ITEM 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
CARVER BANCORP, INC.
Carver Bancorp, Inc., a Delaware corporation (on a stand-alone basis, the "Holding Company"), is the holding company for Carver Federal Savings Bank, a federally chartered savings bank, and its subsidiaries (collectively, the "Bank" or "Carver Federal"). Collectively, the Holding Company, the Bank and the Holding Company's other direct and indirect subsidiaries are referred to herein as the "Company" or "Carver." On October 17, 1996, the Bank completed its reorganization into a holding company structure (the "Reorganization") and became a wholly owned subsidiary of the Holding Company. Pursuant to an Agreement and Plan of Reorganization, dated May 21, 1996, each share of the Bank's outstanding common stock was exchanged for one share of common stock of the Holding Company. The Holding Company conducts business as a unitary savings and loan holding company, and the principal business of the Holding Company consists of the operation of its wholly owned subsidiary, the Bank.
The Holding Company's executive offices are located at the home office of the Bank at 75 West 125th Street, New York, New York 10027. The Holding Company's telephone number is (212) 876-4747.
CARVER FEDERAL SAVINGS BANK
The Bank was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally chartered mutual savings and loan association, at which time the Bank obtained federal deposit insurance and became a member of the Federal Home Loan Bank (the "FHLB") of New York. The Bank converted to a federal savings bank in 1986 and changed its name at that time to Carver Federal Savings Bank. On October 24, 1994, the Bank converted from mutual to stock form and issued 2,314,275 shares of its common stock at a price of $10 per share.
Carver Federal was founded as an African-American operated institution to provide residents of under-served communities with the ability to invest their savings and obtain credit. Carver Federal's principal business consists of attracting deposit accounts through its five branch offices and investing those funds in mortgage loans and other investments permitted to federal savings banks. Based on asset size as of March 31, 2003, Carver Federal is the largest African-American operated financial institution in the United States.
COMPANY WEBSITE AND AVAILABILITY OF SECURITIES AND EXCHANGE COMMISSION FILINGS
The Company makes available on or through its internet website, WWW.CARVERBANK.COM, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Such reports are free of charge and are available as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission.
MANAGEMENT STRATEGY
The Company's general operating strategy focuses on the origination of commercial, construction, multifamily and, to a lesser extent, secured consumer and business loans and the efficient use of personnel and technological resources. During 1999, the Company reduced its previous emphasis on investing in one- to four-family loans in favor of investing in higher margin business lines, including commercial, construction and multifamily real estate loans. The Company's current operating strategy consists primarily of: (1) the origination of commercial construction and multifamily real estate in the Bank's primary market area; (2) investing funds not utilized for loan originations or purchases in the purchase of United States Government Agency securities, mortgage-backed securities and, to a lesser extent, repurchasing the Company's common stock; (3) expanding its branch network by opening de novo branches and stand-alone ATM centers; (4) generating fee income by attracting and retaining high transaction core deposit accounts; and (5) to continue to lower its expense ratio by efficiently utilizing personnel, branch facilities and alterative delivery channels (telephone banking, internet, and ATMs) to service its customers. The Company plans to generate additional fee income by utilizing third party providers to sell non-deposit investment products and to offer a Carver credit card.
LENDING ACTIVITIES
GENERAL. Carver Federal's principal lending activity is the origination or purchase of mortgage loans for the purpose of purchasing or refinancing one- to four-family residential, multifamily, and commercial properties. Carver Federal also originates or participates in loans for the construction or renovation of commercial properties and residential housing developments and occasionally originates permanent financing upon completion of construction. In addition, Carver Federal originates home equity loans and consumer loans secured by deposits. Carver continued to engage in first-mortgage loan purchases during the fiscal year ended March 31, 2003 ("fiscal 2003"), which accounted for 42.5% of loan additions. Loan purchases are used to complement originations.
LOAN PORTFOLIO COMPOSITION. Gross loans receivable increased by $5.7 million, or 1.9%, to $303.2 million at March 31, 2003, compared to $297.5 million at March 31, 2002. Carver Federal's net loan portfolio as a percentage of total assets decreased to 57.8% at March 31, 2003, compared to 64.3% at March 31, 2002. One- to four-family mortgage loans totaled $71.7 million, or 23.7% of Carver Federal's total gross loan portfolio, multifamily loans totaled $131.7 million, or 43.5% of total gross loans, non-residential real estate loans, which includes commercial and church loans, totaled $79.2 million, or 26.1% of total gross loans, and construction loans totaled $18.4 million, or 6.1% of total gross loans. Consumer (credit card loans, personal loans, automobile loans, home equity loans and home improvement loans) and business loans totaled $2.1 million, or 0.7% of total gross loans. One- to four-family mortgage loans decreased by $51.1 million, or 41.6%, to $71.7 million at March 31, 2003, compared to $122.8 million at March 31, 2002. This decrease in one- to four-family loans is a result of a shift in focus toward multifamily lending, the sale of newly originated one- to four-family loans in the secondary market and portfolio repayments through normal amortization and early prepayments. During fiscal 2003, multifamily real estate loans increased by $13.1 million, or 11.0%, to $131.7 million at March 31, 2003, compared to $118.6 million at March 31, 2002. Non-residential real estate loans (including church loans) increased by $39.1 million, or 97.5%, to $79.2 million at March 31, 2003, compared to $40.1 million at March 31, 2002. Construction loans increased by $4.7 million, or 34.3%, to $18.4 million at March 31, 2003, compared to $13.7 million at March 31, 2002. Consumer and business loans decreased by $203,000, or 8.7%, to $2.1 million at March 31, 2003, compared to $2.3 million at March 31, 2002. The decrease in consumer and business loans reflects the Bank's continued de-emphasis on consumer lending resulting from its decision during the fiscal year ended March 31, 1999 ("fiscal 1999") to discontinue the origination of unsecured consumer loans.
Premiums on loans are paid when the effective yield on the loans being purchased is greater than the current market rate for comparable loans. These premiums are amortized as the loan is repaid. It is possible that in a declining interest rate environment the rate or speed at which loans repay may increase which may have the effect of accelerating the amortization of the premium and therefore reduce the effective yield of the loan. Premium on loans decreased by $39,000, or 4.3%, to $867,000 at March 31, 2003, compared to $906,000 at March 31, 2002. The decrease was attributable to the amortization of existing loan premiums which exceeded any additional premiums recorded on new loans purchased.
Loans in process increased by $2.9 million, or 73.7%, to $6.8 million at March 31, 2003, compared to $3.9 million at March 31, 2002. Allowance for loan losses increased by $30,000, or 0.7%, to $4.2 million at March 31, 2003, reflecting net charge-offs during fiscal 2003; there were no provisions for loan losses made during fiscal 2003. See "Asset Quality--Asset Classification and Allowance for Losses."
The following table sets forth selected data relating to the composition of Carver Federal's loan portfolio by type of loan at the dates indicated.
AT MARCH 31, --------------------- --------------------- Amount Percent ---------- --------- (DOLLARS IN THOUSANDS) Real estate loans: One- to four-family $ 181,320 65.39 Multifamily 52,366 18.89 Non-residential 23,093 8.33 Construction 11,047 3.98 Consumer and business (1) 9,450 3.41 ---------- --------- Total gross loans 277,276 100.00 ========= ADD: Premium on loans 1,014 LESS: Loans in process (2) (2,636) Deferred fees and loan discounts (1,110) Allowance for loan losses (4,020) ---------- Net loan portfolio $270,524 ==========
(1) Includes automobile loans, personal loans, credit card loans, home equity, home improvement loans and business loans. (2) Represents undisbursed portion of of outstanding construction loans.
ONE- TO FOUR-FAMILY RESIDENTIAL LENDING. Traditionally, Carver Federal's lending activity has been the origination and purchase of loans secured by first mortgages on existing one- to four-family residences in Carver Federal's market area. Carver Federal originates and purchases one- to four-family residential mortgage loans in amounts that range between $35,000 and $750,000. Approximately 67% of Carver Federal's one- to four-family residential mortgage loans at March 31, 2003 had adjustable rates and approximately 33% had fixed rates.
Carver Federal's one- to four-family residential mortgage loans are generally for terms of 30 years, amortized on a monthly basis, with principal and interest due each month. Residential mortgage loans often remain outstanding for significantly shorter periods than their contractual terms. These loans customarily contain "due-on-sale" clauses that permit the Bank to accelerate repayment of a loan upon transfer of ownership of the mortgaged property. Also, borrowers may refinance or prepay one- to four-family residential loans at their option without penalty.
The Bank's lending policies generally limit the maximum loan-to-value ("LTV") ratio on one- to four-family residential mortgage loans secured by owner-occupied properties to 95% of the lesser of the appraised value or purchase price, with private mortgage insurance required on loans with LTV ratios in excess of 80%. Under certain special loan programs, Carver originates and sells loans secured by single-family homes purchased by first time home buyers where the LTV ratio may go to 97%.
Carver Federal's fixed-rate, one- to four-family residential mortgage loans are underwritten in accordance with applicable guidelines and requirements for sale to the Federal National Mortgage Association ("Fannie Mae") or the State of New York Mortgage Agency ("SONYMA") in the secondary market. From time to time the Bank has sold such loans to Fannie Mae and to SONYMA. The Bank also originates, to a limited extent, loans underwritten according to Federal Home Loan Mortgage Corporation ("FHLMC") standards. Loans are sold with limited recourse on a servicing retained basis to Fannie Mae and on a servicing released basis to SONYMA. Carver Federal uses several sub-servicing firms to service mortgage loans, whether held in portfolio or sold with the servicing retained. At March 31, 2003, the Bank, through its sub-servicers, was servicing $4.1 million of loans for Fannie Mae and FHLMC.
Carver Federal offers one-year, three-year, five/one-year and five/three-year adjustable-rate one- to four-family residential mortgage loans. These loans are retained in Carver Federal's portfolio and are not sold on the secondary market. They are indexed to the weekly average rate on 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 a 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 Carver Federal's portfolio helps reduce Carver Federal's exposure to increases in prevailing market interest rates. However, there are unquantifiable credit risks resulting from potential increases in costs to borrowers in the event of upward repricing of adjustable-rate loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate loans may increase due to increases in interest costs to borrowers. Although adjustable-rate loans allow the Bank to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest rate sensitivity is limited by
periodic and lifetime interest rate adjustment limitations. Accordingly, there can be no assurance that yields on the Bank's adjustable-rate loans will fully adjust to compensate for increases in the Bank's cost of funds. Adjustable-rate loans increase the Bank's exposure to decreases in prevailing market interest rates, although decreases in the Bank's cost of funds would tend to offset this effect.
MULTIFAMILY REAL ESTATE LENDING. At March 31, 2003, multifamily loans totaled $131.7 million, or 43.5% of Carver Federal's gross loan portfolio. The largest of these loans outstanding was a $2.4 million loan secured by a 48 unit, multifamily apartment building located in New York, New York. This loan was performing at March 31, 2003. The Bank intends to continue its emphasis on multifamily mortgage lending, which has enabled the Bank to benefit from these higher yielding loans compared to lower yielding one- to four- family loans. In addition, Carver Federal has expanded its presence in the multifamily lending market in the New York City area. Carver Federal offers competitive rates with flexible terms that make the product attractive to borrowers. Multifamily property lending entails additional risks compared to one- to four-family residential lending. For example, such loans are dependent on the successful operation of the real estate project and can be significantly impacted by supply and demand conditions in the market for multifamily residential units.
Carver Federal's multi-family product guidelines generally require that the maximum LTV not exceed 75% while "cash out" refinances are limited to 65% LTV based on the appraised value. The Bank generally requires a debt coverage ratio ("DCR") of at least 1.3, which requires the properties to generate cash flow after expenses and allowances in excess of the principal and interest payment. The regulatory maximum for loans to one borrower is $6.7 million. Carver Federal originates multifamily mortgage loans, the predominance of which are adjustable rate loans that generally amortize on the basis of a 15-, 20-, 25- or 30-year period but require a balloon payment after the first five years, or the borrower may have an option to extend the loan for two additional five-year periods. The Bank, on a case-by-case basis, originates ten-year fixed rate loans.
To help ensure continued collateral protection and asset quality for the term of multifamily real estate loans, Carver Federal employs (with the assistance of an independent consulting firm) a risk-rating system. Under the risk-rating system, all multifamily real estate loans with balances over $250,000 are risk rated. Separate multifamily real estate loan portfolio reviews are performed annually resulting in written management summary reports.
NON-RESIDENTIAL REAL ESTATE LENDING. At March 31, 2003, non-residential real estate mortgage loans (including loans to churches) totaled $79.2 million, or 26.1% of the gross loan portfolio. Carver Federal originates non-residential real estate first mortgage loans in its market area. At March 31, 2003, the largest non-residential loan outstanding was a $2.8 million loan secured by a retail/office building located in New York, New York. This loan was performing at March 31, 2003. Carver Federal's non-residential real estate lending activity consists predominantly of loans for the purpose of purchasing or refinancing office, mixed-use (properties used for both commercial and residential purposes but predominantly commercial), retail and church buildings in its market area. Non-residential real estate lending entails additional risks compared with one- to four-family residential lending. For example, such loans typically involve large loan balances to single borrowers or groups of related borrowers, and the payment experience on such loans typically is dependent on the successful operation of the real estate project. Carver Federal's maximum LTV on non-residential real estate mortgage loans is 75%, and "cash out" refinances are limited to 65% LTV based on the appraised value. The Bank generally requires a DCR of at least 1.3. The Bank requires the assignment of rents of all tenants' leases in the property which serves as security for the mortgage.
