hedging activities." This statement also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and those instruments at fair value. This statement is effective 55 57 for all fiscal quarters of fiscal years beginning after June 15, 1999. The adoption of this statement is not anticipated to have a material impact on the financial position or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The information required by this item appears under the caption "Discussion of Market Risk -- Interest Rate Sensitivity Analysis." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 56 58 LETTERHEAD OF MITCHELL & TITUS LLP To The Board of Directors and Stockholders Carver Bancorp Inc., We have audited the accompanying consolidated statements of financial condition of Carver Bancorp Inc., (the "Company") and subsidiaries as of March 31, 1998 and 1997 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three years ended March 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carver Bancorp and subsidiaries as of March 31, 1998 and 1997, and the results of their operations and cash flows for each of the years in the three years ended March 31, 1998 in conformity with generally accepted accounting principles. /s/ MITCHELL & TITUS LLP -------------------------------------- July 10, 1998 New York, New York 57 59 CARVER BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, ---------------------------- 1998 1997 ------------ ------------ ASSETS Cash and amounts due from depository institutions........... $ 12,120,071 $ 4,230,757 Federal funds sold.......................................... 3,000,000 -- ------------ ------------ Total cash and cash equivalents (Notes 1 and 19)....... 15,120,071 4,230,757 Securities available for sale (Notes 1, 3, 13 and 19)....... 28,407,505 83,892,617 Investment securities held to maturity, net (estimated fair value of $1,673,000 in 1997 (Notes 1, 4, 13, 18 and 19)... -- 1,675,181 Mortgage-backed securities held to maturity, net (estimated fair value of $107,719,000 in 1997) (Notes 1, 5, 12, 13, 18 and 19)................................................ 91,115,861 110,852,668 Loans receivable, net (Notes 1, 6, 13 and 19)............... 274,954,337 197,917,673 Real estate owned, net (Note 1)............................. 82,198 82,198 Property and equipment, net (Notes 1 and 8)................. 11,545,627 11,342,678 Federal Home Loan Bank of New York stock, at cost (Note 13)....................................................... 5,754,600 5,535,000 Accrued interest receivable, net (Notes 1, 9 and 19)........ 2,762,843 2,978,365 Excess of cost over net assets acquired, net (Notes 1 and 10)....................................................... 1,246,116 1,456,000 Other assets (Notes 14 and 16).............................. 6,469,053 3,650,366 ------------ ------------ Total assets........................................... $437,458,211 $423,613,503 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits (Notes 11 and 19).................................. $274,894,232 $266,471,487 Securities sold under agreements to repurchase (Notes 12 and 19)....................................................... 87,020,000 74,335,000 Advances from Federal Home Loan Bank of New York (Notes 13 and 19)................................................... 36,741,686 45,400,000 Other borrowed money (Notes 17 and 19)...................... 1,183,858 1,365,990 Advance payments by borrowers for taxes and insurance....... 659,995 670,502 Other liabilities (Notes 14 and 16)......................... 1,424,096 1,386,802 ------------ ------------ Total liabilities...................................... 401,923,867 389,629,781 ------------ ------------ Commitments and contingencies (Notes 18 and 19)............. -- -- STOCKHOLDERS' EQUITY: (Note 15) Preferred stock, $0.01 par value per share; 1,000,000 authorized; none issued........ -- -- Common stock; $0.01 par value per share; 5,000,000 authorized; 2,314,275 issued and outstanding (Note 2)..... 23,144 23,144 Additional paid-in capital (Note 2)......................... 21,418,897 21,410,167 Retained earnings -- substantially restricted (Notes 2 and 14)....................................................... 15,289,632 14,359,060 Common stock acquired by Employee Stock Ownership Plan ("ESOP") (Notes 2 and 17)................................. (1,183,858) (1,365,990) Unrealized (loss) on securities available for sale, net of taxes..................................................... (13,470) (442,659) ------------ ------------ Total stockholders' equity............................. 35,534,345 33,983,722 ------------ ------------ Total liabilities and stockholders' equity............. $437,458,211 $423,613,503 ============ ============
See Notes to Consolidated Financial Statements 58 60 CARVER BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED MARCH 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- INTEREST INCOME: Loans (Note 1)...................................... $18,311,042 $ 7,843,822 $ 4,800,482 Mortgage-backed securities.......................... 8,522,922 9,978,660 12,217,281 Debt and equity securities.......................... 323,243 4,416,362 5,415,806 Other interest-earning assets....................... 670,509 607,903 1,095,336 ----------- ----------- ----------- Total interest income.......................... 27,827,716 22,846,747 23,528,905 ----------- ----------- ----------- INTEREST EXPENSE: Deposits (Note 11).................................. 8,596,358 8,355,168 8,390,201 Advances and other borrowed money................... 6,422,666 4,127,743 5,204,068 ----------- ----------- ----------- Total interest expense......................... 15,019,024 12,482,911 13,594,269 ----------- ----------- ----------- Net interest income................................. 12,808,692 10,363,836 9,934,636 Provision for loan losses (Notes 1 and 6)........... 1,259,531 1,689,508 130,892 ----------- ----------- ----------- Net interest income after provision for loan losses............................................ 11,549,161 8,674,328 9,803,744 ----------- ----------- ----------- NON-INTEREST INCOME: Loan fees and service charges....................... 559,960 194,689 78,084 Gain (loss) on sale of securities held for sale (Notes 4 and 5)................................... 188,483 (927,093) -- Other............................................... 1,603,096 845,287 529,873 ----------- ----------- ----------- Total non-interest income...................... 2,351,539 112,883 607,957 ----------- ----------- ----------- NON-INTEREST EXPENSES: Salaries and employee benefits (Notes 16 and 17).... 4,739,069 4,044,718 3,482,928 Net occupancy expense (Notes 1 and 18).............. 1,118,467 1,111,602 975,795 Equipment (Note 1).................................. 1,255,301 1,088,258 685,657 Loss on foreclosed real estate (Note 1)............. -- 37,995 76,582 Advertising......................................... 289,061 172,795 168,084 Federal deposit insurance premium................... 125,506 481,646 618,169 Amortization of intangibles (Note 1)................ 209,892 213,073 229,898 Legal expenses...................................... 371,430 157,023 350,921 Bank charges........................................ 415,223 341,272 308,391 Security service.................................... 290,431 286,036 234,856 SAIF assessment..................................... -- 1,632,290 -- Other............................................... 2,836,568 2,235,249 1,921,462 ----------- ----------- ----------- Total non-interest expenses.................... 11,650,948 11,801,957 9,052,743 ----------- ----------- ----------- Income (loss) before income taxes................... 2,249,752 (3,014,746) 1,358,958 Income taxes (Notes 1 and 14)....................... 1,203,466 (1,275,078) 605,874 ----------- ----------- ----------- Net income (loss)................................... $ 1,046,286 $(1,739,668) $ 753,084 =========== =========== =========== Net income (loss) per common share.................. $ 0.48 $ (0.80) $ 0.35 =========== =========== =========== Weighted average number of shares outstanding (Note 1)................................................ 2,187,619 2,169,276 2,156,346
See Notes to Consolidated Financial Statements 59 61 CARVER BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
RETAINED COMMON (LOSS) ON ADDITIONAL EARNINGS STOCK SECURITIES COMMON PAID-IN SUBSTANTIALLY ACQUIRED AVAILABLE STOCK CAPITAL RESTRICTED BY ESOP FOR SALE NET TOTAL ------- ----------- ------------- ----------- ------------ ----------- Balance -- March 31, 1995... $23,144 $21,465,072 $15,345,644 $(1,730,254) $ (302,455) $34,801,161 Net income for the year ended March 31, 1996...... -- -- 753,084 -- -- 753,084 Allocation of ESOP stock.... -- (28,837) -- 182,132 -- 153,295 Increase in unrealized (loss) in securities available for sale, net... -- -- -- -- (942,759) (942,759) ------- ----------- ----------- ----------- ----------- ----------- Balance -- March 31, 1996... 23,144 21,436,235 16,098,728 (1,548,122) (1,245,204) 34,764,781 Net loss for the year ended March 31, 1997............ -- -- (1,739,668) -- -- (1,739,668) ------- ----------- ----------- ----------- ----------- ----------- Allocation of ESOP stock.... -- (26,068) -- 182,132 -- 156,064 Decrease in unrealized, loss in securities available for sale, net............. -- -- -- -- 802,545 802,545 ------- ----------- ----------- ----------- ----------- ----------- Balance -- March 31, 1997... 23,144 21,410,167 14,359,060 (1,365,990) (442,659) 33,983,722 ------- ----------- ----------- ----------- ----------- ----------- Net Income for the year ended March 31, 1998...... -- -- 1,046,286 -- -- 1,046,286 Allocation of ESOP Stock.... -- 58,566 182,132 -- 240,698 Dividends paid.............. -- (115,714) (115,714) Options exercised........... (49,836) -- -- -- (49,836) Decrease in unrealized, loss in Securities available for sale, net............. -- -- -- -- 429,189 429,189 ------- ----------- ----------- ----------- ----------- ----------- Balance -- March 31, 1998... $23,144 $21,418,897 $15,289,632 $(1,183,858) $ (13,470) $35,534,345 ======= =========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements 60 62 CARVER BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income........................................... $ 1,046,286 $ (1,739,668) $ 753,084 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization............................... 695,192 664,750 301,918 Amortization of intangibles................................. 209,892 213,082 229,888 Other amortization and accretion, net....................... 402,662 1,143,308 651,014 Provision for loan losses................................... 1,259,531 1,689,508 130,892 Gain from sale of real estate owned......................... -- (26,229) -- Proceeds from sale of loans................................. 1,459,491 -- 1,948,143 Net loss on sale of securities available for sale........... (188,483) 927,093 -- Deferred income taxes....................................... 58,555 (387,456) (380,541) Allocation of ESOP stock.................................... 240,698 156,064 153,295 (Increase) decrease in accrued interest receivable.......... 215,522 (290,166) 19,310 Decrease (increase) in refundable income taxes.............. 0 (286,000) 238,157 (Increase) decrease in other assets......................... 2,818,687 (1,493,435) (72,455) Increase (decrease) in other liabilities.................... 37,294 (510,154) 731,784 ------------ ------------ ------------ Net cash provided by operating activities................... 8,255,327 60,697 4,704,489 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Principal repayments on investments held to maturity........ 194,476 311,894 96,335 Principal repayments on securities available for sale....... 5,061,181 5,357,790 2,965,441 Purchases of securities available for sale.................. (17,000,000) (57,508,308) -- Proceeds from sales and call of securities held for sale.... 55,485,112 84,052,091 9,000,000 Purchase of investment securities held to maturity.......... (1,946,326) (50,000) -- Proceeds from maturities and calls of investment securities held to maturity.......................................... 8,480,705 7,000,000 Principal repayment of mortgage-backed securities held to maturity.................................................. 19,313,831 19,302,028 23,663,432 Purchase of loans........................................... (68,153,900) (84,708,587) (26,911,379) Net change in loans receivable.............................. (8,882,764) (32,265,562) (9,357,887) Proceeds from sale of real estate owned..................... 0 258,292 -- Additions to premises and equipment......................... (897,030) (2,050,447) (5,930,518) (Purchase) Federal Home Loan Bank stock..................... (219,600) (2,415,000) -- ------------ ------------ ------------ Net cash (used in) provided by investing activities......... (8,564,315) (62,715,809) (6,474,576) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits......................... 8,422,745 9,519,604 8,505,919 Net increase (decrease) in short-term borrowings............ (942,404) 58,335,000 (19,188,000) Proceeds of long-term borrowings............................ 12,685,000 -- 11,000,000 Repayment of long-term borrowings........................... (45,400,000) (11,000,000) -- Advances from Federal Home Loan of New York................. 36,741,314 -- -- Repayment of other borrowed money........................... (182,132) (182,132) -- Dividends Paid.............................................. (115,714) -- -- Increase (Decrease) in advance payments by borrowers for taxes and insurance....................................... (10,507) 187,447 (339,687) ------------ ------------ ------------ Net cash provided by (used in) financing activities......... (11,198,302) 56,859,919 (21,768) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents........ 10,889,314 (5,795,193) (1,791,855) Cash and cash equivalents -- beginning...................... 4,230,757 10,025,950 11,817,805 ------------ ------------ ------------ Cash and cash equivalents -- ending......................... $ 15,120,071 $ 4,230,757 $ 10,025,950 ============ ============ ============ Supplemental disclosure of non-cash activities: Transfers of mortgage-backed securities..................... $ -- $ -- $ 25,891,771 ============ ============ ============ Unrealized Gain (loss) on securities available for sale: Unrealized Gain (loss)...................................... (25,417) 835,206 (1,778,783) Deferred income taxes....................................... 11,947 (397,547) 836,033 ------------ ------------ ------------ $ 13,470 $ 442,659 $ (942,760) ============ ============ ============ Loans receivable transferred to real estate owned........... $ -- $ 32,729 $ 449,197 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid for: Interest.................................................... $ 15,019,024 $ 12,361,162 $ 13,344,140 ============ ============ ============ Federal, state and city income taxes........................ $ 515,457 $ 286,000 $ -- ============ ============ ============