To help ensure continued collateral protection and asset quality for the term of the non-residential real estate loans, Carver Federal employs (with the assistance of an independent consulting firm) a risk-rating system. Under the risk-rating system, all non-residential real estate loans with balances over $250,000 are risk rated. Independent third party non-residential loan portfolio reviews are performed at least annually resulting in written management summary reports.
Historically, Carver Federal has been a New York City area leader in the origination of loans to churches. At March 31, 2003, loans to churches totaled $15.4 million, or 5.1% of the Bank's gross loan portfolio. These loans generally have five-, seven- or ten-year terms with 15-, 20- or 25-year amortization periods and a balloon payment due at the end of the term, and generally have no greater than a 60% LTV ratio. At March 31, 2003, the largest permanent church loan was a $2.0 million loan secured by a building located in New York, New York. This loan was performing at March 31, 2003. The Bank provides construction financing for churches and generally provides permanent financing upon completion of construction. Under the Bank's current lending policies, the maximum loan amount for such lending is $1.0 million, but larger loan amounts are considered on a case-by-case basis. There are currently 25 church loans in the Bank's portfolio.
Loans secured by real estate owned by religious organizations generally are larger and involve greater risks than one- to four-family residential mortgage loans. Because payments on loans secured by such properties are often dependent on voluntary contributions by members of the church's congregation, repayment of such loans may be subject to a greater extent to adverse conditions in the economy. The Bank seeks to minimize these risks in a variety of ways, including reviewing the church's financial condition, limiting the size of such loans and establishing the quality of the collateral securing such loans. The Bank determines the appropriate amount and type of security for such loans based in part upon the governance structure of the particular organization, the length of time the church has been established in the community and a cash flow analysis of the church to determine its ability to service the proposed loan. Carver Federal will obtain a first mortgage on the underlying real property and usually requires personal
guarantees of key members of the congregation and/or key person life insurance on the pastor of the congregation and may also require the church to obtain key person life insurance on specific members of the church's leadership. Asset quality in the church loan category has been exceptional throughout Carver Federal's history. Management believes that Carver Federal remains a leading lender to churches in its market area.
CONSTRUCTION LENDING. The Bank originates construction loans for new construction and renovation of churches, multi-family buildings, residential developments, community service facilities and affordable housing programs. Carver Federal also offers construction loans to qualified individuals and developers for new construction and renovation of one- to four-family residences in the Bank's market area. The Bank's construction loans generally have adjustable interest rates and are underwritten in accordance with the same standards as the Bank's mortgage loans on existing properties. The loans provide for disbursement in stages as construction is completed. Construction terms are usually from 12 to 24 months, during which period the borrower is required to make monthly payments of interest on the outstanding loan balance. Borrowers must satisfy all credit requirements that apply to the Bank's permanent mortgage loan financing for the subject property. Carver Federal has established additional criteria for construction loans to include an engineer's review on all construction budgets in excess of $500,000 and appropriate interest reserves for loans in excess of $250,000.
Construction financing generally is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with a project having a value that is insufficient to assure full repayment. The ability of a developer to sell developed lots or completed dwelling units will depend on, among other things, demand, pricing, availability of comparable properties and economic conditions. The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers in the Bank's market areas, limiting the aggregate amount of outstanding construction loans and imposing a stricter LTV ratio requirement than that required for one- to four-family mortgage loans.
At March 31, 2003, the Bank had $18.4 million (including $6.8 million of committed but undisbursed funds) in construction loans outstanding, comprising 6.1% of the Bank's total gross loan portfolio. At March 31, 2003, the largest construction loan was on a retail building for $2.0 million located in New York, New York. At March 31, 2003, this loan was performing.
CONSUMER AND BUSINESS LOANS. At March 31, 2003, the Bank had approximately $2.1 million in consumer and business loans, or 0.7% of the Bank's gross loan portfolio. The secured loans in this portfolio were either secured by deposits at the Bank and homes. At March 31, 2003, $521,000, or 24.5% of all consumer and business loans, were secured and $1.6 million, or 75.5%, were unsecured.
Consumer loans generally involve more risk than first mortgage loans. Loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Further, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered. These loans may also give rise to claims and defenses by a borrower against Carver Federal, and a borrower may be able to assert claims and defenses against Carver Federal which it has against the seller of the underlying collateral. In underwriting secured consumer loans other than secured credit cards, Carver Federal considers the borrower's credit history, an analysis of the borrower's income, expenses and ability to repay the loan and the value of the collateral. The underwriting for secured credit cards only takes into consideration the value of the underlying collateral. See "Asset Quality--Non-performing Assets."
At March 31, 2003, the Bank had $385,000 in unsecured business loans. During the fourth quarter of fiscal 1999, the Bank discontinued the origination of unsecured commercial business loans. The Bank continues to make a limited number of commercial business loans that are secured in full by passbook and/or certificate of deposit accounts.
LOAN PROCESSING. Carver Federal's loan originations are derived from a number of sources, including referrals by realtors, builders, depositors, borrowers and mortgage brokers, as well as walk-in customers. Loans are originated by the Bank's personnel who receive a salary. Loan application forms are available at each of the Bank's offices. All applications are forwarded to the Bank's Lending Department located in the main office.
Carver Federal has established underwriting standards for multifamily and non-residential real estate. A non-residential real estate loan application is completed for all multifamily and non-residential properties which the Bank finances. Prior to loan approval, the property is inspected by a loan officer, who will prepare a property inspection report. As part of the loan approval process, consideration is given to the appraisal, location, accessibility, stability of neighborhood, environmental assessment, personal credit history of the applicant(s) and the financial capacity of the applicant(s).
Upon receipt of a completed loan application from a prospective borrower, a credit report and verifications are ordered to verify specific information relating to the loan applicant's income and credit standing. It is the Bank's policy to obtain an appraisal of
the real estate intended to secure a proposed mortgage loan from an independent fee appraiser approved by the Bank.
It is Carver Federal's policy to record a lien on the real estate securing the loan and to obtain a title insurance policy which insures that the property is free of prior encumbrances. Borrowers must also obtain hazard insurance policies prior to closing and, when the property is in a flood plain as designated by the Department of Housing and Urban Development, paid flood insurance policies must be obtained. Most borrowers are also required to advance funds on a monthly basis, together with each payment of principal and interest, to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes and hazard insurance.
LOAN APPROVAL. Except for loans in excess of $1.5 million, mortgage loan approval authority has been delegated by the Bank's Board of Directors ("Board") to the Bank's Management Loan Committee, which consists of certain members of executive management, and to the Bank's Asset Liability and Interest Rate Risk Committee, a committee of the Board. All one- to four-family mortgage loans that conform to Fannie Mae standards and limits may be approved by the Residential Mortgage Loan Underwriter. Loans above $1.5 million as well as any loan that represents an exception to the Bank's lending policies must be approved by the full Board.
LOANS TO ONE BORROWER. 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 may not exceed 15% of the unimpaired capital and surplus of a savings bank. See "Regulation and Supervision-Federal Banking Regulation-Loans to One Borrower Limitations." At March 31, 2003, the maximum loan under this test would be $6.7 million. At March 31, 2003 there were no loans that exceed the $6.7 million limit.
LOAN SALES. Originations of one- to four-family real estate loans are generally made on properties located within the New York City metropolitan area, although Carver Federal does occasionally fund loans secured by property in other areas. All such loans, however, satisfy the Bank's underwriting criteria regardless of location. The Bank continues to offer one- to four-family fixed-rate mortgage loans in response to consumer demand but requires that such loans satisfy guidelines of either Fannie Mae or SONYMA to provide opportunity for subsequent sale in the secondary market as desired to manage interest rate risk exposure.
LOAN PURCHASES. During fiscal 2003 Carver Federal purchased a total of $42.3 million of mortgage loans, consisting of performing multifamily and adjustable-rate one- to four-family mortgage loans to supplement its origination efforts. This represented 42.5% of Carver Federal's net addition to its loan production during fiscal 2003. The Bank purchases loans in order to increase interest income and to manage its liquidity position. The Bank continues to shift its loan production emphasis to take advantage of the higher yields and better interest rate risk characteristics available on multifamily and non-residential real estate mortgage loans as well as to increase its participation in multifamily and non-residential real estate mortgage loans with New York area lenders. Loans purchased in fiscal 2003 decreased $2.9 million, or 6.5%, from loan purchases of $45.2 million during the fiscal year ended March 31, 2002 ("fiscal 2002").
The following table sets forth certain information with respect to Carver Federal's loan originations, purchases and sales during the periods indicated.
(1) Comprised of auto, credit card, personal and home equity. (2) Comprised primarily of one- to four-family and multi-family mortgage loans. (3) Comprise primarily of one- to four-family mortgage loans and automobile loans.
Loan originations were $59.6 million in fiscal 2003, compared to $65.9 million in fiscal 2002 and $30.5 million in fiscal 2001. The decline in loan originations in fiscal 2003 is due primarily to highly competitive market conditions.
Loans purchased by the Bank entail certain risks not necessarily associated with loans the Bank originates. The Bank's purchased loans are generally acquired without recourse and in accordance with the Bank's underwriting criteria for originations. In addition, purchased loans have a variety of terms, including maturities, interest rate caps and indices for adjustment of interest rates, that may differ from those offered at the time by the Bank in connection with the loans the Bank originates. Finally, the market areas in which the properties that secure the purchased loans are located are subject to economic and real estate market conditions that may significantly differ from those experienced in Carver Federal's market area. There can be no assurance that economic conditions in these out-of-state areas will not deteriorate in the future, resulting in increased loan delinquencies and loan losses among the loans secured by property in these areas. It is important to note that the Bank initially seeks to purchase loans in its market area, however, the Bank will purchase loans outside its market area to meet its financial objectives.
In an effort to reduce these risks, with its existing personnel and through the use of a quality control/loan review firm, the Bank has sought to ensure that purchased loans satisfy the Bank's underwriting standards and do not otherwise have a higher risk of collection or loss than loans originated by the Bank. A Lending Department officer monitors the inspection and confirms the review of each purchased loan. Carver Federal also requires appropriate documentation and further seeks to reduce its risk by requiring, in each buy/sell agreement, a series of warranties and representations as to the underwriting standards and the enforceability of the related legal documents. These warranties and representations remain in effect for the life of the loan. Any misrepresentation must be cured within ninety (90) days of discovery or trigger certain repurchase provisions in the buy/sell agreement.
INTEREST RATES AND LOAN FEES. Interest rates charged by Carver Federal on mortgage loans are primarily determined by competitive loan rates offered in its market area and minimum yield requirements for loans purchased by Fannie Mae and SONYMA. Mortgage loan rates reflect factors such as prevailing market interest rate levels, the supply of money available to the savings industry and the demand for such loans. These factors are in turn affected by general economic conditions, the monetary policies of the federal government, including the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the general supply of money in the economy, tax policies and governmental budget matters.
Carver Federal charges fees in connection with loan commitments and originations, rate lock-ins, loan modifications, late payments, changes of property ownership and for miscellaneous services related to its loans. Loan origination fees are calculated as a percentage of the loan principal. The Bank typically receives fees of between zero and one point (one point being equivalent to 1% of the principal amount of the loan) in connection with the origination of fixed-rate and adjustable-rate residential mortgage loans. The loan origination fee, net of certain direct loan origination expenses, is deferred and accreted into income over the contractual life of the loan using the interest method. If a loan is prepaid, refinanced or sold, all remaining deferred fees with respect to such loan are taken into income at such time.
In addition to the foregoing fees, Carver Federal receives fees for servicing loans for others, which in turn generally are sub-serviced for Carver Federal by a third party servicer. Servicing activities include the collection and processing of mortgage payments, accounting for loan repayment funds and paying real estate taxes, hazard insurance and other loan-related expenses out of escrowed funds. Income from these activities varies from period to period with the volume and type of loans originated, sold and purchased, which in turn is dependent on prevailing market interest rates and their effect on the demand for loans in the Bank's market area.
LOAN MATURITY SCHEDULE. The following table sets forth information at March 31, 2003 regarding the dollar amount of loans maturing in Carver Federal's portfolio, including scheduled repayments of principal, based on contractual terms to maturity. Demand loans, loans having no schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. The table below does not include any estimate of prepayments, which significantly shorten the average life of all mortgage loans and may cause Carver Federal's actual repayment experience to differ significantly from that shown below.
The following table sets forth amounts in each loan category at March 31, 2003 that are contractually due after March 31, 2003 and whether such loans have fixed rates or adjustable interest rates. Scheduled contractual principal repayments of loans do not necessarily reflect the actual lives of such assets. The average life of long-term loans is substantially less than their contractual terms due to prepayments. In addition, due-on-sale clauses in mortgage loans generally give Carver Federal the right to declare a conventional loan due and payable in the event, among other things, that a borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and tends to decrease when current mortgage loan market rates are substantially lower than rates on existing mortgage loans.