See Notes to Consolidated Financial Statements 61 63 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Background Carver Bancorp, Inc. ("Carver" or the "Holding Company") is a bank holding company that was incorporated in May 1996 and whose principal wholly owned subsidiary is Carver Federal Savings Bank (the "Bank"). CFSB Realty Corp. and CFSB Credit Corp. are wholly owned subsidiaries of the Bank. The Bank was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally chartered mutual savings and loan association. The Bank converted to a federal savings bank in 1986 and changed its name at that time. On October 24, 1994, Carver Federal Savings Bank converted from mutual stock form and issued 2,314,375 shares of its common stock, par value $0.01 per share. In connection with an agreement and plan of reorganization whereby the Bank would become a wholly owned subsidiary of Carver, the Bank incorporated Carver on May 9, 1996 under the General Corporation Law of the State of Delaware. Pursuant to the Reorganization, each outstanding share of the outstanding common stock of the Bank was converted on a one-to-one basis for Carver's common stock, except for 100 shares with regard to which a stockholder of the Bank exercised dissenters' rights of appraisal. Accordingly, 2,314,275 shares of Carver's common stock are presently issued and outstanding. Nature of operations Carver's banking subsidiary's principal business consists of attracting passbook and other savings accounts through its branch offices and investing those funds in mortgage loans and other investments permitted federal savings banks. Carver's banking subsidiary has seven branches located throughout the City of New York that primarily serves the communities in which they operate. Basis of consolidated financial statement presentation The consolidated financial statements include the accounts of Carver, the Bank and its wholly owned subsidiaries, CFSB Realty Corp. and CFSB Credit Corp. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the period then ended. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near-term relate to prepayment assumptions on mortgage-backed securities, the determination of the allowance for loan losses and the valuation of real estate owned. Management believes that prepayment assumptions on mortgage-backed securities are appropriate, the allowance for loan losses is adequate and real estate owned is properly valued. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowance for loan losses or future write downs of real estate owned may be necessary based on changes in economic conditions in the areas where Carver had extended mortgages and other credit instruments. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Carver's allowance for loan losses and real estate owned valuations. Such agencies may require Carver to recognize additions to the allowance for loan losses or additional write downs of real estate owned based on their judgments about information available to them at the time of their examination. 62 64 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Cash and cash equivalents Cash and cash equivalents include cash and amounts due from depository institutions and federal funds sold. Generally, federal funds sold are sold for one-day periods. Investment and mortgage-backed securities When purchased, securities are classified in either the investments held to maturity portfolio or the securities available for sale portfolio. Securities can be classified as held to maturity and carried at amortized cost only if the reporting entity has a positive intent and ability to hold those securities to maturity. If not classified as held to maturity, such securities must be classified as securities available for sale. Unrealized holding gains or losses for securities available for sale are to be excluded from earnings and reported net of deferred income taxes as a separate component of retained earnings. Investment and mortgage-backed securities held to maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using the level-yield method over the remaining period until maturity. Gains or losses on sales of securities of all classifications are recognized on the specific identification method. Loans receivable Loans receivable are carried at unpaid principal balances plus unamortized premiums, less the allowance for loan losses and deferred loan fees and discounts. Carver defers loan origination fees and certain direct loan origination costs and accretes such amounts as an adjustment of yield over the contractual lives of the related loans by use of the interest method. Premiums and discounts on loans purchased are amortized and accreted, respectively, as an adjustment of yield over the contractual lives of the related loans by use of the interest method. Loans are placed on non-accrual status when they are past due three months or more as to contractual obligations. When a loan is placed on non-accrual status, any interest accrued but not received is reversed against interest income. A non-accrual loan is restored to accrual status when principal and interest payments become less than three months past due. A loan is considered to be impaired, as defined by FAS No. 114, "Accounting by Creditors for Impairment of a Loan," when it is probable that Carver will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. Carver tests loans covered under FAS No. 114 for impairment if they are on nonaccrual status or have been restructured. Consumer credit nonaccrual loans are not tested for impairment because they are included in large groups of smaller-balance homogeneous loans that, by definition along with leases, are excluded from the scope of FAS No. 114. Impaired loans are required to be measured based upon the present value of expected future cash flows, discounted at the loan's initial effective interest rate, or at the loan's market price or fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, an impairment reserve must be established for the difference. The impairment reserve is established by either an allocation of the reserve for credit losses or by a provision for credit losses, depending on the adequacy of the reserve for credit losses. Impairment reserves are not needed when interest payments have been applied to reduce principal, or when credit losses have been recorded so that the recorded investment in an impaired loan is less than the loan valuation. 63 65 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Allowance for loan losses An allowance for loan losses is maintained at a level considered adequate to absorb future loan losses. Management, in determining the allowance for loan losses, considers the risks inherent in its loan portfolio and changes in the nature and volume of its loan activities, along with the general economic and real estate market conditions. Carver maintains a loan review system which allows for a periodic review of its loan portfolio and the early identification of potential problem loans. Such system takes into consideration, among other things, delinquency status, size of loans, type of collateral and financial condition of the borrowers. Loan loss allowances are established for problem loans based on a review of such information and/or appraisals of the underlying collateral. On the remainder of its loan portfolio, loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of loan portfolio, current economic conditions and management's judgment. Although management believes that adequate loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of the loan loss allowance may be necessary in the future. Concentration of risk The Bank's principle lending activities are concentrated in loans secured by real estate a substantial portion of which is located in the State of New York, and the State of California. See "Purchases of Loans." Premises and equipment Premises and equipment are comprised of land and construction in progress, at cost, and buildings, building improvements, furnishings and equipment and leasehold improvements, at cost, less accumulated depreciation and amortization. Depreciation and amortization charges are computed using the straight-line method over the following estimated useful lives: Buildings and improvements........... 10 to 50 years Furnishings and equipment............ 3 to 10 years Leasehold improvements............... The lesser of useful life or term of lease
Significant renewals and betterments are charged to the property and equipment account. Maintenance and repairs are charged to expense in the year incurred. Real estate owned Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at the lower of cost or fair value at the date of acquisition and thereafter carried at the lower of cost or fair value less estimated selling costs. The amounts ultimately recoverable from real estate owned could differ from the net carrying value of these properties because of economic conditions and the current softness in the local real estate market. Costs incurred to improve properties or get them ready for sale are capitalized. Revenues and expenses related to the holding and operating of properties are recognized in operations as earned or incurred. Gain or loss on sale of properties is recognized as incurred. Excess of cost over net assets acquired In connection with the acquisition of two branches, core deposit premiums paid and other capitalized acquisition costs are being amortized to expense over periods from five to fifteen years using the straight-line method. 64 66 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Interest-rate risk The Bank is principally engaged in the business of attracting deposits from the general public and using these deposits, together with borrowings and other funds, to originate loans secured by real estate and to purchase investment and mortgage-backed securities. The potential for interest-rate risk exists as a result of the shorter duration of interest-sensitive liabilities compared to the generally longer duration of interest-sensitive assets. In a rising rate environment, liabilities will reprice faster than assets, thereby reducing the market value of long-term assets and net interest income. For this reason, management regularly monitors the maturity structure of the assets and liabilities in order to measure its level of interest-rate risk and plan for future volatility. Income taxes Federal, state and city income taxes have been provided on the basis of reported income. The amounts reflected on the tax returns differ from these provisions due principally to temporary differences in the treatment of certain items of income and expense for financial statement and income tax reporting purposes. Deferred income taxes in the consolidated statement of condition are adjusted each year to reflect the cumulative taxable and deductible temporary differences and net operating loss and tax credit carryforwards at the then existing income tax rates. Net income per common share Net income per common share for each of the years in the three years ended March 31, 1998 is based on net income for the entire year dividend by weighted average shares outstanding during the year. For the purpose of these calculations, unreleased ESOP shares are not considered to be outstanding. NOTE 2. CONVERSION TO STOCK FORM OF OWNERSHIP AND REORGANIZATION INTO A HOLDING COMPANY On October 24, 1994, the Bank issued an initial offering of 2,314,375 shares of common stock (par value $0.01) at a price of $10 per share resulting in net proceeds of $21,519,000. As part of the initial public offering and in order to grant priority to eligible depositors, the Bank established a liquidation account at the time of conversion, in an amount equal to the surplus and reserves of the Bank at September 30, 1994. In the unlikely event of a complete liquidation of the Bank (and only in such event), eligible depositors who continue to maintain accounts shall be entitled to receive a distribution from the liquidation account. The total amount of the liquidation account may be decreased if the balances of eligible deposits decreased as measured on the annual determination dates. The balance of the liquidation account was approximately $4,884,000, and $5,763,000 at March 31, 1998 and 1997, respectively. On October 17, 1996, the Bank completed a reorganization into a holding company structure (the "Reorganization") and became the wholly-owned subsidiary of Carver Bancorp, Inc., a savings and loan holding company. Pursuant to an Agreement and Plan of Reorganization, dated May 21, 1996, each share of the Bank's outstanding common stock was exchanged for one share of the Holding Company's common stock. In connection with the Reorganization, a shareholder of the Bank exercised common stock were purchased and 100 shares of the Bank's common stock were purchased from such shareholder in the fourth fiscal quarter of 1997. Accordingly 2,314,275 shares of the Company's common stock remain outstanding. The Bank's shareholder approved the Reorganization at the Bank's annual meeting of shareholders held on July 29, 1996. As a result of the Reorganization, the Bank will not be permitted to pay dividends to the Holding Company on its capital stock if the effect thereof would cause its net worth to be reduced below either: (i) the amount required for the liquidation account or (ii) the amount required for the Bank to comply with applicable minimum regulatory capital requirements. 65 67 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3. SECURITIES AVAILABLE FOR SALE
MARCH 31, 1998 -------------------------------------------------- GROSS UNREALIZED CARRYING ----------------- ESTIMATED VALUE GAINS LOSSES FAIR VALUE -------------- ----- -------- ----------- Mortgage -- backed securities................ $28,407,505 $-- $ 25,417 $28,382,089 Interest rate agreement for a notional amount of $5,000,000.............................. 0 -- -- 0 ----------- -- -------- ----------- $28,407,505 -- -- $28,382,089 =========== == ======== ===========
MARCH 31, 1997 -------------------------------------------------- GROSS UNREALIZED CARRYING ----------------- ESTIMATED VALUE GAINS LOSSES FAIR VALUE -------------- ----- -------- ----------- Mortgage -- backed securities................ $33,469,963 $-- $845,206 $32,624,757 Equity securities: Mutual funds............................... 49,108,306 -- -- 49,108,306 Common and preferred stock................. 2,049,898 -- -- 2,048,898 Interest rate agreement for a notional amount of $5,000,000.................... 29,750 -- Interest rate agreement for a notional amount of $20,000,000................... 79,906 -- 79,906 ----------- -- -------- ----------- $84,737,823 $ $845,206 $83,892,617 =========== == ======== ===========
Proceeds from sales of investment securities held for sale during the year ended March 31, 1998 were $5,188,483, resulting in gross gains of $188,000. There were no sales of investment securities held for sale during the years ended March 31, 1997 and 1996. NOTE 4. INVESTMENT SECURITIES HELD TO MATURITY, NET
MARCH 31, 1998 -------------------------------------------------- GROSS UNREALIZED CARRYING ----------------- ESTIMATED VALUE GAINS LOSSES FAIR VALUE -------------- ----- -------- ----------- U.S. Government (including agencies): After one year through five years.......... $ 0 $0 $ 0 $ 0 =========== == ======== ===========
MARCH 31, 1997 -------------------------------------------------- GROSS UNREALIZED CARRYING ----------------- ESTIMATED VALUE GAINS LOSSES FAIR VALUE -------------- ----- -------- ----------- U.S. Government (including agencies): After one year through five years.......... $ 1,675,181 $-- $ 2,094 $ 1,673,087 =========== == ======== ===========
There were no sales of securities held to maturity during the years ended March 31, 1998, 1997 and 1996. Proceeds from calls of investment securities held to maturity during the years ended March 31, 1998, 1997 and 1996 were $2,000,000, $7,000,000 and $9,000,000, respectively. No gains or losses were realized on these calls. 66 68 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5. MORTGAGE-BACKED SECURITIES HELD TO MATURITY, NET
MARCH 31, 1998 ------------------------------------------------------ PRINCIPAL UNAMORTIZED UNEARNED CARRYING BALANCE PREMIUMS DISCOUNTS VALUE ----------- ----------- --------- ----------- Government National Mortgage Association............................ $ 8,918,901 $ 0 $ 64,260 $ 8,854,642 Federal Home Loan Mortgage Corporation... 35,141,886 872,418 112,803 35,901,501 Federal National Mortgage Association.... 36,264,031 529,740 109,146 36,684,625 Small Business Administration............ 1,782,199 -- 11,847 1,770,352 Collateralized mortgage obligations: Resolution Trust Corporation........... 6,478,542 85,901 -- 6,564,443 Federal Home Loan Mortgage Corporation......................... 1,340,298 -- -- 1,340,298 Others................................. 629,118 -- -- -- ----------- ---------- -------- ----------- $89,925,857 $1,488,059 $298,056 $91,115,861 =========== ========== ======== ===========
MARCH 31, 1997 ---------------------------------------------------------- PRINCIPAL UNAMORTIZED UNEARNED CARRYING BALANCE PREMIUMS DISCOUNTS VALUE -------------- ----------- --------- ------------ Government National Mortgage Association........................... $ 11,797,496 $ 40 $108,430 $ 11,689,106 Federal Home Loan Mortgage Corporation........................... 43,789,880 1,132,946 154,798 44,768,028 Federal National Mortgage Association... 41,007,256 603,316 144,713 41,465,859 Small Business Administration........... 2,263,969 -- 15,251 2,248,718 Collateralized mortgage obligations: Resolution Trust Corporation.......... 8,240,457 113,289 -- 8,353,746 Federal Home Loan Mortgage Corporation........................ 1,690,298 -- -- 1,690,298 Others................................ 629,118 7,795 -- 636,913 ------------ ---------- -------- ------------ $109,418,474 $1,857,386 $423,192 $110,852,668 ============ ========== ======== ============
A summary of gross unrealized gains and losses and estimated fair value follows:
MARCH 31, 1998 ---------------------------------------------- GROSS UNREALIZED CARRYING ------------------ ESTIMATED VALUE GAINS LOSSES FAIR VALUE ----------- ------- -------- ----------- Government National Mortgage Association....... $ 8,854,642 $ -- $ 39,022 $88,156,620 Federal Home Loan Mortgage Corporation......... 35,901,501 -- 585,759 35,315,741 Federal National Mortgage Association.......... 36,684,625 -- 206,223 36,478,402 Small Business Administration.................. 1,770,352 40,744 -- 1,811,096 Collateralized mortgage obligations: Resolution Trust Corporation................. 1,340,298 116,838 1,329,408 Federal Home Loan Mortgage Corporation....... 6,564,443 -- 10,890 6,447,605 Others....................................... -- -- -- -- ----------- ------- -------- ----------- $91,115,861 $40,744 $958,732 $90,197,873 =========== ======= ======== ===========
67 69 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997 --------------------------------------------------- GROSS UNREALIZED CARRYING --------------------- ESTIMATED VALUE GAINS LOSSES FAIR VALUE ------------ -------- ---------- ------------ Government National Mortgage Association............................. $ 11,689,106 $149,141 $ 475,567 $ 11,362,680 Federal Home Loan Mortgage Corporation.... 44,768,028 -- 937,810 43,830,218 Federal National Mortgage Association..... 41,465,859 -- 1,480,513 39,985,346 Small Business Administration............. 2,248,718 38,806 -- 2,287,524 Collateralized mortgage obligations: Resolution Trust Corporation............ 8,353,746 268,352 8,085,394 Federal Home Loan Mortgage Corporation.......................... 1,690,298 -- 29,581 1,660,717 Others.................................. 636,913 -- 7,795 629,118 ------------ -------- ---------- ------------ $110,852,668 $187,947 $3,199,618 $107,840,997 ============ ======== ========== ============
The following is a schedule of final maturities as of March 31,1998:
CARRYING ESTIMATED VALUE FAIR VALUE -------- ---------- (IN THOUSANDS) After one through five years............................ $19,501 $19,428 After five through ten years............................ 71,615 70,770 After ten years......................................... -- -- ------- ------- $91,116 $90,198 ======= =======
There were no sales of mortgage-backed securities held to maturity during the years ended March 31,1998, 1997 and 1996. 68 70 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6. LOANS RECEIVABLE, NET
YEAR ENDED MARCH 31, ------------------------------------------- 1998 1997 1996 ------------ ------------ ----------- Real estate mortgage: One- to four- family............................ $188,761,350 $139,961,350 $59,466,442 Multi-family.................................... 49,289,001 19,935,991 2,490,355 Non-residential................................. 12,789,230 22,415,427 11,138,426 Equity and second mortgages..................... 443,907 586,300 364,085 ------------ ------------ ----------- 251,283,488 182,899,068 73,459,308 ------------ ------------ ----------- Agency for International Development.............. -- -- 9,441 ------------ ------------ ----------- Real estate construction.......................... 15,993,381 14,386,137 6,965,301 ------------ ------------ ----------- Commercial loans.................................. 1,442,158 3,192,251 1,090,941 ------------ ------------ ----------- Consumer: Passbook or certificate......................... 997,804 954,635 1,011,371 Student education............................... 174,313 974,892 1,094,351 Other........................................... 12,478,147 3,600,859 931,319 ------------ ------------ ----------- 13,650,264 5,530,386 3,037,041 ------------ ------------ ----------- Total loans....................................... 282,369,290 206,007,842 84,562,032 ------------ ------------ ----------- Add: Premium...................................... 1,555,397 1,804,938 882,138 Less: Loans in process............................ 4,752,246 6,854,591 1,406,150 Allowance for loan losses......................... 3,138,000 2,245,746 1,205,496 Deferred loan fees and discounts.................. 1,080,104 794,770 224,459 ------------ ------------ ----------- (7,414,953) (9,895,107) (2,836,105) ------------ ------------ ----------- $274,954,337 $197,917,673 $82,608,065 ============ ============ ===========
The following is an analysis of the allowance for loan losses:
YEAR ENDED MARCH 31, -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Balance -- beginning........................... $2,245,746 $1,204,496 $1,074,604 Provision charged to operations................ 1,259,532 1,698,508 130,892 Recoveries of amounts previously charged off... -- 49,940 -- Loans charged off.............................. (367,278) (699,198) -- ---------- ---------- ---------- Balance -- ending.............................. $3,138,000 $2,245,746 $1,205,496 ========== ========== ==========
Non-accrual loans consist of loans for which the accrual of interest has been discounted as a result of such loans becoming three months or more delinquent as to principal and/or interest payments. Interest income on non-accrual loans is recorded when received. Restructured loans consist of loans where borrowers have been granted concessions in regards to the terms of their loans due to financial or other difficulties which rendered them unable to service their loans under the original contractual terms. Such loans are performing in 69 71 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) accordance with their restructured terms. The balances of non-accrual and restructured loans and their impact in interest income are as follows:
YEAR ENDED MARCH 31, -------------------------- 1998 1997 1996 ------ ------ ------ (IN THOUSANDS) Non-accrual loans........................................ $5,568 $2,872 $2,034 Restructured loans....................................... 807 413 -- ------ ------ ------ $6,375 $3,285 $2,034 ====== ====== ======
YEAR ENDED MARCH 31, -------------------- 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Interest income which would have been recorded had loans performed in accordance with original contracts........... $762 $393 $138 Interest income received.................................... 285 147 26 ---- ---- ---- Interest income lost........................................ 477 246 $112 ==== ==== ====
At March 31, 1998, loans to officers totaled approximately $850,000. In addition, the Bank carried two loans to former officers totaling approximately $244,000 one of which for $122,000 was originated during fiscal 1998. The following is a summary of loans to the Bank's directors and officers (and to any associates of such persons), exclusive of loans to any such person which in aggregate did not exceed $60,000:
YEAR ENDED MARCH 31, -------------------- 1998 1997 -------- -------- (IN THOUSANDS) Balance -- beginning........................................ $649,607 $428,429 Loans originated............................................ 464,488 235,200 Other....................................................... (243,789) Repayments.................................................. (20,111) (14,022) -------- -------- Balance -- ending........................................... $850,195 $649,607 ======== ========
NOTE 7. LOANS SERVICING The mortgage loan portfolios serviced for the FHLMC and Fannie Mae are not included in the accompanying financial statements. The unpaid principal balances of these loans aggregated $3,696,000; $3,881,000, and $4,317,000 at March 31, 1998, 1997 and 1996, respectively. Custodial escrow balances, maintained in connection with the foregoing loan servicing, were approximately $61,000, $80,000 and $89,000 at March 31, 1998, 1997 and 1996, respectively. 70 72 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8. PREMISES AND EQUIPMENT, NET
MARCH 31, -------------------------- 1998 1997 ----------- ----------- Land...................................................... $ 450,952 $ 450,952 Buildings and improvements................................ 8,431,160 8,362,760 Leasehold improvements.................................... 395,770 379,331 Furnishings and equipment................................. 4,231,094 3,589,757 Construction in process................................... 299,809 127,848 ----------- ----------- 13,808,785 12,910,648 Less accumulated depreciation and amortization............ 2,263,158 1,567,970 ----------- ----------- $11,545,627 $11,342,678 =========== ===========
Depreciation and amortization charged to operations for the years ended March 31, 1998, 1997 and 1996 were $695,000, $664,000 and $302,000, respectively. NOTE 9. ACCRUED INTEREST RECEIVABLE, NET
MARCH 31, ------------------------ 1998 1997 ---------- ---------- Loans....................................................... $2,164,713 $1,783,330 Mortgage-backed securities.................................. 745,533 1,074,768 Investments and other interest-bearing assets............... 98,918 306,260 ---------- ---------- 3,009,164 3,169,358 Less allowance for uncollected interest..................... (243,321) (190,993) ---------- ---------- $2,762,843 $2,978,365 ========== ==========
NOTE 10. EXCESS OF COST OVER ASSETS ACQUIRED, NET
MARCH 31, ------------------------ 1998 1997 ---------- ---------- Core deposit premium........................................ $1,198,405 $1,403,835 Acquisition costs........................................... 47,712 52,165 ---------- ---------- $1,246,117 $1,456,000 ========== ==========
71 73 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11. DEPOSITS
MARCH 31, ------------------------------------------------------------------ 1998 1997 ------------------------------- ------------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE RATE AMOUNT PERCENT RATE AMOUNT PERCENT -------- -------- ------- -------- -------- ------- (DOLLARS IN THOUSANDS) DEMAND: Interest bearing............. 2.23% $ 19,230 6.99% 1.89% $ 18,579 6.97% Non-interest-bearing......... 0.00 9,687 3.52 0.00 7,677 2.88 ---- -------- ------ ---- -------- ------ 1.48 28,917 10.52 1.34 26,256 9.85 ---- -------- ------ ---- -------- ------ Savings and club............... 2.50 145,448 52.93 2.50 142,953 53.65 Money Management............... 3.22 21,496 7.82 3.15 21,078 7.91 Certificate of Interest........ 5.24 79,033 28.74 5.18 76,184 28.59 ---- -------- ------ ---- -------- ------ 3.46 246,072 89.48 3.41 240,215 90.15 ---- -------- ------ ---- -------- ------ 3.24% $274,894 100.00% 3.28% $266,471 100.00% ==== ======== ====== ==== ======== ======
The scheduled maturities of certificates of deposits are as follows:
MARCH 31, ------------------------- 1998 1997 -------------- ------- (IN THOUSANDS) One year or less............................................ $23,765 $36,028 After one year to three years............................... 38,605 25,639 After three years to five years............................. 29 14,447 After five years............................................ 16,634 71 ------- ------- $79,033 $76,185 ======= =======
The aggregate amount of certificates of deposit with minimum denominations of $100,000 or more was approximately $11,625,000 and $9,430,000 at March 31,1998 and 1997, respectively. Interest expense on deposits consists of the following:
FOR YEAR ENDED MARCH 31, -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Demand......................................... $ 364,774 $ 332,393 $ 330,562 Savings and clubs.............................. 3,601,095 3,542,024 3,507,068 Money Management............................... 691,939 657,529 599,280 Certificates of deposit........................ 3,948,687 3,844,009 3,965,252 ---------- ---------- ---------- 8,606,495 8,375,955 8,402,162 Penalty for early withdrawals of certificate of deposit...................................... (10,137) (20,787) (11,961) ---------- ---------- ---------- $8,596,358 $8,355,168 $8,390,201 ========== ========== ==========
72 74 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
MARCH 31, INTEREST -------------------------- LENDER MATURITY RATE 1998 1997 - ------ ------------------ -------- ----------- ----------- Federal Home Loan Bank.............. April 30, 1997 5.69% 8,000,000 Federal Home Loan Bank.............. May 30, 1997 5.73% 7,000,000 Federal Home Loan Bank.............. June 30, 1997 5.76% 8,000,000 Federal Home Loan Bank.............. July 11, 1997 5.56% 6,000,000 Federal Home Loan Bank.............. July 29, 1997 5.81% 4,000,000 Federal Home Loan Bank.............. August 15, 1997 5.82% 4,000,000 Federal Home Loan Bank.............. September 10, 1997 5.51% 6,000,000 Federal Home Loan Bank.............. September 16, 1997 5.56% 5,000,000 Federal Home Loan Bank.............. October 14, 1997 5.79% 5,000,000 Federal Home Loan Bank.............. November 3, 1997 5.59% 4,000,000 Federal Home Loan Bank.............. November 26, 1997 5.58% 5,835,000 Federal Home Loan Bank.............. December 3, 1997 5.56% 6,500,000 Federal Home Loan Bank.............. December 22, 1997 5.77% 5,000,000 Federal Home Loan Bank.............. April 13, 1998 5.77% 5,700,000 Federal Home Loan Bank.............. May 26, 1998 5.98% 6,000,000 Federal Home Loan Bank.............. June 23, 1998 5.89% 5,000,000 Federal Home Loan Bank.............. June 23, 1998 5.98% 6,000,000 Federal Home Loan Bank.............. July 29, 1998 5.91% 8,000,000 Federal Home Loan Bank.............. July 28, 1998 5.89% 6,000,000 Morgan Stanley Repo................. August 14, 1998 5.91% 4,000,000 Federal Home Loan Bank.............. September 3, 1998 5.91% 6,500,000 Federal Home Loan Bank.............. October 27, 1998 5.92% 6,000,000 Morgan Stanley Repo................. November 26, 1998 5.58% 4,820,000 Federal Home Loan Bank.............. February 26, 1999 5.81% 8,000,000 Federal Home Loan Bank.............. December 20, 1999 5.79% 5,000,000 Federal Home Loan Bank.............. March 2, 2000 5.82% 7,000,000 Federal Home Loan Bank.............. January 26, 2000 5.75% 9,000,000 ----------- 5.85% $87,020,000 $74,335,000 =========== ===========
Information concerning borrowings collateralized by securities sold under agreements to repurchase are summarized as follows:
FOR THE YEAR ENDED MARCH 31, ------------------ 1998 1997 ------- ------- (IN THOUSANDS) Average balance during the year............................. $75,280 $26,650 Average interest rate during the year....................... 5.80% 5.73% Maximum month-end balance during the year................... 83,335 74,335 Mortgage-backed securities underlying the agreements at year end: Carrying value............................................ $59,065 $ 4,898 Estimated fair value...................................... $59,090 $ 4,757
73 75 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 13. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK
MARCH 31, ---------------------------------------------------------- 1998 1997 MATURING --------------------------- --------------------------- YEAR ENDED WEIGHTED WEIGHTED MARCH 31, AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT - ---------------------------------------- ------------ ----------- ------------ ----------- 1998.................................... 5.89% $21,000,000 9.69% $45,000,000 1999.................................... 5.84% 5,000,000 2000.................................... 5.85% 10,000,000 2003.................................... 3.58% 372,596 3.58% 400,000 2012.................................... 3.50% 369,090 ----------- ----------- 36,741,686 45,400,000 =========== ===========
At March 31, 1998 and 1997, the advances were secured by pledges of the Bank's investment in the capital stock of the Federal Home Loan Bank totaling $5,535,000 respectively and a blanket assignment of the Bank's unpledged qualifying mortgage, mortgage-backed securities and investment portfolios. NOTE 14. INCOME TAXES The Bank qualifies as a thrift institution under the provisions of the Code and is therefore permitted to deduct from taxable income an allowance for bad debts based on the greater of: (1) actual loan losses (the "experience method"); or (2) eight percent of taxable income before such bad debt deduction less certain adjustments (the "percentage of taxable income method"). For the tax years ended December 31,1996 and 1995, the deduction for bad debts was computed using the experience method. For the year ended March 31, 1998, the deductions for bad debt was computed using the percentage method. Retained earnings at March 31, 1998, includes approximately $4,183,000 of such bad debts, for which federal income taxes have not been provided. If such amount is used for purpose other than bad debts losses, including distributions in liquidation, it will be subject to federal income tax at the current rate. The components of income taxes are summarized as follows:
YEAR ENDED MARCH 31, ------------------------------------- 1998 1997 1996 ---------- ----------- -------- Current........................................ $ 966,000 $(1,348,259) $785,816 Deferred....................................... 237,466 73,181 (75,869) ---------- ----------- -------- $1,203,466 $(1,275,078) $674,297 ========== =========== ========
74 76 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following table presents a reconciliation between the reported income taxes and the federal income taxes which would be computed by applying the normal federal income tax rate of 34% to income before income taxes:
YEAR ENDED MARCH 31, ------------------------------------------------------------------ 1998 1997 1996 AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ----------- ------- ----------- ------- -------- ------- Income taxes........................ $ 765,000 34.00 $(1,025,014) (34.00) $462,046 34.00 Increases (reductions) in income taxes resulting from: Statutory bad debts deduction..... 303,000 13.47 -- -- (36,000) (2.65) Amortization of intangibles....... (34,000) (1.51) (43,324) (1.44) (37,600) (2.77) Dividend exclusion................ (85,200) (3.79) (373,400) (12.39) (190,845) 14.04 State and city income taxes, net of federal income tax effect... (304,660) 12.47 (166,660) (5.53) 190,845 14.04 Other items, net.................. (49,334) (2.15) 26,583 1.96 ----------- ------ ----------- ------ -------- ----- Effective income taxes.............. $(1,203,466) 53.49 $(1,275,078) 72.30 $605,874 44.58 =========== ====== =========== ====== ======== =====
At March 31, 1997, income taxes payable of $379,076 are included in other liabilities. The tax effects of existing temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows:
MARCH 31, ---------------------- 1998 1997 -------- ---------- (IN THOUSANDS) DEFERRED TAX ASSETS Reserve for uncollected interest............................ $114,360 $ 89,767 Loan and real estate owned losses in excess of bad debts deduction................................................. 188,000 (46,808) Deferred loan fees.......................................... 151,400 354,388 Accrued pension............................................. (63,165) 229,535 Write down of common stock.................................. 19,829 19,829 Reserve for losses on other assets.......................... 98,741 149,985 Unrealized loss on securities available for sale............ 40,410 392,547 Other....................................................... 65,165 64,579 -------- ---------- 612,740 1,253,822 -------- ---------- DEFERRED TAX LIABILITIES Savings premium............................................. 209,883 282,685 Depreciation................................................ 330,800 521,721 -------- ---------- Sub total................................................... 540,683 1,099,380 -------- ---------- Net deferred tax assets (liabilities) included in other assets or (liabilities)................................... $ 72,057 $ 154,442 ======== ==========
75 77 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 15. REGULATORY CAPITAL The operations and profitability of the Bank are significantly affected by legislation and the policies of the various regulatory agencies. As required by the FERREA, the OTS promulgated capital requirements for financial institutions consisting of minimum tangible and core capital ratios of 1.50% and 3.00%, respectively, of the institution's adjusted total assets and a minimum risk-based capital ratio of 8.00% of the institution's risk weighted assets. Although the minimum core capital ratio is 3.00%, the FDICIA stipulates that an institution with less than 4.00% core capital is deemed undercapitalized. At March 31,1998 and 1997, the Bank exceeded all the current capital requirements. The following table sets out the Bank's various regulatory capital categorized at March 31, 1998.
1998 --------------------- DOLLARS PERCENTAGE ------- ---------- (IN THOUSANDS) Tangible capital............................................ $30,201 6.90% Tangible equity............................................. 31,434 7.17 Core/leverage capital....................................... 30,249 6.91 Tier 1 risk-based capital................................... 31,731 7.25 ------- ----- Total risk-based capital.......................... $31,731 16.01% ======= =====
The following table reconciles the Bank's stockholders' equity at March 31, 1998, under generally accepted accounting principles to regulatory capital requirements:
REGULATORY CAPITAL REQUIREMENTS ---------------------------------------------- GAAP TANGIBLE TIER/CORE RISK-BASED CAPITAL CAPITAL CAPITAL CAPITAL ------- -------- --------- ---------- Stockholders' Equity at March 31, 1998............ $31,434 $31,434 $31,434 $31,434 ======= ======= ======= ======= Add: Unrealized loss on securities available for sale, net.................................... 13 13 13 General valuation allowances.................... -- -- 1,522 Qualifying intangible assets.................... 48 48 48 Deduct: Goodwill........................................ (1,246) (1,246) (1,246) Excess of net deferred tax assets............... -- -- -- Asset required to be deducted................... -- -- (40) ------- ------- ------- Regulatory capital.............................. 30,201 30,249 31,731 Minimum capital requirement..................... 6,562 13,124 15,856 ------- ------- ------- Regulatory capital excess....................... $23,639 $17,125 $15,875 ======= ======= =======
NOTE 16. BENEFIT PLANS Pension Plan Carver has a non-contributory defined benefit pension plan covering all eligible employees. The benefits are based on each employee's term of service. Carver's policy is to fund the plan with contributions which 76 78 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) equal the maximum amount deductible for federal income tax purposes. The following table sets forth the plan's funded status:
MARCH 31, ------------------------ 1998 1997 ---------- ---------- (IN THOUSANDS) Actuarial present value of benefit obligation including vested benefits of $2,054,535 and $1,690,000.............. $2,382,850 $2,097,345 Projected benefit obligation................................ 2,796,385 2,425,891 ---------- ---------- Plan assets at fair value................................... 3,275,671 2,900,146 Plan assets in excess of projected benefit obligation....... 474,255 474,255 Unrecognized net obligation being amortized over 19.75 years..................................................... 330,567 366,279 Unrecognized prior service cost............................. 18,678 20,812 Unrecognized net (gain)..................................... (947,721) (1,008,762) ---------- ---------- (Accrued) pension cost included other liabilities........... (119,181) 147,416 ========== ==========
Net periodic pension cost included the following components:
YEAR ENDED MARCH 31, --------------------------------- 1998 1997 1996 -------- -------- --------- Service cost...................................... $158,235 $115,541 $ 95,323 Interest cost..................................... 182,273 158,379 137,100 Return on plan assets............................. (387,657) (318,555) (174,058) Net deferral and amortization..................... 133,928 157,672 (94,665) -------- -------- --------- Net periodic pension cost......................... $ 86,779 $ 55,057 $ 36,300) ======== ======== =========
Significant actuarial assumptions used in determining plan benefits are:
YEAR ENDED MARCH 31, -------------------- 1998 1997 1996 ---- ---- ---- Annual salary increase...................................... 5.50% 5.00% 6.00% Long-term return on assets.................................. 8.00% 8.00% 8.0% Discount rate used in measurement of benefit obligations.... 7.50% 7.00% 8.25%
Savings Incentive Plan The Bank has a savings incentive plan, pursuant to Section 401(k) of the Code, for all eligible employees of the Bank. Employees may elect to save up to 15% of their compensation and may receive a percentage matching contribution from the Bank with respect to 50% of the eligible employee's contributions up to the maximum allowed by law. Total incentive plan expenses for the years ended March 31, 1998, 1997 and 1996 were $73,000, $63,500 and $52,700, respectively. 77 79 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Directors' Retirement Plan Concurrent with the conversion to the stock form of ownership, the Bank adopted a retirement plan for non-employee directors. The benefits are payable based on the term of service as a director.