Asset Quality
GENERAL. One of the Bank's key operating objectives has been and continues to be to maintain a high level of asset quality. Through a variety of strategies, including, but not limited to, monitoring loan delinquencies, borrower workout arrangements and marketing of foreclosed properties, the Bank has been proactive in addressing problem and non-performing assets which, in turn, has helped to build the strength of the Bank's financial condition. Such strategies, as well as the Bank's concentration on one- to four-family and multifamily mortgage lending, the maintenance of sound credit standards for new loan originations and a strong real estate market, have resulted in the Bank maintaining a low level of non-performing assets.
The underlying credit quality of the Bank's loan portfolio is dependent primarily on each borrower's ability to continue to make required loan payments and, in the event a borrower is unable to continue to do so, the value of the collateral should be adequate to secure the loan. A borrower's ability to pay typically is dependent primarily on employment and other sources of income which, in turn, is impacted by general economic conditions, although other factors, such as unanticipated expenditures or changes in the financial markets, may also impact the borrower's ability to pay. Collateral values, particularly real estate values, are also impacted by a variety of factors, including general economic conditions, demographics, maintenance and collection or foreclosure delays.
NON-PERFORMING ASSETS. When a borrower fails to make a payment on a mortgage loan, immediate steps are taken by Carver Federal's sub-servicers to have the delinquency cured and the loan restored to current status. With respect to mortgage loans, once the payment grace period has expired (in most instances 15 days after the due date), a late notice is mailed to the borrower within two business days and a late charge is imposed if applicable. If payment is not promptly received, the borrower is contacted by telephone and efforts are made to formulate an affirmative plan to cure the delinquency. Additional calls are made by the 20th and 25th day of the delinquency. If a mortgage loan becomes 30 days delinquent, a letter is mailed to the borrower requesting payment by a specified date. If a mortgage loan becomes 60 days delinquent, Carver Federal seeks to make personal contact with the borrower and also has the property inspected. If a mortgage becomes 90 days delinquent, a letter is sent to the borrower demanding payment by a certain date and indicating that a foreclosure suit will be filed if the deadline is not met. If payment is still not made, management may pursue foreclosure or other appropriate action.
When a borrower fails to make a payment on a consumer loan, steps are taken by Carver Federal's loan department to have the delinquency cured and the loan restored to current status. With the exception of automobile loans, once the payment grace period has expired (10 days after the due date), a late notice is mailed to the borrower immediately and a late charge is imposed if applicable. If payment is not promptly received, the borrower is contacted by telephone, and efforts are made to formulate an affirmative plan to cure the delinquency. If a consumer loan becomes 30 days delinquent, a letter is mailed to the borrower requesting payment by a specified date. If the loan becomes 60 days delinquent, the account is given to an independent collection agency to follow up with the collection of the account. If the loan becomes 90 days delinquent, a final warning letter is sent to the borrower and any co-borrower. If the loan remains delinquent, it is reviewed for charge-off. The Bank's collection efforts generally continue after the loan is charged off.
The following table sets forth information with respect to Carver Federal's non-performing assets at the dates indicated. Loans generally are placed on non-accrual status when they become 90 days delinquent.
(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, 2003, gross interest income of $173,000 would have been recorded on loans accounted for on a non-accrual basis at the end of the fiscal year if the loans had been current throughout the year. Instead, there was no interest on such loans included in income during the period.
(2) Other non-performing assets represent property acquired by the Bank in settlement of loans (i.e., through foreclosure or repossession or as an in-substance foreclosure). These assets are recorded at the lower of their fair value or the unpaid principal balance plus unpaid accrued interest of the related loans.
(3) Total non-performing assets consist of non-accrual loans, accruing loans 90 days or more past due and property acquired in settlement of loans.
At March 31, 2003, total non-performing assets decreased by $1.0 million, or 36.2%, to $1.8 million, compared to $2.8 million at March 31, 2002. All non-performing assets at March 31, 2003 and 2002 relate to loans accounted for on a non-accrual basis. The decrease primarily reflects a decrease in non-accruing non-residential and multifamily real estate loans partially offset by an increase in non-accruing one- to four-family real estate loans.
There were no accruing loans contractually past due 90 days or more at March 31, 2003 and March 31, 2002, reflecting the continued practice adopted by the Bank during the fiscal year ended March 31, 2000 to either write off or place on non-accrual status all loans contractually past due 90 days or more.
ASSET CLASSIFICATION AND ALLOWANCES FOR LOSSES. Federal regulations and the Bank's policies require the classification of assets on the basis of quality on a regular basis. An asset is classified as "substandard" if it is determined to be inadequately protected by the current net worth and paying capacity of the obligor or the current value of the collateral pledged, if any. An asset is classified as "doubtful" if full collection is highly questionable or improbable. An asset is classified as "loss" if it is considered un-collectible, even if a partial recovery could be expected in the future. The regulations also provide for a "special mention" designation, described as assets that do not currently expose a savings institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention. Assets classified as substandard or doubtful require a savings institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, a savings institution must either establish specific allowances for loan losses in the amount of the portion of the asset classified loss or charge off such amount. Federal examiners may disagree with a savings institution's classifications. If a savings institution does not agree with an examiner's classification of an asset, it may appeal this determination to the OTS Regional Director.
At March 31, 2003, Carver Federal had $2.1 million of loans classified as substandard which represented 0.4% of the Bank's total assets and 5.3% of the Bank's tangible regulatory capital at March 31, 2003. There were no loans classified as doubtful or loss at March 31, 2003.
The OTS, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan losses and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems, that management has analyzed all significant factors that affect the ability to collect the portfolio in a reasonable manner and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary. Federal examiners may disagree with the savings institution as to the appropriate level of the institution's allowance for loan losses. While management believes Carver Federal has established its existing loss allowances in accordance with generally accepted accounting principles, there can be no assurance that regulators, in reviewing Carver's assets, will not require Carver Federal to increase its loss allowance, thereby negatively affecting Carver's reported financial condition and results of operations.
Carver Federal's methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific loans as well as losses that have not been identified but can be expected to occur. Further, management reviews the ratio of allowances to total loans (including projected growth) and recommends adjustments to the level of allowances accordingly. The Internal Asset Quality Review Committee conducts quarterly reviews of the Bank's loans and evaluates the need to establish general and specific allowances on the basis of this review. In addition, management actively monitors Carver Federal's asset quality and charges off loans and properties acquired in settlement of loans against the allowances for losses on loans and such properties when appropriate and provides specific loss reserves when necessary. Although management believes it uses the best information available to make determinations with respect to the allowances for losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations.
Carver Federal's Internal Asset Quality Review Committee reviews its assets on a quarterly basis to determine whether any assets require classification or re-classification. The Bank has a centralized loan servicing structure that relies upon outside servicers, each of which generates a monthly report of delinquent loans. The Board has designated the Internal Asset Quality Review Committee to perform quarterly reviews of the Bank's asset quality, and their report is submitted to the Board for review. The Asset Liability and Interest Rate Risk Committee establishes policy relating to internal classification of loans and also provides input to the Internal Asset Quality Review Committee in its review of classified assets. In originating loans, Carver Federal recognizes that credit losses will occur and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. It is management's policy to maintain a general allowance for loan losses based on, among other things, regular reviews of delinquencies and loan portfolio quality, character and size, the Bank's and the industry's historical and projected loss experience and current and forecasted economic conditions. In addition, considerable uncertainty exists as to the future improvement or deterioration of the real estate markets in various states, or of their ultimate impact on Carver Federal as a result of its purchased loans in such states. See "Lending Activities-Loan Purchases." Carver Federal increases its allowance for loan losses by charging provisions for possible losses against the Bank's income. General allowances are established by the Board on at least a quarterly basis based on an assessment of risk in the Bank's loans, taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, the state of the real estate market and economic conditions generally. Specific allowances are provided for individual loans, or portions of loans, when ultimate collection is considered improbable by management based on the current payment status of the loan and the fair value or net realizable value of the security for the loan.
At the date of foreclosure or other repossession or at the date the Bank determines a property is an impaired property, the
Bank transfers the property to real estate acquired in settlement of loans at the lower of cost or fair value, less estimated selling costs. Fair value is defined as the amount in cash or cash-equivalent value of other consideration that a real estate parcel would yield in a current sale between a willing buyer and a willing seller. Any amount of cost in excess of fair value is charged-off against the allowance for loan losses. Carver Federal records an allowance for estimated selling costs of the property immediately after foreclosure. Subsequent to acquisition, the property is periodically evaluated by management and an allowance is established if the estimated fair value of the property, less estimated costs to sell, declines. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of real estate is recorded. At March 31, 2003, the Bank had no real estate acquired in settlement of loans. See Note 1 of Notes to Consolidated Financial Statements.
The following table sets forth an analysis of Carver Federal's allowance for loan losses for the periods indicated.
(1) Non-performing assets consist of non-accrual loans, accruing loans 90 days or more past due and property acquired in settlement of loans.
The following table allocates the allowance for loan losses by asset category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
AT MARCH 31, ------------ ---- % OF LOANS IN EACH CATEGORY TO TOTAL AMOUNT LOANS ------ ----- (DOLLARS IN THOUSANDS) Loans: Real estate One- to four-family $ 957 65.39 % Multi-family 902 18.89 Non-residential 251 8.33 Construction 424 3.98 Consumer and business 1,486 3.41 Unallocated - - ------- ------ Total allowance for loan losses $ 4,020 100.00 % ======= ======
INVESTMENT ACTIVITIES
GENERAL. The Bank utilizes mortgage-backed and other investment securities in virtually all aspects of its asset/liability management strategy. In making investment decisions, the Board considers, among other things, the Bank's yield and interest rate objectives, its interest rate and credit risk position and its liquidity and cash flow.
The Bank must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. The Bank's liquidity policy requires that cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained.
Generally, the investment policy of the Bank is to invest funds among categories of investments and maturities based upon the Bank's asset/liability management policies, investment quality, loan and deposit volume, liquidity needs and performance objectives. SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, requires that securities be classified into three categories: trading, held-to-maturity, and available-for-sale. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value with unrealized gains and losses included in earnings. Debt securities for which the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. All other securities not classified as trading or held-to-maturity are classified as available-for-sale and reported at fair value with unrealized gains and losses included, on an after-tax basis, in a separate component of stockholders' equity. At March 31, 2003, the Bank had no securities classified as trading. At March 31, 2003, $129.1 million, or 77.9% of the Bank's mortgage-backed and other investment securities, was classified as available-for-sale. The remaining $36.5 million, or 22.1%, was classified as held-to-maturity.
MORTGAGE-BACKED SECURITIES. The Bank has invested in mortgage-backed securities in order to achieve its asset/liability management goals. Although mortgage-backed securities generally yield from 60 to 100 basis points less than whole loans, they present substantially lower credit risk, are more liquid than individual mortgage loans and may be used to collateralize obligations of the Bank. Because Carver Federal receives regular payments of principal and interest from its mortgage-backed securities, these investments provide more consistent cash flows than investments in other debt securities which generally only pay principal at maturity. Mortgage-backed securities also help the Bank meet certain definitional tests for favorable treatment under federal banking and tax laws. See "Regulation and Supervision--Federal Banking Regulation--QTL Test" and "Federal and State Taxation."
At March 31, 2003, mortgage-backed securities constituted 24.9% of total assets, as compared to 14.7% of total assets at March 31, 2002. Carver Federal maintains a significant portfolio of mortgage-backed securities in the form of Government National Mortgage Association ("GNMA") pass-through certificates, Fannie Mae and FHLMC participation certificates and at times collateralized mortgage obligations ("CMOs"). GNMA pass-through certificates are guaranteed as to the payment of principal and interest by the full faith and credit of the U.S. Government while Fannie Mae and FHLMC certificates are each guaranteed by their respective agencies as to principal and interest. Mortgage-backed securities generally entitle Carver Federal to receive a pro rata portion of the cash flows from an identified pool of mortgages. CMOs are securities issued by special purpose entities generally collateralized by pools of mortgage-backed securities. The cash flows from such pools are segmented and paid in accordance with a predetermined priority to various classes of securities issued by the entity. Carver Federal also has invested in pools of loans guaranteed as to principal and interest by the Small Business Administration ("SBA").
The Bank seeks to manage interest rate risk by investing in adjustable-rate mortgage-backed securities which at March 31, 2003 constituted $117.6million, or 92.8% of the mortgage-backed securities portfolio. Mortgage-backed securities, however, expose Carver Federal to certain unique risks. In a declining rate environment, accelerated prepayments of loans underlying these securities expose Carver Federal to the risk that it will be unable to obtain comparable yields upon reinvestment of the proceeds. In the event the mortgage-backed security has been funded with an interest-bearing liability with a maturity comparable to the original estimated life of the mortgage-backed security, the Bank's interest rate spread could be adversely affected. Conversely, in a rising interest rate environment, the Bank may experience a lower than estimated rate of repayment on the underlying mortgages, effectively extending the estimated life of the mortgage-backed security and exposing the Bank to the risk that it may be required to fund the asset with a liability bearing a higher rate of interest.
The following table sets forth the carrying value of Carver Federal's mortgage-backed securities at the dates indicated. In November 2002 the Bank transferred $22.8 million of mortgage-backed securities from available-for-sale to held-to-maturity. At the beginning of fiscal 2002 the Bank transferred $45.7 million of mortgage-backed securities from held-to-maturity to available-for-sale.
AT MARCH 31, ------------ 2003 2002 2001 ---- ---- ---- (IN THOUSANDS) Available-for-Sale: GNMA $ 47,120 $ 10,584 $ - Fannie Mae 23,470 11,451 - FHLMC 19,693 28,249 - CMO - 136 - --------- -------- -------- Total available-for-sale 90,283 50,420 -
Held-to-Maturity: GNMA 2,473 3,448 5,774 Fannie Mae 6,203 5,607 21,633 FHLMC 27,482 6,149 14,672 SBA 372 439 594 CMO - - 193 --------- -------- -------- Total held to maturity 36,530 15,643 42,866 --------- -------- -------- Total mortgage-backed securities $ 126,813 $ 66,063 $ 42,866 ========= ======== ========
The following table sets forth the scheduled maturities, carrying values and fair values for Carver Federal's mortgage-backed securities at March 31, 2003. Expected maturities will differ from contractual maturities due to scheduled repayments and because borrowers may have the right to call or prepay obligations with or without prepayment penalties. The following table does not take into consideration the effects of scheduled repayments or the effects of possible prepayments.
CARRYING FAIR VALUE VALUE ------------- ------------- (IN THOUSANDS)
Available-for-sale: One through five years $ 112 $ 115 Five through ten years 1,813 1,933 After ten years 88,041 88,235 ------------- ------------- $ 89,966 $ 90,283 ============= =============
Held-to-maturity: One through five years $ - $ - Five through ten years 326 345 After ten years 36,204 37,198 ------------- ------------- $ 36,530 $ 37,543 ============= =============
OTHER INVESTMENT SECURITIES. In addition to mortgage-backed securities, the Bank also invests in high-quality assets (primarily government and agency obligations) with short and intermediate terms (typically seven years or less) to maturity. Carver Federal is permitted under federal law to make certain investments, including investments in securities issued by various federal agencies and state and municipal governments, deposits at the FHLB, certificates of deposit in federally insured institutions, certain bankers' acceptances and federal funds. The Bank may also invest, subject to certain limitations, in commercial paper having one of the two highest investment ratings of a nationally recognized credit rating agency, and certain other types of corporate debt securities and mutual funds.
The following table sets forth the carrying value of Carver Federal's other securities available-for-sale and held-to-maturity at the date indicated.
The following table sets forth the scheduled maturities, carrying values and fair values for Carver Federal's other investments at March 31, 2003.
OTHER EARNING ASSETS. Federal regulations require the Bank to maintain an investment in FHLB stock and a sufficient amount of liquid assets which may be invested in cash and specified securities. For additional information, see "Regulation and Supervision--Federal Banking Regulation--Liquidity."
The following table sets forth the carrying value of Carver Federal's investment in FHLB stock and liquid assets at the dates indicated.
AT MARCH 31, ------------ 2003 2002 2001 ---- ---- ---- (IN THOUSANDS) FHLB stock $ 5,440 $ 3,763 $ 5,755 Federal funds sold 5,500 21,100 23,700
Deposit Activity and Other Sources of Funds
GENERAL. Deposits are the primary source of Carver Federal's funds for lending and other investment purposes. In addition to deposits, Carver Federal derives funds from loan principal repayments, interest payments and maturing investments. Loan repayments and interest payments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by prevailing market interest rates and money market conditions. Borrowed money may be used to supplement the Bank's available funds, and from time to time the Bank has borrowed funds from the FHLB and through repurchase agreements.
DEPOSITS. Carver Federal attracts deposits principally from within its market area by offering a variety of deposit instruments, including passbook and statement accounts and certificates of deposit, which range in term from 91 days to seven years. Deposit terms vary, principally on the basis of the minimum balance required, the length of time the funds must remain on deposit and the interest rate. Carver Federal also offers Individual Retirement Accounts. Carver Federal's policies are designed primarily to attract deposits from local residents through the Bank's branch network rather than from outside the Bank's market area. Carver Federal also holds deposits from various governmental agencies or authorities and corporations. Although the Board has authorized accepting brokered deposits, the Bank does not have any of these types of 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 Bank's funds acquisition and liquidity requirements, the rates paid by the Bank's competitors, the Bank's growth goals and applicable regulatory restrictions and requirements.
During fiscal 2002, the Bank sold its branch located in East New York. As a result of this sale, the Bank transferred approximately $16.4 million of deposits to the purchaser. During fiscal 2001, the Bank sold its branches located in Roosevelt and Chelsea, New York. The total amount of deposits transferred as a result of these sales was $8.4 and $14.1 million, respectively. There were no branch sales in fiscal 2003.
The following table sets forth the change in dollar amount of deposits in the various types of accounts offered by Carver Federal between the dates indicated. Included in the net increase (decrease) in deposits before interest credited is the amount of deposits sold during the year ended March 31, 2002 and 2001 of $16.4 and $22.5 million, respectively.
The following table sets forth the distribution of the Bank's deposit accounts and the related weighted average interest rates at the dates indicated.
AT MARCH 31, ------------------------------------- ------------------------------------- PERCENT OF WEIGHTED TOTAL AVERAGE AMOUNT DEPOSITS RATE ------ -------- ---- (DOLLARS IN THOUSANDS) Non-interest -bearing demand $ 11,409 4.1 % - % NOW accounts 14,757 5.3 1.59 Savings and club 132,645 47.5 2.22 Money market savings account 15,718 5.6 2.34 Certificates of deposit 104,895 37.5 5.04 --------- ----- ---- Total $ 279,424 100.0 % 3.04 % ========= ===== ====
The following table sets forth the amount and maturities of time deposits in specified weighted average interest rate categories at March 31, 2003.
Carver Federal's certificates of deposit of $100,000 or more were $100.1 million as of March 31, 2003.
BORROWED MONEY. Deposits are the primary source of funds for Carver Federal's lending, investment and general operating activities. Carver Federal is authorized, however, to use advances and securities sold under agreement to repurchase ("Repos") from the FHLB and approved primary dealers to supplement its supply of funds and to meet deposit withdrawal requirements. The FHLB functions as a central bank providing credit for savings institutions and certain other member financial institutions. As a member of the FHLB system, Carver Federal is required to own stock in the FHLB and is authorized to apply for advances. Advances are made pursuant to several different programs, each of which has its own interest rate and range of maturities. Advances from the FHLB are secured by Carver Federal's stock in the FHLB and a blanket pledge of Carver Federal's mortgage loan and mortgage-backed securities portfolios.
One of the elements of Carver Federal's investment strategy is to leverage the balance sheet by increasing liabilities with FHLB advances and Repos and investing borrowed funds primarily in adjustable-rate mortgage loan and mortgage-backed securities products. The Bank seeks to match as closely as possible the term of borrowed money with the repricing cycle of the mortgage loans on the balance sheet. At March 31, 2003, Carver Federal had outstanding $108.8 million in FHLB advances and no Repos.
The following table sets forth certain information regarding Carver Federal's borrowed money at the dates and for the periods indicated:
(1) The approximate weighted average rate paid during the period was computed by dividing the average amounts outstanding into the related interest expense for the period.
Subsidiary Activities
At this time, the Holding Company conducts business as a unitary savings and loan holding company and the principal business of the Holding Company consist of the operation of its wholly owned subsidiaries, Carver Federal and Alhambra Holding Corp., a Delaware Corporation ("Alhambra"). The Company formed Alhambra to hold the Company's investment in a commercial office building that was subsequently sold in March 2000. Alhambra is currently inactive.
On March 8, 1995, Carver Federal formed CFSB Realty Corp. as a wholly owned subsidiary to hold real estate acquired through foreclosure pending eventual disposition. At March 31, 2003, this subsidiary had $221,000 in total capital and net operating loss of less than $1,000. At March 31, 2003 there was no real estate owned pending disposition. Carver Federal also owns CFSB Credit Corp., currently an inactive subsidiary originally formed to undertake the Bank's credit card issuance.
During the fourth quarter of fiscal 2003, Carver Federal formed Carver Asset Corporation, a wholly owned subsidiary which qualifies as a real estate investment trust pursuant to the Internal Revenue Code of 1986, as amended. This subsidiary may, among other things, be utilized by Carver Federal to raise capital in the future. Upon formation of Carver Asset Corporation, Carver Federal transferred approximately $119 million of mortgage loans to this subsidiary.
Market Area and Competition
The Bank's primary market area for deposits consists of the areas served by its five branches. The Bank considers its primary lending market to include Bronx, Kings, Manhattan, Queens and Richmond counties, together comprising New York City, and lower Westchester County, New York. See "Item 2
ITEM 2. PROPERTIES.
The Bank currently conducts its business through one administrative office and five branch offices. The following table sets forth certain information regarding Carver Federal's offices and other material properties at March 31, 2003.
The net book value of Carver Federal's investment in premises and equipment totaled approximately $10.2 million at March 31, 2003.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, Carver Federal is a party to various legal proceedings incident to its business. Certain claims, suits, complaints and investigations involving Carver Federal, arising in the ordinary course of business, have been filed or are pending. The Company is of the opinion, after discussion with legal counsel representing the Bank in these proceedings, that the aggregate liability or loss, if any, arising from the ultimate disposition of these matters would not have a material adverse effect on the Company's consolidated financial position or results of operations. At March 31, 2003, except as set forth below, there were no material legal proceedings to which the Company or its subsidiaries was a party or to which any of their property was subject.
On or about April 29, 1999, plaintiff Reginald St. Rose ("St. Rose") filed suit against Carver Federal in the Supreme Court of the State of New York, County of New York (the "St. Rose Action"). St. Rose is a former Carver Federal employee. On or about January 12, 1999, Carver Federal and St. Rose entered into an agreement (the "Agreement") providing that St. Rose would resign from Carver Federal on the terms and conditions set forth in the Agreement. In the St. Rose Action, St. Rose alleged the following causes of action, which relate to the Agreement and St. Rose's separation from Carver Federal: (1) breach of contract; (2) promissory estoppel; and (3) fraudulent misrepresentation. St. Rose seeks damages in an amount not less than $50,000 with respect to the breach of contract cause of action and seeks undisclosed damages with respect to the promissory estoppel and fraudulent misrepresentation causes of action.
On or about August 18, 1999, Carver Federal moved to dismiss St. Rose's fraudulent misrepresentation cause of action. By decision dated November 23, 1999, the Court granted Carver Federal's motion to dismiss and entered an order embodying that decision on January 26, 2000. Carver Federal has not filed an answer in the St. Rose Action. By written stipulation of the parties, Carver Federal's time to file an answer to St. Rose's complaint has been extended without date. Carver Federal has unasserted counterclaims against St. Rose for, among other claims, payment of certain financial obligations to Carver Federal (including, but not limited to, automobile loans, unsecured loans, lines of credit and credit card debts), which obligations remain outstanding as of the date of this Form 10-K. Since January 2000, the St. Rose Action has been largely inactive. The parties have had intermittent settlement discussions but have not reached an agreement. If the parties do not reach a settlement, Carver Federal intends to continue to defend the St. Rose Action vigorously.
Carver Federal is also a defendant in an action brought by Ralph Williams (the "Williams Action") and an action brought by Janice Pressley (the "Pressley Action" and, together with the Williams Action, the "Actions") both of which arise out of events concerning the Northeastern Conference Federal Credit Union ("Northeastern"). Plaintiff Williams is a former member of the Board of Directors of Northeastern and plaintiff Pressley is a former treasurer of Northeastern.
Northeastern was a federal credit union and it maintained accounts with Carver Federal and with other banks in the New York metropolitan area. Plaintiffs' complaints (which are virtually identical) allege that the National Credit Union Administration (the "NCUA") acted improperly when it placed Northeastern into conservatorship and subsequent liquidation. On or about November 22, 2000, Williams filed his pro se complaint in the United States District Court, District of Columbia, against the NCUA, Carver Federal, JPMorgan Chase Bank (formerly Chase Manhattan Bank) ("Chase"), Astoria Federal Savings and Loan Association and Reliance Federal Savings Bank (Carver Federal with the last three defendants, collectively the "Bank Defendants") seeking damages in the amount of $1 million plus certain additional unspecified amounts. On or about November 22, 2000, plaintiff Pressley filed her pro se action in the United States District Court, District of Columbia, against the same defendants seeking unspecified compensatory and punitive damages. Williams seeks damages for the allegedly "unauthorized" or "invalid" actions of the NCUA Board of Directors in taking control of Northeastern as well as damages for discrimination and civil rights violations. Pressley seeks damages based on identical allegations except that she also alleges certain claims of employment discrimination. While the bulk of both complaints relate to the action of the NCUA Board of Directors, the plaintiffs advance two allegations against the Bank Defendants, including Carver Federal. First, plaintiffs allege that the Bank Defendants "collaborated with the NCUA Board of Directors" in violating unspecified constitutional and privacy rights. Second, plaintiffs allege that the Bank Defendants engaged in discrimination.