MARCH 31, -------------------- 1998 1997 -------- -------- (IN THOUSANDS) Actuarial present value of benefit obligation including vested benefits of $2,054,535 and $1,690,000.............. $327,815 $360,564 ======== ======== Projected benefit obligation................................ $479,672 $401,463 Plan assets at fair value................................... -- -- -------- -------- Projected benefit obligation in excess of plan assets....... 479,672 401,463 Unrecognized past service cost.............................. 165,700 (220,936) Additional minimum liability................................ 13,843 180,037 -------- -------- Accrued liability included in other liabilities............. $327,815 $360,564 ======== ========
Net periodic pension cost for the years ended March 31,1998, 1997 and 1996 included the following:
1998 1997 1996 -------- ------- -------- Service cost................................ $ 42,403 $24,330 $ 18,267 Interest cost............................... 31,562 31,395 28,417 Net deferral and amortization............... 58,758 55,324 55,236 -------- ------- -------- Net pension cost............................ $132,723 $111,049 $101,920 ======== ======= ========
The actuarial assumptions used in determining plan benefits include annual fee at 2.80% for each of the three years ended March 31, 1998, and a discount rate of 8.00%, 7.50% and 8.00%, for the years ended March 31, 1998, 1997 and 1996, respectively. The additional minimum liability included as an intangible asset in other assets are $165,700 and $221,093 for the years ended March 31, 1998 and 1997, respectively. Management Recognition Plan Pursuant to the management recognition plan approved at the stockholders meeting held on September 12, 1995, the Bank recognized $93,000 and $75,000 as expense for the years ended March 31, 1998 and 1997. NOTE 17. EMPLOYEE STOCK OWNERSHIP PLAN Effective upon conversion, an ESOP was established for all eligible employees. The ESOP used $1,821,320 in proceeds from a term loan obtained from a third-party institution to purchase 182,132 shares of Bank common stock in the initial public offering. The term loan principal is payable over forty equal quarterly installments through September 2004. Interest on the term loan is payable quarterly, at a rate of 3.00% over the average federal funds rate. Each year, the Bank intends to make discretionary contributions to the ESOP which will be equal to principal and interest payments required on the term loan less any dividends received by the ESOP on unallocated shares. Shares purchased with the loan proceeds were initially pledged as collateral for the term loan and are held in a suspense account for future allocation among the participants on the basis of compensation, as described by the Plan, in the year of allocation. 78 80 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP shares in the consolidated statements of financial condition. As shares are committed to be released from collateral, the Bank reports compensation expense equal to the current market price of the shares, and the share become outstanding for net income per common share computations. ESOP compensation expense was $241,000 and $156,000 for the years ended March 31,1998 and 1997 respectively. The ESOP shares at March 31,1998 and 1997 are as follows:
1998 1997 ---------- ---------- (DOLLARS IN THOUSANDS) Allocated shares............................................ 50,236 28,389 ---------- ---------- Shares committed to be released............................. 25,519 21,847 Unreleased shares........................................... 106,377 131,896 ---------- ---------- Total ESOP shares................................. 182,132 182,132 ========== ========== Fair value of unreleased shares............................. $2,709,214 $1,345,251
NOTE 18. COMMITMENTS AND CONTINGENCIES The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing need of its customers. These financial instruments primarily include commitments to extend credit and to sell loans. Those instruments involve, to varying degrees, elements of credit and interest rate in excess of the amount recognized in the statement of financial condition. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies making commitments as it does for on-balance-sheet instruments. The Bank has outstanding various loan commitments as follows:
MARCH 31, ------------------------- 1998 1997 ---------- ----------- Commitments To Originate Loans Mortgage.................... $9,585,776 $13,443,419 ========== =========== Commitments To Purchase Loans Mortgage..................... $ -- $32,544,057 ========== =========== Commitments to Sell Loans Mortgage......................... -- $ -- Consumer Loans............................................. $ -- -- ---------- ----------- Total............................................ $ -- $ -- ========== ===========
At March 31,1998, of the $9,585,776 in outstanding commitments to originate mortgage loans, $1,334,776 are at fixed rates within a range of 6.50% to 8.00%, $7,626,000 are for balloon loans with 5 years maturity, whose rates range between 8.50% to 9.50% and $625,000 commercial are adjustable rate with initial rates ranging from 8.00% to 8.25%. 79 81 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) At March 31,1998, undisbursed from approved commercial lines of credit totaled $2,107,000. All such lines are secured, including $1,100,000 in warehouse lines of credit secured by the underlying warehoused mortgages, expired within one year, and carry interest rates that float at from 1.50% to 2.00% above the prime rate. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management's credit evaluation of the counter-party. Collateral held consists primarily of residential real estate, but may include income-producing commercial properties. Rentals, including real estate taxes, under long-term operating leases for certain branch offices aggregated approximately $263,000, $285,000 and $302,000 for the years ended March 31, 1998, 1997, and 1996, respectively. As of March 31, 1998, minimum rental commitments under all noncancellable leases with initial or remaining terms of more than one year and expiring through 2011 are as follows:
MINIMUM RENTAL YEAR ENDED MARCH 31 (IN THOUSANDS) - ------------------- -------------- 1998.......................................... $ 263 1999.......................................... 266 2000.......................................... 293 2001.......................................... 296 2002.......................................... 296 2003.......................................... 296 Thereafter.................................... 1,330 ------ $2,744
The Bank also has, in the normal course of business, commitments for services and supplies. Management does not anticipate losses on any of these transactions. On January 2, 1996, the United States District Court for the Southern District of New York dismissed the class action encaptioned Dougherty v. Carver Federal Savings Bank for lack of subject matter jurisdiction. The class action alleged that the offering circular, used by Carver to sell its stock in its public offering, contained material misstatements and omissions. Further, the complaint alleged that the Bank's shares were not appraised by an independent appraiser. By separate order on the same date, the court made its ruling applicable to Gomberg v. Carver Federal Savings Bank and Uminer v. Carver Federal Savings Bank, two other class actions filed in the Southern District of New York which asserted claims essentially identical to those asserted in the Dougherty suit. The plaintiffs filed a consolidated notice of appeal on January 29, 1996 with the United States Court of Appeals for the Second Circuit. In April 1997 the Circuit Court concluded that the District had subject matter jurisdiction over the plaintiffs' complaint, the Circuit Court reversed and remanded the case back to the District Court. On July 10, 1997, upon request of all counsel, the trial judge directed that discovery be completed by March 31, 1998 and that the case be ready for trial in May of 1998. As of the date hereof, no trial date has been set by the court. Carver believes that the allegations made in this action are without merit and intends to aggressively defend its interest with respect to this matter. 80 82 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) In the conduct of the Company's business, it is also involved in normal litigation matters. In the opinion of management, the ultimate disposition of such litigation should not have a material adverse effect on the financial position or results of operations of the Company. NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is defined as the amount at which the instrument could be exchange in a current transaction between willing parties, other than a forced or liquidation sale. Significant estimations were used by the Bank for the purpose of this disclosure. Estimated fair values have been determined by the Bank using the best available data and estimation methodology suitable for each category of financial instrument. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate their recorded book balances. The estimation methodologies used and the estimated fair values and carrying values of the Bank's financial instruments are set forth below: Cash And Cash Equivalents And Accrued Interest Receivable The carrying amounts for cash and cash equivalents and accrued receivable approximate fair value because they mature in three months or less. Securities The fair values for securities available for sale, mortgage-backed securities held to maturity and investment securities held to maturity are based on quoted market or dealer prices, if available. If quoted market or dealer prices are not available, fair value is estimated using quoted market or dealer prices for similar securities. Loans Receivable The fair value of loans receivable is estimated by discounting future cash flows, using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities of such loans. Deposits The fair value of demand, savings and club accounts is equal to the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market. Advances from Federal Home Loan Bank of New York, Securities sold under agreement to repurchase and Other borrowed money. The fair values of advances from Federal Home Loan Bank of New York, securities sold under agreement to repurchase and other borrowed money are estimated using the rates currently available to the Bank for debt with similar terms and remaining maturities. Commitments The fair value of commitments to originate loans is equal to amount of commitment. 81 83 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The carrying amounts and estimated fair values of the Bank's financial instruments at March 31, 1998 and 1997 are as follows:
AT MARCH 31, ------------------------------------------------ 1998 1997 ---------------------- ---------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- (IN THOUSANDS) Financial Assets: Cash and cash equivalents...................... $12,120 $12,120 $ 4,231 $ 4,231 Securities available........................... 28,408 28,382 84,708 83,863 Investment securities.......................... -- -- 1,675 1,673 Mortgage-backed securities..................... 91,116 90,198 110,853 107,841 Loans receivable............................... 274,905 276,170 197,918 199,073 Accrued interest receivable.................... 2,763 2,763 2,978 2,978 Financial Liabilities: Deposits....................................... 274,894 273,401 266,471 265,566 Securities sold under agreements to purchase... 87,020 87,020 74,335 74,333 Advances from Federal Home Loan Bank of New York........................................ 36,742 36,730 45,400 45,325 Other borrowed money........................... 1,184 1,184 1,366 1,366 Commitments To originate loans............................. 9,586 9,586 13,443 4,905 To sell loans.................................. -- -- -- -- To fund line of credit......................... 5,276 5,276 5,970 5,970