On or about December 15, 2000, defendant Chase moved to consolidate the Actions. In anticipation of that consolidation, the Bank Defendants filed a joint motion to dismiss both complaints arguing that both Actions are barred by principles of res judicata and both complaints fail to state claims on which relief can be granted. The Bank Defendants' motion to dismiss was denied without prejudice insofar as it applied to the Williams Action solely for the reason that it was a motion addressed to both Actions prior to the issuance of an order consolidating these cases. The Bank Defendants have refiled their motion to dismiss the Williams Action and it is sub judice. If the motion to dismiss is not granted, Carver Federal intends to defend the Williams Action vigorously. On September 20, 2001, the Court granted the Bank Defendants' motion to dismiss the Pressley Action. Pressley has appealed the dismissal. Carver Federal is vigorously opposing the appeal.
On or about December 28, 2000, plaintiff Thomas L. Clark ("Clark") filed suit against Carver Federal and individual defendants in the Supreme Court of the State of New York, County of New York. Clark is the former President and Chief Executive Officer of Carver Federal. Clark claimed that the defendants should be forced to obtain approval from the OTS to pay severance benefits that Clark believes Carver Federal owes him under an employment agreement. Carver Federal sought injunctive relief and asserted claims for breach of contract, equitable estoppel and estoppel by contract. On or about March 30, 2001, Carver Federal and the individual defendants moved to dismiss the complaint in its entirety based on documentary evidence and for failure to state a cause of action. By Decision and Order entered November 27, 2001, the Court granted that motion to the extent of dismissing the first cause of action for breach of contract against all of the individual defendants and dismissing the second cause of action based on estoppel theories as against all the defendants. Carver Federal appealed the Decision and Order insofar as it did not dismiss the complaint in its entirety. On September 26, 2002, the Appellate Division of the Supreme Court reversed the lower court and granted Carver Federal's motion in its entirety. Clark did not appeal that decision and his time to do so has expired.
In or about November 2001, Monique Barrow filed an action against Carver Federal in the United States District Court for the Southern District of New York alleging that Carver Federal's termination of her employment constituted a violation of the federal Family and Medical Leave Act, 29 U.S.C. ss. 2601, et seq., the New York State Human Rights Law, N.Y. Executive ss.296 ET SEQ., and the New York City Human Rights Law, N.Y.C. Administrative Code ss. 8-101 et seq. Ms. Barrow seeks back pay, front pay and benefits with interest in an amount not less than $5 million, and punitive, liquidated and other compensatory damages in an amount not less than $10 million. Carver Federal has answered the complaint denying any liability. Carver Federal obtained an order providing for expedited discovery on liability issues. Carver Federal has completed its discovery and has requested permission to make a motion for summary judgment. Carver Federal intends to make that motion as soon as permission is received.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Holding Company held its Annual Meeting on February 4, 2003 for the fiscal year ended March 31, 2002.
The purpose of the Annual Meeting was to vote on the following proposals:
1. The election of three directors for terms of three years each; and
2. The ratification of the appointment of KPMG, LLP as independent auditors of the Holding Company for the fiscal year ended March 31, 2003.
The results of voting were as follows:
In addition to the nominees elected at the Annual Meeting, the following persons' terms of office as directors continued after the Annual Meeting: Pazel G. Jackson, Jr., David L. Hinds, Frederick O. Terrell, Robert Holland, Jr. and Deborah C. Wright.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Holding Company's common stock is listed on the American Stock Exchange under the symbol "CNY." As of May 31, 2003, there were 2,286,133 shares of the common stock outstanding, held by approximately 1,073 stockholders of record. The following table shows the high and low per share sales prices of the common stock and the dividends declared for the quarters indicated.
On January 9, 2003, the Holding Company's Board of Directors announced the establishment of a quarterly cash dividend in an amount to be determined each quarter. As such, the Board of Directors declared two separate cash dividends of $0.05 per common share for the third and fourth quarters of fiscal 2003. They were paid on or about February 7, 2003 and May 19, 2003, respectively, to common stockholders of record at the close of business on January 20, 2003 and May 5, 2003, respectively. In each of the past five fiscal years other than fiscal 2003 the Company has paid an annual $0.05 per common share cash dividend.
The Bank will not be permitted to pay dividends to the Holding Company on its capital stock if its regulatory capital would be reduced below applicable regulatory capital requirements or if its stockholders' equity would be reduced below the amount required to be maintained for the liquidation account, which was established in connection with the Bank's conversion to stock form. The OTS capital distribution regulations applicable to savings institutions (such as the Bank) that meet their regulatory capital requirements permit, after not less than 30 days prior notice to the OTS, capital distributions during a calendar year that do not exceed the Bank's net income for that year plus its retained net income for the prior two years. For information concerning the Bank's liquidation account, see Note 11 of the Notes to the Consolidated Financial Statements.
Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the payment of dividends to its stockholders, although the source of such dividends will be dependent, in part, upon dividends from the Bank. The Holding Company is subject to the requirements of Delaware law, which generally limit dividends to an amount equal to the excess of the net assets of the Company (the amount by which total assets exceed total liabilities) over its statutory capital, or if there is no such excess, to its net profits for the current and/or immediately preceding fiscal year.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(1) Net income divided by average total assets
(2) Net income divided by average total equity
(3) For fiscal 1999, excluding non-recurring expenses amounting to $7.8 million, the return on average assets, return on average equity, operating expenses to average assets and efficiency ratio were 0.24%, 2.85%, 2.98%, and 78.94%, respectively.
(4) Net interest income divided by average interest-earning assets.
(5) The difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(6) Non-interest expense (other than real estate owned expenses) divided by the sum of net interest income and non-interest income (other than net security gains and losses and other non-recurring income).
(7) Non-interest expense less real estate owned expenses, divided by average total assets.
(8) Dividends paid to common stockholders as a percentage of net income (loss) available to common stockholders.
(9) Non performing assets consist of non-accrual loans, loans accruing 90 days or more past due, and property acquired in settlement of loans.
(10) Total stockholders' equity divided by diluted weighted average shares outstanding.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements presented elsewhere in this report.
General
Carver's net income is dependent primarily on its net interest income, which is the difference between interest income earned on its loan, investment and mortgage-backed securities portfolios and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. In addition, net income is affected by the level of provision for loan losses, as well as non-interest income and operating expenses.
The operations of Carver are significantly affected by prevailing economic conditions, competition and the monetary and fiscal policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flow and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities, and the levels of personal income and savings.
Asset/Liability Management
Net interest income, the primary component of Carver's net income, is determined by the difference or "spread" between the yield earned on interest-earning assets and the rates paid on its interest-bearing liabilities and the relative amounts of such assets and liabilities. Because Carver's interest-bearing liabilities consist primarily of shorter term deposit accounts, Carver's interest rate spread can be adversely affected by changes in general interest rates if its interest-earning assets are not sufficiently sensitive to changes in interest rates. Management has sought to reduce Carver's exposure to changes in interest rates by more closely matching the effective maturities and repricing periods of its interest-earning assets and interest-bearing liabilities through a variety of strategies, including the origination and purchase of adjustable-rate loans for its portfolio, investment in adjustable-rate mortgage-backed securities and shorter-term investment securities and the sale of all long-term fixed-rate loans originated into the secondary market. The Bank has also reduced interest rate risk through its origination and purchase of primarily adjustable-rate mortgage loans and extension of the term of borrowings.
Discussion of Market Risk--Interest Rate Sensitivity Analysis
As a financial institution, the Bank's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Bank's assets and liabilities, and the market value of all interest-earning assets, other than those which possess a short term to maturity. Since all of Carver's interest-bearing liabilities and virtually all of Carver's interest-earning assets are located at the Bank, most of Carver's interest rate risk ("IRR") exposure lies at the Bank level. As a result, all significant IRR management procedures are performed at the Bank level. Based upon the Bank's nature of operations, the Bank is not subject to foreign currency exchange or commodity price risk. The Bank does not own any trading assets.
Carver seeks to manage its IRR by monitoring and controlling the variation in repricing intervals between its assets and liabilities. To a lesser extent, Carver also monitors its interest rate sensitivity by analyzing the estimated changes in market value of its assets and liabilities assuming various interest rate scenarios. As discussed more fully below, there are a variety of factors which influence the repricing characteristics of any given asset or liability.
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific period of time and the amount of interest-bearing liabilities repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities and is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest 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. Conversely, 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 6.26% of total rate sensitive assets at March 31, 2003, as a result of which its net interest income could be negatively affected by rising interest rates and positively affected by falling interest rates.
The following table sets forth information regarding the projected maturities, prepayments and repricing of the major rate-sensitive asset and liability categories of Carver as of March 31, 2003. Maturity repricing dates have been projected by applying prepayment rates which management believes are appropriate. The information presented in the following table is derived in part from data incorporated in "Schedule CMR: Consolidated Maturity and Rate," which is part of the Bank's quarterly reports filed with the 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.
(1) Includes securities available-for-sale.
The table above assumes that fixed maturity deposits are not withdrawn prior to maturity and that transaction accounts will decay as disclosed in the table above.
Certain shortcomings are inherent in the method of analysis presented in the table above. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in the market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, generally have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Additionally, an increased credit risk may result as the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. Virtually all of the adjustable-rate loans in Carver's portfolio contain conditions that restrict the periodic change in interest rate.
Net Portfolio Value ("NPV") Analysis. As part of its efforts to maximize net interest income and manage the risks associated with changing interest rates, management uses the NPV methodology.
Under this methodology, IRR exposure is assessed by reviewing the estimated changes in net interest income ("NII") and NPV that would hypothetically occur if interest rates rapidly rise or fall all along the yield curve. Projected values of NII and NPV at both higher and lower regulatory defined rate scenarios are compared to base case values (no change in rates) to determine the sensitivity to changing interest rates.
Presented below, as of March 31, 2003, is an analysis of the Bank's IRR as measured by changes in NPV and NII for instantaneous and sustained parallel shifts of 100 basis points in market interest rates. Such limits have been established with consideration of the impact of various rate changes and the Bank's current capital position. The information set forth below relates solely to the Bank; however, because virtually all of the Company's IRR exposure lies at the Bank level, management believes the table below also accurately reflects an analysis of the Company's IRR.
Certain shortcomings are inherent in the methodology used in the above IRR measurements. Modeling changes in NPV require the making of certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV table presented assumes that the composition of Carver's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV table provides an indication of Carver's IRR exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on Carver's net interest income and will differ from actual results.
Average Balance, Interest and Average Yields and Rates
The following table sets forth certain information relating to Carver's average interest-earning assets and average interest-bearing liabilities and reflects the average yield on assets and the average cost of liabilities for the years indicated. Such yields and costs are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods shown. Average balances are derived from average month-end balances, except for federal funds which are derived from daily balances. Management does not believe that the use of average monthly balances instead of average daily balances on all other accounts has caused any material difference in the information presented.
The table also presents information for the years indicated with respect to the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, or "interest rate spread," which savings institutions have traditionally used as an indicator of profitability. Another indicator of an institution's profitability is its "net interest margin," which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.
(1) Includes non-accrual loans.
(2) Includes FHLB stock.
(1) Includes non-accrual loans.
(2) Includes FHLB stock.
Rate/Volume Analysis
The following table sets forth information regarding the extent to which changes in interest rates and changes in volume of interest related assets and liabilities have affected Carver Federal's interest income and expense during the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided for changes attributable to (i) changes in volume (changes in volume multiplied by old rate), (ii) changes in rates (change in rate multiplied by old volume), and (iii) changes in rate/volume. Changes in rate/volume variance are allocated proportionately between changes in rate and changes in volume.
Comparison of Financial Condition at March 31, 2003 and 2002
At March 31, 2003, total assets increased by $59.5 million, or 13.2%, to $509.8 million, compared to $450.3 million at March 31, 2002. The increase in total assets was primarily attributable to increases in total securities. Total securities at March 31, 2003 increased $60.1 million to $165.6 million from $105.5 million at March 31, 2002, reflecting a $39.2 million increase in available-for-sale securities and a $20.9 million increase in held-to-maturity securities. In November 2002, the Bank transferred $22.8 million of mortgage-backed and other securities from available-for-sale to held-to-maturity. The increase in available-for-sale securities, excluding securities transferred to held-to-maturity, primarily reflects purchases of $91.1 million substantially offset by $28.7 million in principal repayments, maturities and calls and a $686,000 increase in the market value of the portfolio. The increase in held-to-maturity securities reflects securities transferred from available-for-sale of $22.8 million and purchases of $4.1 million offset by principal payments and maturities of $6.6 million. Available-for-sale securities represented 77.9% of the total securities portfolio at March 31, 2003, compared to 85.2% at March 31, 2002.
Loans receivable, net, increased by $3.0 million, or 1.0%, to $292.7 million, compared to $289.7 million one year ago. The loan growth during fiscal 2003 represented loan originations of $59.6 million and loan purchases of $42.3 million, offset by principal repayments of $96.4 million and loans sold to Fannie Mae of $2.5 million. The increase in mortgage loan principal repayments, originations and purchases in fiscal 2003 and fiscal 2002 is primarily a result of the lower interest rate environment during both fiscal years which has increased the level of mortgage refinance activity.
At March 31, 2003, total liabilities increased $55.2 million, or 13.3%, to $468.8 million, compared to $413.6 million at March 31, 2002. Deposits increased $22.2 million, or 6.8%, to $347.2 million at March 31, 2003 from $325.0 million at March 31, 2002. The increase in deposits was primarily attributable to increases of $11.4 million in certificates of deposit, of which $5.0 was an individual government deposit, $5.5 million in money market accounts, $3.1 million in demand accounts and $2.2 million in regular savings and club accounts. Advances from the FHLB-NY and other borrowed money increased $33.3 million, or 44.1%, to $109.0 million at March 31, 2003, from $75.7 million one year ago.
At March 31, 2003, stockholders' equity increased $4.3 million, or 11.8%, to $41.1 million, compared to $36.7 million at March 31, 2002. The increase in stockholders' equity was primarily attributable to net income of $3.8 million, other comprehensive income, net of taxes, of $634,000 and the amortization of the allocated portion of shares held by the Carver Federal Employee Stock Ownership Plan of $152,000. These increases were partially offset by a net increase in treasury stock holdings of $52,000 and dividends declared of $313,000. The Bank's capital levels meet regulatory requirements of a well capitalized financial institution.
Comparison of Operating Results For The Years Ended March 31, 2003 and 2002
Net Income
The Bank reported net income for fiscal 2003 of $3.8 million, compared to $4.7 million for the prior fiscal year. Net income available to common stockholders for fiscal 2003 was $3.6 million, or $1.52 per diluted common share, compared to $4.5 million, or $1.89 per diluted common share, for fiscal 2002. The decrease in net income was primarily due to a $2.2 million increase in federal income taxes, a $1.3 million decrease in non-interest income and a $494,000 increase in non-interest expense partially offset by a $2.2 million improvement in net interest income and a $900,000 decrease in the provision for loan losses.
Interest Income
Interest income for fiscal 2003 was $27.4 million, a decrease of $876,000, or 3.1%, from the prior year. The average balance of interest-earning assets increased to $431.8 million for fiscal 2003 from $399.7 million for the prior year. This increase was more than offset by a decline in the average yield on interest-earning assets to 6.34% for fiscal 2003, compared to 7.07% for fiscal 2002.
Interest income on loans decreased by $1.4 million, or 6.2%, to $21.2 million for fiscal 2003 compared to $22.6 million for fiscal 2002. The decrease in interest income from loans reflects a decrease of $14.7 million, or 4.9%, in the average balance of loans to $282.4 million for fiscal 2003 compared to $297.1 million for fiscal 2002, coupled with a 10 basis point decrease in the average rate earned on loans to 7.50% for fiscal 2003 from 7.60% for the prior year. The decrease in the average balance of loans reflects amortization of prepayments in excess of originations and purchases. The decline in the average rate earned on loans was principally due to the downward pricing on loan products during the continuing declining interest rate environment during fiscal 2003.
Interest income on mortgage-backed securities increased by $1.4 million, or 46.7%, to $4.3 million for fiscal 2003, compared to $2.9 million for the prior year, reflecting an increase of $42.6 million in the average balance of mortgage-backed securities to $93.0 million for fiscal 2003 compared to $50.5 million for fiscal 2002. The increase in the average balance of such securities was due to the utilization of part of the proceeds received from increased borrowings and deposits, coupled with the redeployment of mortgage loan principal repayments, to purchase mortgage-backed securities. This increase was partially offset by a 118 basis point decrease in the average rate earned on mortgage-backed securities to 4.60% from 5.78%.
Interest income on investment securities decreased by approximately $710,000, or 30.6%, to $1.6 million for fiscal 2003, compared to $2.3 million for the prior year. The increase in interest income on investment securities reflects a 164 basis point decrease in the average rate earned on investment securities to 4.40% from 6.04% and a decrease of $1.8 million in the average balance of investment securities to $36.7 million for fiscal 2003 compared to $38.5 million for fiscal 2002.
Interest income on federal funds decreased $126,000, to $300,000 for fiscal 2003, compared to $426,000 for the prior year. The decrease is attributable to a 160 basis point decrease in the average rate earned on federal funds, partially offset by a $6.1 million increase in the average balance of federal funds.
Interest Expense
Interest expense decreased by $3.1 million, or 25.4%, to $9.0 million for fiscal 2003, compared to $12.0 million for the prior year. The decrease in interest expense reflects a decline of 95 basis points in the average cost of interest-bearing liabilities. This decline in average rate paid was partially offset by a $22.8 million increase in the average balance of interest-bearing liabilities to $397.9 million in fiscal 2003 from $375.1 million in fiscal 2002. The increase in the average balance of interest-bearing liabilities in fiscal 2003 compared to fiscal 2002 was due to increases in the average balance of interest-bearing deposits and, to a lesser extent, increases in the average balance of borrowed money.
Interest expense on deposits decreased $2.4 million, or 29.1%, to $5.8 million for fiscal 2003, compared to $8.1 million for the prior year. This decrease is attributable to a 92 basis point decrease in the cost of average deposits partially offset by a $20.1 million, or 6.8%, increase in the average balance of interest-bearing deposits to $317.1 million for fiscal 2003, compared to $297.0 million for fiscal 2002. The increase in the average balance of interest-bearing deposits was primarily due to an increase in the average balance of certificates of deposit of $21.6 million, or 16.1%. The increase in average interest-bearing deposits was achieved through increased retail production brought about by enhanced marketing efforts. The decrease in the average rate paid on deposits was principally due to the declining interest rate environment experienced in fiscal 2003.
Interest expense on borrowed money decreased by $697,000, or 17.8%, to $3.2 million for fiscal 2003, compared to $3.9 million for the prior year. The decrease in interest expense on borrowed money for fiscal 2003 reflects a decrease of 103 basis points in the average cost of borrowed money partially offset by a $2.7 million increase in the average balance of borrowed money. The decrease in average cost of borrowings was due to the continued declining interest rate environment experienced during fiscal 2003.
Net Interest Income
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned and paid. Our net interest income is significantly impacted by changes in interest rate and market yield curves. See "Discussion of Market Risk--Interest Rate Sensitivity Analysis" for further discussion on the potential impact of changes in interest rates on our results of operations.
Net interest income before the provision for loan losses increased $2.2 million, or 13.5%, to $18.4 million for fiscal 2003 compared to $16.2 million for the prior year. Net interest income benefited from a general interest rate decline, as well as an increase in deposits. This benefit was partially offset by an increase in borrowed money, a decrease in loan originations and average loan balances and accelerated prepayments of mortgage-backed securities. The 95 basis point decrease in the cost of interest-bearing liabilities used to fund interest-earning assets, coupled with a 73 basis point decrease in the return on average interest-earning assets, contributed to a 22 basis point increase in the interest rate spread to 4.08% for fiscal 2003, compared to 3.86% for the prior year. The net interest margin increased to 4.26% for fiscal 2003, compared to 4.05% for fiscal 2002.
Provision for Loan Losses
For fiscal 2003 there were no provisions recorded for loan losses, compared to $900,000 for fiscal 2002. The Bank records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level that is considered appropriate to absorb probable losses inherent in the existing loan portfolio. The provision in each period reflects management's evaluation of the adequacy of the allowance for loan losses. Factors considered include the volume and type of lending conducted, the Bank's previous loan loss experience, the known and inherent risks in the loan portfolio, adverse situations that may affect the borrowers' ability to repay, the estimated value of any underlying collateral, trends in the local and national economy and trends in the real estate market. Management believes that the decrease in provisions for loan losses was warranted by the decreases in charge-offs and non-performing assets.
During fiscal 2003, the Bank had net recoveries of approximately $30,000, compared to net charge-offs of $323,000 for fiscal 2002. At March 31, 2003, non-performing loans totaled $1.8 million, or 0.6% of total loans, compared to $2.8 million, or 1.0% of total loans, at March 31, 2002. At March 31, 2003, the Bank's allowance for loan losses was $4.2 million compared to $4.1 million at March 31, 2002, resulting in a ratio of the allowance to non-performing loans of 230.7% at March 31, 2003, compared to 146.2% at March 31, 2002, and a ratio of allowance for possible loan losses to total loans of 1.40% and 1.41% at March 31, 2003 and March 31, 2002, respectively. Management believes the Company's reported allowance for loan loss at March 31, 2003 is both appropriate in the circumstances and adequate to provide for estimated probable losses in the loan portfolio. For further discussion of non-performing loans and allowance for loan losses, see "Business--General Description of Business--Asset Quality" and Note 1 to the Consolidated Financial Statements.
Non-Interest Income
Non-interest income is composed of loan fees and service charges, gains or losses from the sale of securities and certain other items, fee income for banking services and miscellaneous non-interest income. Non-interest income decreased $1.3 million, or 29.5%, to $3.2 million for fiscal 2003, compared to $4.5 million for fiscal 2002. Despite increases in fees and charges for deposits and loans, non-interest income decreased due to the inclusion in fiscal 2002 of $1.4 million relating to the sale of securities, $987,000 relating to the sale of the Bank's East New York branch and the loss $101,000 from the sale of the Bank's automobile loan portfolio.
Excluding the income and loss from sales of securities, loans and deposits, total non-interest income increased by $961,000, or 43.7%, compared to fiscal 2002. Loan fees and service charges amounted to $1.3 million for fiscal 2003, a $655,000, or a 95.5%, increase from the prior year. The increase in loan fees and service charges is primarily attributable to substantially higher mortgage prepayment penalties, primarily resulting from multifamily borrowers prepaying due to the lower interest rate environment, and a restructuring of the Bank's loan fees in the second quarter of fiscal 2003. Depository fees and charges increased $316,000, or 21.1%, to $1.8 million for fiscal 2003 from $1.5 million for fiscal 2002. The increase in depository fees primarily relates to increased ATM fees and the restructuring of the Bank's service charges in the second quarter of fiscal 2003.
Non-Interest Expense
Non-interest expense increased by $494,000, or 3.5%, to $14.7 million for fiscal 2003, compared to $14.2 million for the prior fiscal year. The increase in non-interest expense was primarily attributable to increases of $307,000 in net occupancy and equipment expenses and $269,000 in salaries and employee benefits, slightly offset by a decrease of $82,000 in other non-interest expense. The increase in net occupancy and equipment expenses are related to the opening of the Malcolm X Blvd. branch in September 2001 and the renovation of an existing branch facility which resulted in increases in maintenance contracts, building taxes and water and sewer expense. The increase in salaries and employee benefits was primarily attributable to increased compensation
resulting from the Bank being able to successfully fill key management positions including the Chief Operating Officer, Chief Financial Officer, Chief Lending Officer and Chief Credit Officer positions.
Income Tax Expense
Income tax expense was approximately $3.0 million for fiscal 2003, a $2.2 million, or 244.3%, increase from $881,000 for fiscal 2002, reflecting the benefit of the Bank's tax loss carryforward utilized in fiscal 2002 coupled with higher pre-tax income in fiscal 2003. During the fourth quarter of fiscal year 2002, the Bank fully utilized its tax loss carryforward resulting from prior period losses and began to accrue for federal taxes. The effective tax rate in fiscal 2003 was 44.2% compared to 15.7% in fiscal 2002.
Comparison of Operating Results For The Years Ended March 31, 2002 and 2001
Net Income
The Bank reported net income for fiscal 2002 of $4.7 million, compared to a net loss of $389,000 for the same period the prior year. Net income available to common stockholders for fiscal 2002 was $4.5 million, or $1.89 per diluted common share, compared to a loss of $586,000, or $0.26 per diluted common share, for fiscal 2001. The increase in the net income was primarily due to a $2.2 million improvement in net interest income, a gain on the sale of securities of $1.4 million, a $1.2 million reduction in non-interest expense, and a $893,000 decrease in the provision for loan losses, partially offset by a $783,000 increase in income taxes.
Interest Income
Interest income for fiscal 2002 amounted to $28.3 million, a decrease of $53,000, or 0.2%, from the prior year. The decrease in interest income was primarily attributable to a decline in the average yield on interest-earning assets to 7.07% for fiscal 2002, compared to 7.28% for fiscal 2001.
Interest income on loans increased by $1.2 million, or 5.6%, to $22.6 million for fiscal 2002 compared to $21.4 million for fiscal 2001. The increase in interest income from loans reflects an increase of $18.9 million, or 6.8%, in the average balance of loans to $297.1 million for fiscal 2002 compared to $278.3 million for fiscal 2001, partially offset by a nine basis point decrease in the average rate earned on loans to 7.60% for fiscal 2002 from 7.69% for the prior year.
Interest income on mortgage-backed securities decreased by $94,000, or 3.1%, to $2.9 million for fiscal 2002, compared to $3.0 million for the prior year reflecting a 38 basis point decrease in the average rate earned on mortgage-backed securities to 5.78% from 6.16%, partially offset by an increase of $1.6 million in the average balance of mortgage-backed securities to $50.5 million for fiscal 2002, compared to $48.9 million for fiscal 2001.
Interest income on investment securities decreased by approximately $550,000, or 19.1%, to $2.3 million for fiscal 2002, compared to $2.9 million for the prior year, reflecting a decrease of $4.9 million in the average balance of investment securities to $38.5 million for fiscal 2002 compared to $43.4 million for fiscal 2001, coupled with a 59 basis point decrease in the average rate earned on investment securities to 6.04% from 6.63%.