Limitations The fair value estimates are made at a discrete point in time based on relevant market information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no quoted market value exists for a significant portion of the Bank's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair value estimates are based on existing on an off balance sheet financial instruments without attempting to value anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment and advances from borrowers for taxes and insurance. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectively to these estimated fair values. 82 84 CARVER BANCORP INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 20. QUARTERLY FINANCIAL DATA (UNAUDITED)
YEAR ENDED MARCH 31, 1998 ---------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Interest income..................................... $ 6,797 $ 7,146 $ 6,931 $ 6,954 Interest expense.................................... (3,820) (3,828) (3,694) (3,677) Net interest income................................. 2,977 3,318 3,237 3,277 Provision for loan losses........................... (168) (171) (280) (691) Non-interest income loss............................ 316 353 550 1,133 Non-interest expense................................ (2,561) (2,902) (2,938) (3,200) Income taxes (benefit).............................. (254) (269) (268) (413) ------- ------- ------- ------- Net income (loss)................................... $ 310 $ 329 $ 301 $ 106 ======= ======= ======= ======= Net income (loss) per common share.................. $ 0.14 $ 0.15 $ 0.14 $ 0.05 ======= ======= ======= =======
YEAR ENDED MARCH 31, 1997 ---------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Interest income..................................... $ 5,811 $ 5,609 $ 5,770 $ 5,657 Interest expense.................................... (3,132) (3,133) (3,135) (3,083) Net interest income................................. 2,679 2,476 2,635 2,574 Provision for loan losses........................... (52) (33) (51) (1,554) Non-interest income loss............................ 328 282 238 (735) Non-interest expense................................ (2,464) (4,158) (2,559) (2,622) Income taxes (benefit).............................. 228 (649) 111 (966) ------- ------- ------- ------- Net income (loss)................................... $ 263 $ (784) $ 152 $(1,371) ======= ======= ======= ======= Net income (loss) per common share.................. $ 0.12 $ (0.36) $ 0.07 $ (0.63) ======= ======= ======= =======
83 85 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding Directors and Executive Officers of the Registrant is included under the headings, "Information with respect to Nominees and Continuing Directors," "Nominees for Election as Directors," "Continuing Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held on August 14, 1998, which will be filed with the SEC within 120 days from March 31, 1998, and is incorporated herein by reference. Information regarding Executive Officers, who are not Directors, appears under the caption "Executive Officers of the Holding Company" included in Item 1 of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. Information relating to executive compensation is included under the headings "Executive Compensation" (excluding the Stock Performance Graph and the Compensation Committee Report) and "Directors' Compensation" in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held on August 14, 1998, which will be filed with the SEC within 120 days from March 31, 1998, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information relating to security ownership of certain beneficial owners and management is included under the headings "Security Ownership of Certain Beneficial Owners" and "Stock Ownership of Management" in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held on August 14, 1998, which will be filed with the SEC within 120 days from March 31, 1998, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information regarding certain relationships and related transactions is included under the heading "Certain Relationships and Related Transactions" in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held on August 14, 1998, which will be filed with the SEC within 120 days from March 31, 1998 and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) List of Documents Filed as Part of this Report (1) Consolidated Financial Statements. The following are incorporated by reference from Item 8 hereof. Independent Auditors' Report Consolidated Statements of Financial Condition as of March 31, 1998 and 1997 Consolidated Statements of Income for Each of the Years in the Three-Year Period Ended March 31, 1998 Consolidated Statements of Changes in Stockholders' Equity for Each of the Years in the Three-Year Period Ended March 31, 1998 Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period Ended March 31, 1998 Notes to Consolidated Financial Statements (2) Financial Statement Schedules. All financial statement schedules have been omitted as the required information is either inapplicable or included in the Financial Statements or related notes. 84 86 (3) Exhibits. The following is a list of exhibits filed as part of this Annual Report and is also the Exhibit Index. (b) Reports on Form 8-K filed during the last quarter of the period covered by this report: None. (c) Exhibit required by Item 601 of Regulation S-K:
NO. EXHIBIT --- ------- 3.1 Certificate of Incorporation of Carver Bancorp, Inc.(1) 3.2 Bylaws of Carver Bancorp, Inc.(1) 4.1 Stock certificate of Carver Bancorp, Inc.(1) 4.2 Federal Stock Charter of Carver Federal Savings Bank(1) 4.3 Bylaws of Carver Federal Savings Bank(1) 4.4 Amendments to Bylaws of Carver Federal Savings Bank 10.1 Carver Bancorp, Inc. 1995 Stock Option Plan, effective as of September 12, 1995(1)(2) 10.2 Carver Federal Savings Bank Retirement Income Plan, as amended and restated effective as of January 1, 1989(1) 10.3 Carver Federal Savings Bank 401(k) Savings Plan in RSI Retirement Trust, as amended and restated effective as of May 1, 1993(1) 10.4 Carver Bancorp, Inc. Employee Stock Ownership Plan, effective as of January 1, 1993(1)(3) 10.5 Carver Federal Savings Bank Deferred Compensation Plan, effective as of August 10, 1993(1) 10.6 Carver Federal Savings Bank Retirement Plan for Nonemployee Directors, effective as of October 24, 1994(1) 10.7 Carver Bancorp, Inc. Management Recognition Plan, effective as of September 12, 1995(1)(4) 10.8 Carver Bancorp, Inc. Incentive Compensative Plan, effective as of September 12, 1995(1)(5) 10.9 Employment Agreement by and between Carver Federal Savings Bank and Thomas L. Clark, entered into as of April 1, 1997(6) 10.10 Employment Agreement by and between Carver Bancorp, Inc. and Thomas L. Clark, entered into as of April 1, 1997(6) 10.11 Separation Agreement and General Release by and among Carver Bancorp, Inc., Carver Federal Savings Bank and Biswarup Mukherjee entered into as of October 24, 1997 10.12 Supplemental Executive Retirement Agreement by and between Carver Federal Savings Bank and Richard T. Greene, entered into as of January 30, 1995(1) 10.13 Consulting Agreement by and between Carver Bancorp, Inc. and M. Moran Weston, entered into as of October 1, 1997 10.14 Agreement and Plan of Reorganization by and among Carver Federal Savings Bank, Carver Bancorp, Inc. and Carver Interim Federal Savings Bank(1) 21.1 Subsidiaries of the Registrant 27.1 Financial Data Schedule (only submitted with filing in electronic format) 99.1 Proxy Statement for the 1998 Annual Meeting of Stockholders of Carver Bancorp, Inc. to be filed with the Securities and Exchange Commission within 120 days from March 31, 1998 is incorporated herein by reference.
- --------------- (1) Incorporated herein by reference to Registration Statement No. 333-0559 on Form S-4 (the "Form S-4") of Carver Bancorp. Inc., filed with the Securities and Exchange Commission during July 1997, as amended. (2) Filed as Exhibit 10.1 to the Form S-4. (3) Filed as Exhibit 10.4 to the Form S-4. (4) Filed as Exhibit 10.7 to the Form S-4. (5) Filed as Exhibit 10.8 to the Form S-4. (6) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997. 85 87 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CARVER BANCORP, INC. July 14, 1998 By /s/ THOMAS L. CLARK, JR. -------------------------------------------------------- Thomas L. Clark, Jr. President and Chief Executive Officer (Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ THOMAS L. CLARK, JR. President, Chief Executive Officer July 14, 1998 and Director (Principal Executive - -------------------------------------------------- Officer) Thomas L. Clark, Jr. By: /s/ WALTER T. BOND Acting Chief Financial Officer and July 14, 1998 Chief Investment Officer - -------------------------------------------------- (Principal Financial and Walter T. Bond Accounting Officer) By: /s/ DAVID N. DINKINS Director July 14, 1998 - -------------------------------------------------- David N. Dinkins By: /s/ LINDA H. DUNHAM Director July 14, 1998 - -------------------------------------------------- Linda H. Dunham By: /s/ HERMAN JOHNSON Director July 14, 1998 - -------------------------------------------------- Herman Johnson By: /s/ DAVID R. JONES Chairman of the Board and Director July 14, 1998 - -------------------------------------------------- David R. Jones By: /s/ PAZEL G. JACKSON Director July 14, 1998 - -------------------------------------------------- Pazel G. Jackson By: /s/ ROBERT J. FRANZ Director July 14, 1998 - -------------------------------------------------- Robert J. Franz
86 88 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE - ------- ----------- ---- 3.1 Certificate of Incorporation of Carver Bancorp, Inc.(1) 3.2 Bylaws of Carver Bancorp, Inc.(1) 4.1 Stock certificate of Carver Bancorp, Inc.(1) 4.2 Federal Stock Charter of Carver Federal Savings Bank(1) 4.3 Bylaws of Carver Federal Savings Bank(1) 4.4 Amendments to Bylaws of Carver Federal Savings Bank 10.1 Carver Bancorp, Inc. 1995 Stock Option Plan, effective as of September 12, 1995(1)(2) 10.2 Carver Federal Savings Bank Retirement Income Plan, as amended and restated effective as of January 1, 1989(1) 10.3 Carver Federal Savings Bank 401(k) Savings Plan in RSI Retirement Trust, as amended and restated effective as of May 1, 1993(1) 10.4 Carver Bancorp, Inc. Employee Stock Ownership Plan, effective as of January 1, 1993(1)(3) 10.5 Carver Federal Savings Bank Deferred Compensation Plan, effective as of August 10, 1993(1) 10.6 Carver Federal Savings Bank Retirement Plan for Nonemployee Directors, effective as of October 24, 1994(1) 10.7 Carver Bancorp, Inc. Management Recognition Plan, effective as of September 12, 1995(1)(4) 10.8 Carver Bancorp, Inc. Incentive Compensative Plan, effective as of September 12, 1995(1)(5) 10.9 Employment Agreement by and between Carver Federal Savings Bank and Thomas L. Clark, entered into as of April 1, 1997(6) 10.10 Employment Agreement by and between Carver Bancorp, Inc. and Thomas L. Clark, entered into as of April 1, 1997(6) 10.11 Separation Agreement and General Release by and among Carver Bancorp, Inc., Carver Federal Savings Bank and Biswarup Mukherjee entered into as of October 24, 1997 10.12 Supplemental Executive Retirement Agreement by and between Carver Federal Savings Bank and Richard T. Greene, entered into as of January 30, 1995(1) 10.13 Consulting Agreement by and between Carver Bancorp, Inc. and M. Moran Weston, entered into as of October 1, 1997 10.14 Agreement and Plan of Reorganization by and among Carver Federal Savings Bank, Carver Bancorp, Inc. and Carver Interim Federal Savings Bank(1) 21.1 Subsidiaries of the Registrant 27.1 Financial Data Schedule (only submitted with filing in electronic format) 99.1 Proxy Statement for the 1998 Annual Meeting of Stockholders of Carver Bancorp, Inc. to be filed with the Securities and Exchange Commission within 120 days from March 31, 1998 is incorporated herein by reference.