Interest income on federal funds decreased $597,000, to $426,000 for fiscal 2002, compared to $1.0 million for the prior year. The decrease is attributable to a 248 basis point decrease in the average rate earned on federal funds, as well as a $4.6 million decrease in the average balance of federal funds.
Interest Expense
Interest expense decreased by $2.3 million, or 15.6%, to $12.0 million for fiscal 2002, compared to $14.3 million for the prior year. The decrease in interest expense reflects an improvement of 71 basis points in the average cost of interest-bearing liabilities, slightly offset by a $10.5 million increase in the average balance of interest-bearing liabilities.
Interest expense on deposits decreased $329,000, or 3.9%, to $8.1 million for fiscal 2002, compared to $8.5 million for the prior year. This decrease is attributable to a 45 basis point decrease in the cost of average deposits partially offset by a $32.2 million, or 12.2%, increase in the average balance of interest-bearing deposits to $297.0 million for fiscal 2002, compared to $264.8 million for fiscal 2001.
Interest expense on borrowed money decreased by $1.9 million, or 32.7%, to $3.9 million for fiscal 2002, compared to $5.8 million for the prior year. Funds from deposit growth were used to pay down borrowed money. The decrease in interest expense on borrowed money for fiscal 2002 reflects a $21.6 million decline in the average balance of borrowed money coupled with an 82 basis points decrease in the average cost of borrowed money.
Net Interest Income
Net interest income before the provision for loan losses increased $2.2 million, or 15.5%, to $16.2 million for fiscal 2002 compared to $14.0 million for the prior year. Net interest income benefited from a general interest rate decline, a reduction in borrowed money, as well as an increase in deposits, loan originations and average loan balances. This benefit was partially offset by accelerated prepayments of mortgage-backed securities and the sale of lower cost deposits in a non-strategic branch that were replaced by comparatively higher cost certificates of deposit. The 71 basis point decrease in the cost of interest-bearing liabilities used to fund interest-earning assets coupled with a 21 basis point decrease in the return on average interest-earning assets contributed to a 50 basis point increase in the interest rate spread to 3.86% for fiscal 2002, compared to 3.36% for the prior year. The net interest margin increased to 4.05% for fiscal 2002, compared to 3.61% for fiscal 2001.
Provision for Loan Losses
Provision for loan losses decreased by $893,000 or 49.8%, to $900,000, for fiscal 2002, compared to $1.8 million for fiscal 2001. When determining the provision for loan losses, management assesses the risk inherent in its loan portfolio based on information available at such time relating to the volume and type of lending conducted, the Bank's previous loan loss experience, the known and inherent risks in the loan portfolio, adverse situations that may affect the borrowers' ability to repay, the estimated value of any underlying collateral, trends in the local and national economy and trends in the real estate market. The provision for loan losses for fiscal 2002 represents the amount required to maintain the allowance for loan losses at the level required by the Company's policy. During fiscal 2002, the Bank charged-off approximately $323,000 of loans as compared to $1.2 million for fiscal 2001. At March 31, 2002, non-performing loans totaled $2.8 million, or 1.0% of total loans, compared to $2.5 million, or 0.9% of total loans, at March 31, 2001. At March 31, 2002, the Bank's allowance for loan losses was $4.1 million compared to $3.6 million at March 31, 2001, resulting in a ratio of the allowance to non-performing assets of 146.2% at March 31, 2002, compared to 118.6% at March 31, 2001, and a ratio of allowance for possible loan losses to total loans of 1.41% and 1.24% at March 31, 2002 and March 31, 2001, respectively.
Non-Interest Income
Non-interest income is composed of loan fees and service charges, gains or losses from the sale of securities and certain other items, fee income for banking services and miscellaneous non-interest income. Non-interest income increased $1.6 million, or 54.2%, to $4.5 million for fiscal 2002, compared to $2.9 million for fiscal 2001. The increase in non-interest income is primarily due to non-recurring income of $1.4 million relating to the sale of securities and to a lesser extent a $316,000 increase in other non-interest income, partially offset by a $101,000 loss in connection with the sale of the Bank's automobile loan portfolio during fiscal 2002. Excluding non-recurring income from sales of securities, loans and deposits, total non-interest income increased by $305,000, or 16.1%, compared to fiscal 2001.
Non-Interest Expense
Non-interest expense decreased by $1.2 million, or 8.0%, to $14.2 million for fiscal 2002, compared to $15.4 million for the prior fiscal year. The decrease in non-interest expense was primarily attributable to decreases of $1.0 million in other non-interest expenses and $279,000 in net occupancy and equipment expenses, slightly offset by an increase of $61,000 in salaries and employee benefits. The decreases in non-interest expense were attributable in part to cost reductions as a result of branch sales and decreases in professional fees and FDIC deposit insurance costs.
Income Tax Expense
Income tax expense was approximately $881,000 for fiscal 2002, an increase from $98,000 for fiscal 2001, reflecting higher pre-tax income in fiscal 2002 as compared to a pre-tax loss in fiscal 2001. During the fourth quarter of fiscal year 2002, the Bank fully utilized its tax loss carryforward resulting from prior period losses and began to accrue for federal taxes. The effective tax rate in fiscal 2002 was 15.7% as compared to (33.7%) in fiscal 2001.
Liquidity and Capital Resources
Carver Federal's primary sources of funds are deposits, FHLB advances, and proceeds from principal and interest payments on loans and mortgage-backed securities. While maturities and scheduled amortization of loans and investments are predictable
sources of funds, deposit flow and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
Congress eliminated the statutory liquidity requirement which required federal savings banks to maintain a minimum amount of liquid assets of between four and ten percent, as determined by the Director of the OTS, the Bank's primary federal regulator. The Bank is required to maintain sufficient liquidity to ensure its safe and sound operation. As a result of the elimination of the liquidity requirement, the Bank manages its liquidity through a Board-approved liquidity policy. At March 31, 2003, the Bank's liquidity ratio was 1.4%. The Bank's most liquid assets are cash and short-term investments. The level of these assets are dependent on the Bank's operating, investing and financing activities during any given period. At March 31, 2003 and 2002, assets qualifying for short-term liquidity, including cash and short-term investments, totaled $45.3 million and $50.0 million, respectively.
The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During fiscal 2003, cash and cash equivalents decreased by $11.7 million. Net cash used in operating activities was $1.0 million, representing primarily the results of operations adjusted for depreciation and amortization and the provision for loan losses. Net cash used in investing activities was $65.8 million, which was primarily the result of purchases of loans and securities and originations of loans partially offset by repayments and maturities of loans and securities. Net cash provided by financing activities was $55.1 million, reflecting primarily net increases in deposits and borrowed money.
Regulatory Capital Position
The Bank must satisfy three minimum capital standards established by the OTS. For a description of the OTS capital regulation, see "Regulation and Supervision--Federal Banking Regulation--Capital Requirements."
The Bank presently exceeds all capital requirements as currently promulgated. At March 31, 2003, the Bank had tangible, core, and total risk-based capital ratios of 7.8%, 7.8% and 14.0%, respectively.
The following table reconciles the Bank's stockholders' equity at March 31, 2003 under accounting principles generally accepted in the United States of America to regulatory capital requirements.
(1) Reflects Bank only.
Impact of Inflation and Changing Prices
The financial statements and accompanying notes appearing elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of Carver Federal's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a greater impact on Carver Federal's performance than do the effects of the general level of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item appears under the caption "Discussion of Market Risk--Interest Rate Sensitivity Analysis" in Item 7, incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
LETTERHEAD OF KPMG LLP
Independent Auditor's Report
To the Board of Directors and Stockholders Carver Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition of Carver Bancorp, Inc. and subsidiaries (the "Company") as of March 31, 2003 and 2002 and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2003 and 2002, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP New York, New York June 24, 2003
MANAGEMENT'S REPORT
Management is responsible for the preparation and integrity of the consolidated financial statements and other information presented in this annual report. The consolidated financial statements have been prepared in conformity with the generally accepted accounting principles and reflect management's judgments and estimates with respect to certain events and transactions.
Management is responsible for maintaining a system of internal control. The purpose of the system is to provide reasonable assurance that transactions are recorded in accordance with management's authorization; that assets are safeguarded against loss or unauthorized use; and that the underlying financial records support the preparation of financial statements. The system includes the communication of written policies and procedures, selection of qualified personnel, appropriate segregation of responsibilities and the ongoing internal audit function.
The Board of Directors meets periodically with Company management, the internal auditor, and the independent auditors, KPMG LLP, to review matters relative to the quality of financial reporting, internal controls, and the nature, extent and results of audit efforts.
The independent auditors conduct an annual audit to enable them to express an opinion on the Company's consolidated financial statements. In connection with the audit, the independent auditors consider the Company's internal controls to the extent they consider necessary to determine the nature, timing and extent of their audit procedures.
/s/ Deborah C. Wright /s/ William C. Gray - ------------------------------------- -------------------------------- Deborah C. Wright William C. Gray President and Chief Executive Officer Senior Vice President and Chief Financial Officer
CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except share data)
See accompanying notes to consolidated financial statements.
CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
See accompanying notes to consolidated financial statements.
CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands)
See accompanying notes to consolidated financial statements.
CARVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
See accompanying notes to consolidated financial statements
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
Carver Bancorp, Inc. ("Carver" or the "Holding Company"), was incorporated in May 1996 and its principal wholly owned subsidiary is Carver Federal Savings Bank (the "Bank" or "Carver Federal"). Carver Asset Corporation, CFSB Realty Corp. and CFSB Credit Corp. are wholly owned subsidiaries of the Bank. CFSB Credit Corp. is currently inactive. The Bank was chartered in 1948 and began operations in 1949 as Carver Federal Savings and Loan Association, a federally chartered mutual savings and loan association. The Bank converted to a federal savings bank in 1986 and changed its name at that time. On October 24, 1994, the Bank converted from mutual to stock form and issued 2,314,275 shares of its common stock, par value $0.01 per share. On October 17, 1996, the Bank completed its reorganization into a holding company structure (the "Reorganization") and became a wholly owned subsidiary of the Holding Company. In connection with the Reorganization, each share of the Bank's outstanding common stock was exchanged for one share of the Holding Company's common stock, par value $0.01 per share. See Note 11.
Carver Federal's principal business consists of attracting deposit accounts through its branch offices and investing those funds in mortgage loans and other investments permitted by federal savings banks. The Bank has five branches located throughout the City of New York that primarily serve the communities in which they operate.
Basis of consolidated financial statement presentation
The consolidated financial statements include the accounts of the Holding Company, the Bank, the Bank's wholly owned subsidiaries, Carver Asset Corporation, CFSB Realty Corp. and CFSB Credit Corp., and Alhambra Holding Corp., a subsidiary of the Holding Company which is inactive. All significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the period then ended. Estimates that are particularly susceptible to significant changes in the near-term relate to prepayment assumptions on mortgage-backed securities, the determination of the allowance for loan losses and the valuation of real estate owned. Actual results could differ significantly from those estimates.
Management believes that prepayment assumptions on mortgage-backed securities are appropriate, the allowance for loan losses is adequate and real estate owned is properly valued. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowance for loan losses or future write downs of real estate owned may be necessary based on changes in economic conditions in the areas where Carver had extended mortgages and other credit instruments.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review Carver's allowance for loan losses and real estate owned valuations. Such agencies may require Carver to recognize additions to the allowance for loan losses or additional write downs of real estate owned based on their judgments about information available to them at the time of their examination.
Cash and cash equivalents
Cash and cash equivalents include cash and amounts due from depository institutions and federal funds sold. Generally, federal funds sold are sold for one-day periods.
Securities
The Bank does not have trading securities, but does differentiate between held-to-maturity securities and available-for-sale securities. When purchased, securities are classified in either the securities held-to-maturity portfolio or the securities available-for-sale portfolio. Securities can be classified as held-to-maturity and carried at amortized cost only if the Bank has a positive intent and ability to hold those securities to maturity. If not classified as held-to-maturity, such securities are classified as securities available-for-sale. Available-for-sale securities are reported at fair value. Unrealized holding gains or losses for securities available-for-sale are to be excluded from earnings and reported net of deferred income taxes as a separate component of accumulated other comprehensive income, a component of Stockholders' Equity.
Securities held-to-maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using the level-yield method over the remaining period until maturity.
Gains or losses on sales of securities of all classifications are recognized based on the specific identification method.
Loans receivable
Loans receivable are carried at unpaid principal balances plus unamortized premiums, less the allowance for loan losses and deferred loan fees and discounts.
The Bank defers loan origination fees and certain direct loan origination costs and accretes such amounts as an adjustment of yield over the contractual lives of the related loans using methodologies which approximate the interest method. Premiums and discounts on loans purchased are amortized or accreted as an adjustment of yield over the contractual lives of the related loans using methodologies which approximate the interest method.
Loans are generally placed on non-accrual status when they are past due 90 days or more as to contractual obligations or when other circumstances indicate that collection is questionable. When a loan is placed on non-accrual status, any interest accrued but not received is reversed against interest income. Payments received on a non-accrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on an assessment of the ability to collect the loan. A non-accrual loan is restored to accrual status when principal and interest payments become current and its future collectibility is reasonably assured.