- --------------- (1) Incorporated herein by reference to Registration Statement No. 333-0559 on Form S-4 (the "Form S-4") of Carver Bancorp. Inc., filed with the Securities and Exchange Commission during July 1997, as amended. (2) Filed as Exhibit 10.1 to the Form S-4. (3) Filed as Exhibit 10.4 to the Form S-4. (4) Filed as Exhibit 10.7 to the Form S-4. (5) Filed as Exhibit 10.8 to the Form S-4. (6) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997. EX-4.4 2 AMENDMENTS TO BYLAWS 1 EXHIBIT 4.4 -------------------------------------- CARVER FEDERAL SAVINGS BANK RESOLUTIONS OF THE BOARD OF DIRECTORS JUNE 17, 1997 -------------------------------------- Annual Meeting The Chairman stated that in order to provide consistency between the Bylaws of the Bank, and the Certificate of Incorporation of its holding company, Carver Bancorp, Inc., that it would be desirable to amend Article II, Section 2 of the Bank's Bylaws, which currently provides that the annual meeting of the stockholders of the Bank (the "Bank's Annual Meeting") be held no later than 120 days after the end of the Bank's fiscal year, to provide that the Bank's Annual Meeting be held no later than 150 days after the end of the Bank's fiscal year (the "Annual Meeting Bylaw Amendment"). NOW, THEREFORE, following discussion, upon motion duly made, seconded, and adopted, it was: RESOLVED, that Article II, Section 2 of the Bank's Bylaws be amended to read as follows: Section 2. Annual Meeting. A meeting of stockholders of the savings bank for the election of directors and for the transaction of any other business of the savings bank shall be held annually within 150 days after the end of the savings bank's fiscal year. FURTHER RESOLVED, that the Senior Vice President, Corporate Counsel and Corporate Secretary, be, and he hereby is, authorized, empowered and directed to cause to be prepared, executed and delivered, a notice or an application to the OTS for approval of the Annual Meeting Bylaw Amendment, consistent with the rules and regulations of the OTS and the Bank's Federal Stock Charter and Bylaws, in such form and manner as he, upon the advice of counsel, may deem necessary. 2 -------------------------------------- CARVER FEDERAL SAVINGS BANK ACTION OF SOLE SHAREHOLDER NOVEMBER 14, 1997 -------------------------------------- CARVER BANCORP, INC., constituting the holder of all of the outstanding shares of common stock of Carver Federal Savings Bank (the "Bank"), a stock form savings bank organized and existing under the laws of the United States, does hereby consent to the adoption of the following amendments of the Bylaws of the Bank, to be effectively immediately and to have the same effect as if adopted at a meeting of stockholders called for this purpose: Article III, Section 2 RESOLVED, that the first sentence of Article III, Section 2 of the Bank's Bylaws be amended to read as follows: The board of directors shall consist of seven members and shall be divided into three classes as nearly equal in number as possible. Article III, Section 3 RESOLVED, that the following sentence be added to the end of Article III, Section X of the Bank's Bylaws: Directors may participate in a meeting by means of a conference telephone or similar communications device through which all persons participating can hear each other at the same time. Participation by such means shall constitute presence in person for all purposes. 3 Article III, Section 5 RESOLVED, that the last sentence of Article III, Section 5 of the Bank's Bylaws be amended to read as follows: Such participation shall constitute presence in person for all purposes. Article III, Section 12 RESOLVED, that both instances of the word "actual" be stricken from Article III, Section 12 of the Bylaws, so that, as so amended, this provision will read as follows: Directors, as such, may receive a stated salary for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation for attendance at committee meetings as the board of directors may determine. IN WITNESS WHEREOF, the undersigned has caused this Action of Sole Shareholder to be signed on this 14th day of November, 1997. CARVER BANCORP, INC. By: /s/ Thomas L. Clark, Jr. --------------------------------------- Thomas L. Clark, Jr. President and Chief Executive Officer EX-10.11 3 SEPARATION AGREEMENT AND GENERAL RELEASE 1 EXHIBIT 10.11 SEPARATION AGREEMENT AND GENERAL RELEASE This SEPARATION AGREEMENT and GENERAL RELEASE (hereinafter referred to as the "Agreement") is executed as of the 24th day of October, 1997 by and among Carver Bancorp, Inc. ("Company"), Carver Federal Savings Bank ("Bank") and Biswarup Mukherjee. WHEREAS, Mr. Mukherjee, the Company and the Bank have agreed that he will resign from his positions as Executive Vice President and Chief Financial Officer of the Company and Executive Vice President and Chief Financial Officer of the Bank effective as of October 24, 1997; and WHEREAS, the Bank and Mr. Mukherjee desire to achieve the separation of Mr. Mukherjee's employment amicably; NOW, THEREFORE, in consideration of the mutual covenants and other good and valuable consideration contained herein, the parties agree as follows: 1. Mr. Mukherjee shall resign from his positions as Executive Vice President and Chief Financial Officer of the Company and as Executive Vice President and Chief Financial Officer of the Bank effective as of October 24, 1997. 2. In consideration for executing this Agreement, including the releases and other promises and obligations set forth herein, Mr. Mukherjee shall receive from the Bank a severance payment of $60,000, payable in cash, in monthly installments of $2,500 commencing on November 1, 1997 and ending with the final installment payment on October 1, 1999. 3. In consideration for executing this Agreement, Mr. Mukherjee shall be eligible to receive continued health, life and disability insurance benefits during the period commencing October 24, 1997 and ending on October 23, 1999, in accordance with the terms of the group insurance plans provided by the Company and the Bank for their active employees. 4. In consideration for executing this Agreement, the Company agrees to purchase from Mr. Mukherjee such shares of common stock of the Company ("Company Stock") as he may offer to the Company during the 120 day period following his termination of employment. Such purchase shall be at a price per share equal to sum of (a) the average of the reported bid and ask price for a share of Company Stock on the American Stock Exchange (as published by The Wall Street Journal) on the day before the date of such purchase or, if Company Stock was not traded on such date, on the next preceding day on which Company Stock was traded thereon, plus (b) $ .25. 5. The payment and benefits provided for under Paragraphs 2 and 3 of this Agreement, and the premium to be paid for any shares of Company Stock purchased from Mr. Mukherjee by the Company pursuant to paragraph 4 of this Agreement, shall be provided in addition to any benefits and other compensation Mr. Mukherjee may be entitled to as a former employee of the Company and the Bank pursuant to the terms of such employee benefit plans, programs or arrangements as may be maintained by the Company and the Bank for the benefit of their employees and former employees, including, without limitation, the Bank's Retirement and 401(k) Savings Plans in RSI Retirement Trust, and the Company's Management Recognition, 1995 Stock Option, Incentive Compensation Plans and Employee Stock Ownership Plan (collectively referred 2 to herein as the "Plans"). Annexed hereto as Exhibit A is a summary of the number of shares of Company Stock that have been awarded, allocated or made subject to options granted to Mr. Mukherjee heretofore, and the retirement benefit payable to him, under the Plans. Mr. Mukherjee shall receive distribution of the shares of the Company Stock awarded to him under the Company's Management Recognition and Incentive Compensation Plans that are vested as of October 24, 1997 and have not previously been distributed to him no later than November 15, 1997. Mr. Mukherjee shall receive distribution of the shares of Company Stock allocated to him under the Company's Employee Stock Ownership Plan no later than January 31, 1998. In addition, to the extent that Mr. Mukherjee has any accrued but unused vacation time as of the date of his termination of employment, he shall receive payment from the Bank for additional salary attributable to such period of unused vacation time. 6. Mr. Mukherjee agrees that, in exercising any voting or other shareholder rights attributable to shares of Company Stock with respect to which he has the right or authority to exercise, or direct the exercise of, shareholder rights, he will act in accordance with the recommendations of the Company's management. The foregoing sentence shall be subject to the provisions of any applicable federal, state or local statute, rule, regulation or ruling which restricts the ability of Mr. Mukherjee to enter into an agreement regarding the exercise of shareholder rights attributable to Company Stock directly or indirectly owned or controlled by him. 7. Mr. Mukherjee agrees that, for a period of one year following the date of his termination of employment with the Bank and the Company, he shall not, without the written consent of the Company, become an officer, employee, consultant, director or trustee of any savings bank, savings and loan association, savings and loan holding company, bank or bank holding company, or any direct or indirect subsidiary or affiliate of any such entity, that entails working in any city, town or county in which the Company or the Bank or any affiliate of the Company or the Bank has an office or has filed an application for regulatory approval to establish an office. Nothing contained in this Agreement shall be deemed to prohibit Mr. Mukherjee from accepting employment with a public accounting firm, or entering into any other professional or business arrangement by which Mr. Mukherjee may provide services to a client for a public accounting firm. 8. Mr. Mukherjee agrees to keep confidential and to refrain from using for the benefit of himself, or any person or entity other than the Company and the Bank or any of their affiliates, any material document or information obtained from the Company or the Bank, or from their affiliates, in the course of his employment with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of his own) until the same ceases to be material (or becomes so ascertainable or available); provided, however, that nothing in this Paragraph 8 shall prevent Mr. Mukherjee, with or without the Company's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. 2 3 9. Mr. Mukherjee hereby covenants and agrees that, for a period of one year following his termination of employment with the Company and the Bank, he shall not, without the written consent of the Company, either directly or indirectly: a. solicit, offer employment to, or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company or the Bank or any affiliate of the Company or the Bank to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits and making loans, doing business in any city, town or county in which the Company, the Bank or their affiliates has an office or has filed an application for regulatory approval to establish an office; b. provide any information, advice or recommendation to any person that is intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company or the Bank, or any affiliate of the Company or the Bank, to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits and making loans, doing business in any city, town or county in which the Company or the Bank or an affiliate of the Company or the Bank has an office or has filed an application for regulatory approval to establish an office; or c. solicit, provide any information, advice or recommendation or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any customer of the Company or the Bank or affiliate of the Company or the Bank to terminate an existing business or commercial relationship with the Company or the Bank or an affiliate of the Company or the Bank. 10. Mr. Mukherjee hereby agrees that he, on behalf of himself and also on behalf of any other person or persons claiming or deriving a right from him, forever releases and discharges the Company and the Bank and their agents, servants, employees, directors, officers, affiliates and/or subsidiaries, and any agents, servants, employees, directors and/or officers of all such affiliates and/or subsidiaries ("the Releasees") from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, actions, demands, debts, costs, expenses, damages, injuries or causes of action ("Claims") which he now has, or ever has had, arising out of his employment by, or termination of employment by, the Company and the Bank, or otherwise, up to and including the date of the execution of this Agreement, pursuant to any law, rule or regulation, including any Claims of which he is not aware or does not suspect to exist as of the date of the execution of this Agreement. 11. The release contained in Paragraph 10 of this Agreement includes, but is not limited to, any Claims Mr. Mukherjee (or any person or persons claiming or deriving a right from him) may have based on discrimination due to age, race, sex, religion or national origin, or any other claims pursuant to the Age Discrimination in Employment Act of 1967, as amended, the National Labor Relations Act, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1866, the 3 4 Equal Pay Act of 1963, the Rehabilitation Act of 1973, the Americans with Disabilities Act, the Equal Pay Act, the Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974, as amended, the Internal Revenue Code of 1986, Executive Orders Nos. 11246 and 11141, the New York Human Rights Law, the New York Equal Pay Law, the New York Equal Rights Law, and any other federal, state or local statute, rule, constitutional provision, regulation, ordinance or common law, including, but not limited to, those for wrongful discharge, fraud, intentional or negligent infliction of emotional distress and breach of any expressed or implied covenant of good faith and fair dealing, and including but not limited to, any Claims for recovery of attorney's fees. 12. The Bank hereby agrees that the Bank, on behalf of itself, its successors and assigns and any person or persons claiming or deriving a right from the Bank or its successors and assigns, forever releases and discharges Mr. Mukherjee from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, actions, demands, debts, costs, expenses, damages, injuries or causes of action ("Claims") which the Bank now has or ever has had, arising out of Mr. Mukherjee's employment by the Bank or otherwise, up to and including the date of the execution of this Agreement, pursuant to any law, rule or regulation, including any claims of which the Bank is not aware of or does not suspect to exist as of the date of the execution of this Agreement. 13. Mr. Mukherjee acknowledges that: a. the payments and benefits to be provided pursuant to Paragraphs 2, 3 and 4 of this Agreement are in consideration for the releases contained herein and exceed what he is otherwise entitled to receive from the Company and the Bank ("Additional Payments"); b. he has been advised to consult an attorney before signing this Agreement and has been afforded the opportunity to do so; c. he has had the opportunity to consider this Agreement for at least 21 days; d. he has read this Agreement in its entirety, understands its terms, and knowingly and voluntarily consents to its terms and conditions; e. the releases made by him in Paragraphs 10 and 11 of this Agreement are made knowingly and voluntarily, and without coercion by the Company, the Bank or any of the Releasees; and f. the filing of a Claim against the Company, the Bank or any of the Releasees by Mr. Mukherjee (or any person or persons claiming or deriving a right from him) shall be a violation of this Agreement resulting in Mr. Mukherjee's obligation to repay to the Bank the Additional Payments he has received in consideration of the releases made by him in Paragraphs 10 and 11 of the Agreement and forfeiture of his rights to any future Additional Payments, in addition to any costs or liabilities that may be imposed on him by a court for a violation of this Agreement. 4 5 12. This Agreement constitutes the entire understanding between the parties, and supersedes any and all prior understandings and agreements between the parties. 13. The parties acknowledge that no representations, promises, consideration or inducements have been made by the Company, the Bank or by any of the Releasees to Mr. Mukherjee other than what is contained in this Agreement. 14. This Agreement may not be modified except by a writing signed by all parties. 15. The parties acknowledge that this Agreement does not constitute or imply any admission of liability by the Bank, or by any of the Releasees, to Mr. Mukherjee or to anyone deriving or claiming a right through him or on his behalf. 16. If any provision in this Agreement is declared or determined by any court to be illegal, void, or unenforceable, the illegality or unenforceability of such provision shall have no effect upon, and shall not impair, the enforceability or validity of any other provisions in this Agreement. 17. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. 18. This Agreement will inure to the benefit of and be binding upon Mr. Mukherjee, his legal representatives and testate or intestate distributees, and the Company, the Bank and its successors and assigns. 19. The parties acknowledge that this Agreement will only become effective on the eighth day following the day it is signed by Mr. Mukherjee, and that Mr. Mukherjee may revoke this Agreement at any time prior to its effective date by giving written notice of revocation to the Bank. 5 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first herein written. CARVER FEDERAL SAVINGS BANK /s/ Biswarup Mukherjee By: /s/ Thomas L. Clark - -------------------------------- --------------------------------------- Biswarup Mukherjee 11/3/97 Title:President and Chief Executive Officer - -------------------------------- ------------------------------------- Date CARVER BANCORP, INC. By: /s/ Thomas L. Clark --------------------------------------- Title:President and Chief Executive Officer 6 EX-10.13 4 CONSULTING AGREEMENT 1 EXHIBIT 10.13 CONSULTING AGREEMENT This CONSULTING AGREEMENT ("Agreement") is made and entered into as of this 1st day of October, 1997 by and between CARVER BANCORP, INC. ("Company"), a Delaware corporation having its executive offices at 75 West 125th Street, New York, New York 10027 and M. MORAN WESTON, residing at 228 Promenade Circle, Heathrow, Florida 32746 ("Consultant"). W I T N E S S E T H : WHEREAS, the Consultant will retire as a member of the Board of Directors of the Company ("Company Board") and the Board of Directors ("Bank Board") of Carver Federal Savings Bank ("Bank"), after having served on the Company Board since 1996, on the Bank Board since 1948, as Chairman of the Bank Board from 1980 to 1995, as Vice Chairman of the Bank Board since 1995 and as President of the Bank from 1968 to 1969; and WHEREAS, for purposes of facilitating a smooth transition of the membership of the Company Board and Bank Board, the Company wishes to secure for itself the availability of the Consultant's advise and counsel for a period following his retirement; and WHEREAS, the Consultant is willing to continue to provide such advice and counsel to the Company on the terms and conditions hereinafter set forth; NOW, THEREFORE, the Company and the Consultant hereby agree as follows: Section 1. Engagement; Period of Engagement. The Company offers to engage the Consultant, and the Consultant hereby accepts such engagement, to be available to the Company for consultation for a period of five (5) years beginning on the date first above written ("Effective Date") and ending on the day before the fifth anniversary of the Effective Date ("Period of Engagement"). Following the expiration of the Period of Engagement, the Company and the Consultant may, but shall be under no obligation to, enter into a subsequent agreement or other arrangement providing for the continued availability of the Consultant to the Company. Section 2. Extent of Services. (a) During the Period of Engagement, the Consultant shall hold himself available for consultation with the Company Board and the Bank Board, upon the Company's reasonable request from time to time. The Consultant may be called upon for such consultation not more often than 2 days per month during the Period of Engagement. Section 3. Compensation. In consideration for the availability of the Consultant's services hereunder, the Company shall pay to the Consultant a retainer at the annual rate of TWELVE THOUSAND DOLLARS ($12,000.00), payable in advance in equal monthly installments, the first such installment to be paid on the Effective Date and each succeeding installment to be paid on the first 2 -2- business day of each succeeding calendar month until a total of sixty (60) such payments have been made; provided, however, that no payment shall be made for any month after the month in which this Agreement terminates as provided in section 7. Such retainer shall constitute the sole and exclusive compensation to which the Consultant is or may become entitled hereunder. Without limiting the generality of the foregoing, the Consultant shall have no right by virtue of his role as a consultant to participate in, or to receive benefits under, any of the following plans, programs or arrangements which may be maintained by, or which may be available for individuals providing services to, the Bank or the Company: any qualified or non-qualified deferred compensation or retirement plan; any life, health (including hospitalization, medical and major medical), accident or disability plan, whether provided through insurance contracts or otherwise; any stock option, appreciation right, phantom stock or restricted stock plan or any other equity participation plan; any bonus, incentive or other cash compensation program; and any vacation, sick leave, severance pay, holiday or other fringe benefit program of any name or nature whatsoever. The foregoing sentence shall not prohibit the Consultant from receiving any other compensation or benefits he is entitled to as a former member of the Company Board or the Bank Board under any plans, programs or arrangements maintained by the Company or the Bank. Section 4. Expenses. If, in connection with the performance of service hereunder at the request of the Company, the Consultant incurs out-of-pocket costs for reasonable expenses of a type for which the members of the Company Board would be reimbursed by the Company, he shall be entitled to reimbursement therefor by the Company in accordance with the standards and procedures in effect from time to time for expense reimbursements to the members of the Company Board. Section 5. Confidentiality; Non-solicitation. (a) During the Period of Engagement and for a period of one (1) year thereafter, the Consultant, except as previously authorized by the Company in writing, shall keep confidential and shall refrain from using or disclosing for the benefit of any person or entity other than the Corporation or the Company any document or information obtained in the course of performing services under this Agreement. The preceding sentence shall not apply to the use or disclosure of any such document or information: (i) on or following the date on which such information or document is first readily ascertainable from public or published information or trade sources; or (ii) in connection with any judicial or administrative investigation, inquiry or proceeding to the extent compelled pursuant to applicable law and as to which, unless expressly prohibited by applicable law, the Consultant has given advance notice to the Company. (b) The Consultant acknowledges that during the course of his performance of service for the Company he may develop or otherwise acquire papers, files or other records involving or relating to confidential or secret plans, design information of any kind, devices, material, research, new product development, customers or customer lists. All such papers, files and other records shall be the exclusive property of the Company and shall, together with any and all copies thereof, be returned to the Company upon the earliest to occur of the termination of this Agreement, the expiration of the Period of Engagement, and a request by the Company for the return thereof. 3 -3- (c) The Consultant hereby covenants and agrees that, during the Period of Engagement and for a period of one (1) year thereafter, he shall not, without the written consent of the Company, either directly or indirectly: (i) solicit, offer employment to, or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company or any affiliate to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any entity that directly or indirectly competes with the Company in any market area in which it is then active; or (ii) provide any information, advice or recommendation to any officer or employee of any entity engaged or to be engaged directly or indirectly in the same or competing business with the Company in any market area in which it is then active that is intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company or any affiliate to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, such competing entity. Nothing in this section 5(c) shall prevent the Consultant from directly or indirectly advertising employment opportunities or disseminating marketing materials through newspapers of general circulation or other mass media or providing employment references to third parties in response to inquiries not initiated by him. (d) The duties and obligations imposed on the Consultant under this section 5 are intended to be in addition to, and not in limitation or exclusion of, any duties and obligations which the Consultant may owe to the Company under applicable law. This section 5 shall be con strued and enforced so as to give effect to this intent. Section 6. Non-Competition. The Consultant agrees that during the Period of Engagement, but in any event during the twelve (12) month period commencing on the Effective Date, the Consultant shall not, directly or indirectly, anywhere within the State of New York, engage in a business (as principal, partner, director, officer, agent, employee, consultant, owner, independent contractor or otherwise, with or without compensation) or hold a financial interest in any organization engaged in the business of banking (commercial or thrift) or which is otherwise engaged in competition with the Company or its subsidiaries or affiliates. The foregoing restriction shall not be construed to prohibit the ownership by the Consultant of less than five percent (5%) of any class of securities of any corporation which is engaged in any of the foregoing businesses having a class of securities registered pursuant to the Securities Exchange Act of 1934, as amended, provided that such ownership represents a passive investment and that neither the Consultant or any group of persons including the Consultant in any way, either directly or indirectly, manages or exercises control of any such corporation, guarantees any of its financial obligations, otherwise takes part in its business (other than exercising his rights as a shareholder) or seeks to do any of the foregoing. 4 -4- Section 7. Termination of Agreement. This Agreement shall terminate immediately upon the occurrence of either (a) the Consultant's breach of his obligations under sections 2, 5 or 6 hereof or (b) the Consultant's election to terminate the Period of Engagement upon 30 days' advance written notice to the Company. Following the termination of this Agreement, neither the Company nor the Consultant shall have any further obligations hereunder, except for their respective obligations, if any, under sections 4, 5, 6 and 9. Section 8. Death Benefits. In the event of the Consultant's death prior to the termination of the Period of Engagement, the Consultant's surviving spouse or, if the Consultant is not survived by a spouse, such beneficiary or beneficiaries as the Consultant shall have designated by written notice to the Secretary of the Company, shall be entitled to receive the compensation provided for under Section 3 hereof for the remainder of the Period of Engagement. In addition, notwithstanding anything to the contrary in Article III of the Carver Federal Savings Bank Retirement Plan for Non-Employee Directors ("Directors' Retirement Plan"), the Consultant's surviving spouse, if any, shall also be entitled to receive annual payments equal to the difference between 100% of the retirement benefit to be, or remaining to be, paid to the Consultant under the Directors' Retirement Plan at the time of his death, if any, and the annual payments his surviving spouse actually receives from the Directors Retirement Plan, if any. Payment of the supplemental survivor retirement benefit provided for under this Section 8 shall be made at the same times and in the same manner as survivor benefits to be paid to the Consultant's surviving spouse pursuant to Article III of the Directors' Retirement Plan. Section 9. No Employment Relationship Created. The relationship between the Company and the Consultant shall be that of client and independent contractor. The Company shall not assume, and specifically disclaims, any obligations of an employer to an employee which may exist under applicable law. The Consultant shall not have any of the rights of an employee with respect to the Company, and specifically waives any and all such rights. The Consultant hereby agrees to take any and all such actions as the Company may reasonably request in order to establish that no employment relationship exists between the parties (except for any such actions as would result in the termination of this Agreement, and provided that the Consultant shall be reimbursed for reasonable out-of-pocket expenses incurred by him in connection therewith). The Consultant shall be treated as an independent contractor for all purposes of federal, state and local income taxes and payroll taxes. Section 10. Right to Specific Performance. The Consultant hereby agrees that any breach of his covenants and agreements under sections 5 and 6 will cause irreparable injury to the Company for which the Company has no adequate remedy at law. Therefore, the Consultant agrees that each and every covenant and agreement set forth in sections 5 and 6 shall, in addition to and not by way of limitation of any other remedy which may be available, be specifically enforceable against him by any party entitled to enforcement thereof in a proceeding described in section 19 hereof. 5 -5- Section 11. Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the Consultant, his legal representatives and testate or intestate distributees, and the Company, and their respective successors and assigns, including, in the case of the Company, any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the respective assets and business of the Company may be sold or otherwise transferred. Notwithstanding the foregoing, the availability of the personal services of the Consultant is an integral part of this Agreement. The Consultant's duty of performance hereunder shall not be subject to assignment. Section 12. Notices. Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Consultant: M. Moran Weston 228 Promenade Circle Heathrow, Florida 32746 If to the Company: Carver Bancorp, Inc. 75 West 125th Street New York, New York 10027 Attention: David R. Jones Chairman of the Board of Directors Section 13. Severability. A determination that any provision of this Agreement, in whole or in part, is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof or of any part of the provision in question not determined to be unenforceable. Section 14. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed 6 -6- by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. Section 15. Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. Section 16. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to the conflict of law principles of such laws. Section 17. Headings and Construction. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. Section 18. Entire Agreement; Modifications. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or resentations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. Section 19. Survival. The provisions of this Agreement, other than section 2 hereof, shall survive the termination of this Agreement or the expiration of the Period of Engagement. Section 20. Indemnification. The Company shall indemnify the Consultant and his heirs, successors and assigns from and against any and all losses, claims, damages and liabilities to which the Consultant may become subject under applicable federal or state law, or otherwise, related to or arising out of the Consultant's performance of services hereunder. The Company will not be liable under the foregoing indemnification provision to the extent that any loss, claim, damage or liability relates to a claim that the Consultant's performance of his duties hereunder is a breach of any duty which he owes or is purported to owe to any other party or results from the Consultant's bad faith, 7 -7- willful misconduct or gross negligence. In the case any action is brought against the Consultant with respect to which indemnity may be sought against the Company under this Agreement, the Consultant shall promptly notify the Company in writing and the Company shall have the right to assume the defense thereof, including the employment of counsel and the payment of all fees and expenses. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and the Consultant has hereunto set his hand, all as of the day and year first above written. /s/ M. Moran Weston -------------------------------------- M. MORAN WESTON CARVER BANCORP, INC. By: /s/ David R. Jones ---------------------------------------- David R. Jones Chairman of the Board of Directors ATTEST: By /s/ Raymond L. Bruce -------------------------- Raymond L. Bruce Secretary [Seal] EX-21.1 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Carver Bancorp, Inc. 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, CFSB Credit Corp and CFSB Realty Corp., both of which are incorporated in the State of New York. EX-27.1 6 FINANCIAL DATA SCHEDULE
9 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, 1998 and is qualified in its entirety by reference to such financial statements. YEAR MAR-31-1997 MAR-31-1998 12,120,071 399,840 3,000,000 0 28,407,505 91,115,861 90,197,873 274,954,337 3,137,999 437,458,211 274,894,232 123,761,868 1,424,096 1,183,858 0 0 23,144 35,511,201 437,458,211 18,311,042 8,846,165 670,509 27,827,716 8,596,358 15,019,024 12,808,692 1,259,531 188,483 11,650,948 2,249,752 0 0 0 1,046,286 .48 .48 7.16 5,568,200 1,274,344 807,500 0 2,245,746 367,278 0 3,137,999 3,137,000 0 0
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