Allowance for loan losses
An allowance for loan losses is maintained at a level considered adequate to provide for potential loan losses. Management is responsible for determining the adequacy of the allowance for loan losses and the periodic provisioning for estimated losses included in the consolidated financial statements. The evaluation process is undertaken on a quarterly basis, but may increase in frequency should conditions arise that would require management's prompt attention, such as business combinations and opportunities to dispose of non-performing and marginally performing loans by bulk sale or any development which may indicate an adverse trend.
The methodology employed for assessing the appropriateness of the allowance consists of the following criteria:
o Establishment of reserve amounts for all specifically identified criticized loans, that have been designated as requiring attention by management's internal loan review program, bank regulatory examinations or the external auditors.
o An average loss factor is applied to smaller balance homogenous types of loans not subject to specific review. These loans include residential 1-4 family, multifamily, nonresidential and construction properties, which also includes consumer and business loans.
o An allocation to the remaining loans giving effect to historical loss experience over several years and linked to cyclical trends.
Recognition is also given to the changed risk profile brought about by business combinations, customer knowledge, the results of ongoing credit quality monitoring processes and the cyclical nature of economic and business conditions. An important consideration in applying these methodologies is the concentration of real estate related loans located in the New York metropolitan area.
The initial allocation or specific-allowance methodology commences with loan officers and underwriters grading the quality of their loans on an eight-category risk classification scale. Loans identified from this process as below investment grade are referred to the Internal Asset Quality Review Committee for further analysis and identification of those factors that may ultimately affect the full recovery or collectibility of principal and/or interest. These loans are subject to continuous review and monitoring while they remain in the criticized category. Additionally, the Internal Asset Quality Review Committee is responsible for performing periodic reviews of the loan portfolio that are independent from the identification process employed by loan officers and underwriters. Gradings that fall into criticized categories are further evaluated and reserve amounts are established for each loan.
The second allocation or loss factor approach to common or homogeneous loans is made by applying the average loss factor to the outstanding balances in each loan category.
The final allocation of the allowance is made by applying several years of loss experience to categories of loans. It gives recognition to the loss experience of acquired businesses, business cycle changes and the real estate components of loans. Since many loans depend upon the sufficiency of collateral, any adverse trend in the real estate markets could seriously affect underlying values available to protect against loss.
Other evidence used to support the amount of the allowance and its components are as follows:
o Regulatory examinations
o Amount and trend of criticized loans
o Actual losses
o Peer comparisons with other financial institutions
o Economic data associated with the real estate market in the Company's market area
o Opportunities to dispose of marginally performing loans for cash consideration
Carver Federal maintains a loan review system, which allows for a periodic review of its loan portfolio and the early identification of potential problem loans. Such system takes into consideration, among other things, delinquency status, size of loans, type of collateral and financial condition of the borrowers. Loan loss allowances are established for 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.
A loan is considered to be impaired, as defined by Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), when it is probable that Carver Federal will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. Carver Federal tests loans covered under SFAS 114 for impairment if they are on nonaccrual status or have been restructured. Consumer credit nonaccrual loans are not tested for impairment because they are included in large groups of smaller-balance homogeneous loans that, by definition along with leases, are excluded from the scope of SFAS 114. Impaired loans are required to be measured based upon the present value of expected future cash flows, discounted at the loan's initial effective interest rate, or at the loan's market price or fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, an impairment reserve must be established for the difference. The impairment reserve is established by either an allocation of the reserve for credit losses or by a provision for credit losses, depending on various circumstances. Impairment reserves are not needed when credit losses have been recorded so that the recorded investment in an impaired loan is less than the loan valuation.
Concentration of risk
The Bank's principal lending activities are concentrated in loans secured by real estate, a substantial portion of which is located in the State of New York. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio is susceptible to changes in New York's market conditions.
Premises and equipment
Premises and equipment are comprised of land, at cost, and buildings, building improvements, furnishings and equipment and leasehold improvements, at cost, less accumulated depreciation and amortization. Depreciation and amortization charges are computed using the straight-line method over the following estimated useful lives:
Significant renewals and betterments are charged to the property and equipment account. Maintenance and repairs are charged to expense in the year incurred.
Real estate owned
Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at the fair value at the date of acquisition and thereafter carried at the lower of cost or fair value less estimated selling costs. The fair value of such assets is determined based primarily upon independent appraisals and other relevant factors. The amounts ultimately recoverable from real estate owned could differ from the net carrying value of these properties because of economic conditions.
Costs incurred to improve properties or get them ready for sale are capitalized. Revenues and expenses related to the holding and operating of properties are recognized in operations as earned or incurred. Gains or losses on sale of properties are recognized as incurred.
Identifiable Intangible
Carver adopted Statement of Financial Accounting Standards No.142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets" on January 1, 2002. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually.
Identifiable intangible assets relate primarily to core deposit premiums, resulting from the valuation of core deposit intangibles acquired in the purchase of two branch offices. These identifiable intangible assets are amortized using the straight line method over periods not exceeding the estimated average remaining life of the existing customer deposits acquired. Amortization periods range from 5 to 15 years. Amortization periods for intangible assets are monitored to determine if events and circumstances require such periods to be reduced.
Income taxes
Carver accounts for income taxes using the asset and liability method. Temporary differences between the basis of assets and liabilities for financial reporting and tax purposes are measured as of the balance sheet date. Deferred tax liabilities or recognizable deferred tax assets are calculated on such differences, using current statutory rates, which result in future taxable or deductible amounts. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
Impairment
The company periodically evaluates long-lived assets, certain indentifiable intangibles, deferred cost and goodwill for indication of impairment in value. There has been no impairment for the past three years. When required, asset impairment will be recorded as an expense in the current period.
Earnings (loss) per common share
Basic earnings per share ("EPS") is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS includes any additional common shares as if all potentially dilutive common shares were issued (e.g. convertible preferred stock). For the purpose of these calculations, unreleased shares of the Carver Federal Savings Bank Employee Stock Ownership Plan ("ESOP") are not considered to be outstanding.
Treasury Stock
Treasury stock is recorded at cost and is presented as a reduction of stockholders' equity.
Pension Plans
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. Carver has made the required disclosures in the accompanying Notes to the Consolidated Financial Statements.
Stock-Based Compensation Plans
Compensation expense is recognized for the Bank's ESOP equal to the fair value of shares committed to be released for allocation to participant accounts. Any difference between the fair value at that time and the ESOP's original acquisition cost is charged or credited to stockholders' equity (additional paid-in capital). The cost of unallocated ESOP shares (shares not yet committed to be released) is reflected as a reduction of stockholders' equity.
The Holding Company accounts for its stock option plan ("Stock Option Plan") in accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, compensation expense is recognized only if the exercise price of the option is less than the fair value of the underlying stock at the grant date. SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), encourages entities to recognize the fair value of all stock-based awards (measured on the grant date) as compensation expense over the vesting period. Alternatively, SFAS 123 allows entities to apply the provisions of APB Opinion No. 25 and provide pro forma disclosures of net income and earnings per share as if the fair-value-based method defined in SFAS 123 had been applied. The Holding Company has elected to apply the provisions of APB Opinion No. 25 and provide these pro forma disclosures.
Carver applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our stock-based Plan under which there is no charge to earnings for stock option awards and the dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share.
Alternatively, Carver could have accounted for its Stock Option Plan under SFAS 123, under which compensation cost for stock option awards would be calculated and recognized over the service period (generally equal to the vesting period). Had Carver applied SFAS 123 for its Stock Option Plan, net income and earnings per common share would have been to the pro forma amounts indicated below for the years ended March 31:
The fair value of the option grants was estimated on the date of the grant using the Black-Scholes option pricing model applying the following weighted average assumptions: risk-free interest rates of 5.50%, 5.50% 5.50% 5.00% 4.50 % and 2.50%, for the relevant years 1997, 1999, 2000, 2001, 2002 and 2003, respectively; volatility of 30% for each of the years; expected dividend yield was calculated using annual dividends of $0.05 per share for 1997, 1999, 2001 and 2002,respectively, and $0.20 for 2003; and an expected life of five years for employee option grants and seven years for directors option grants.
The Holding Company's management recognition and retention plan ("MRP") is also accounted for in accordance with Accounting Principles Board Opinion No. 25. The fair value of the shares awarded, measured at the grant date, is recognized as unearned compensation (a deduction from stockholders' equity) and amortized to compensation expense as the shares become vested. When MRP shares become vested, the Company records a credit to additional paid-in capital for tax benefits attributable to any MRP deductions for tax purposes in excess of the grant-date fair value charged to expense for financial reporting purposes.
Reclassifications
Certain amounts in the consolidated financial statements presented for prior periods have been reclassified to conform with the current year presentation.
NOTE 2. SECURITIES
The following is a summary of securities at March 31, 2003:
The following is a summary of securities at March 31, 2002:
The net unrealized gain on available-for-sale securities was $902,000 ($750,000 after taxes) at March 31, 2003 as compared to $216,000 ($116,000 after taxes) at March 31, 2002. On November 30, 2002 the Bank transferred $22.8 million of mortgage-backed securities from available-for-sale to held-to-maturity as a result of management's intention to hold these securities in portfolio until maturity. A related unrealized gain of $464,000 as of March 31, 2003 continues to be reported as a separate component of stockholders' equity and is amortized over the remaining lives of the securities as an adjustment to yield. Changes in unrealized holding gains and losses resulted in an after-tax increase in stockholders' equity of $634,000. These gains and losses will continue to fluctuate based on changes in the portfolio and market conditions.
Sales of available-for-sale securities resulted in gross realized gains during the fiscal year ended March 31, 2002 ("fiscal 2002") of $1.4 million. There were no sales of securities in the fiscal years ended March 31, 2003 ("fiscal 2003") and 2001 ("fiscal 2001").
The following is a summary of the carrying value (amortized cost) and fair value of securities at March 31, 2003, by remaining period to contractual maturity (ignoring earlier call dates, if any). Actual maturities may differ from contractual maturities because certain security issuers have the right to call or prepay their obligations.
Carrying Fair Value Value -------- -------- (Dollars in thousands)
Available-for-sale: Due in one year or less $ 22,109 $ 22,117 One through five years 16,190 16,770 Five through ten years 1,813 1,933 After ten years 88,041 88,235 -------- -------- $128,153 $129,055 ======== ========
Held-to-maturity: Five through ten years $ 326 $ 345 After ten years 36,204 37,198 -------- -------- $ 36,530 $ 37,543 ======== ========
NOTE 3. LOANS RECEIVABLE, NET
A summary of loans receivable, net follows:
At March 31, 2003, 93.6% of the Company's real estate loans receivable were principally secured by properties located in the State of New York.
The mortgage loan portfolios serviced for the FHLMC and Fannie Mae are not included in the accompanying consolidated financial statements. The unpaid principal balances of these loans aggregated $4.1 million, $2.9 million and $2.1 million at March 31, 2003, 2002 and 2000, respectively. Custodial escrow balances, maintained in connection with the foregoing loan servicing, were approximately $16,000, $28,000 and $34,000 at March 31, 2003, 2002 and 2000, respectively. During the year ended March 31, 2003 the Bank sold $2.5 million in loans with minimal gain recognized, as compared to $1.3 million in loans sold during fiscal 2002 and a loss of $101,000 recognized.
The following is an analysis of the allowance for loan losses:
Non-accrual loans consist of loans for which the accrual of interest has been discounted as a result of such loans becoming 90 days or more delinquent as to principal and/or interest payments. Interest income on non-accrual loans is recorded when received. Restructured loans consist of loans where borrowers have been granted concessions in regards to the terms of their loans due to financial or other difficulties, which rendered them unable to repay their loans under the original contractual terms.
At March 31, 2003, 2002 and 2001 the recorded investment in impaired loans was $1.8 million, $2.8 million and $2.5 million, respectively all of which represented non-accrual loans. The related allowance for credit losses was approximately $195,000 and $146,000 at March 31, 2003 and 2002, respectively. The impaired loan portfolio is primarily collateral dependent. The average recorded investment in impaired loans during the fiscal years ended March 31, 2003, 2002 and 2001 was approximately $1.8 million, $2.3 million and $3.2 million, respectively. For the fiscal years ended March 31, 2003, 2002 and 2001, the Company did not recognize any interest income on these impaired loans. Interest income of $173,000, $288,000 and $202,000, respectively, for the fiscal years ended March 31, 2003, 2002 and 2001 would have been recorded on impaired loans had they performed in accordance with the original contract.
At March 31, 2003 and 2002, there were no loans to officers.
NOTE 4. PREMISES AND EQUIPMENT, NET
The detail of premises and equipment is as follows:
Depreciation and amortization charged to operations for the fiscal years ended March 31, 2003, 2002 and 2001 amounted to $1.2 million, $1.2 million and $1.1 million, respectively.
NOTE 5. ACCRUED INTEREST RECEIVABLE
The detail of accrued interest receivable is as follows:
NOTE 6. IDENTIFIABLE INTANGIBLES
The identifiable intangible asset relates to the acquisition of the Bedford-Stuyvesant branch office. The detail is as follows:
NOTE 7. DEPOSITS
Deposit balances and weighted average stated interest rates at March 31 are summarized as follows:
The scheduled maturities of certificates of deposits are as follows:
March 31, ---------------------- 2003 2002 -------- -------- (In thousands) Certificates of deposit by remaining term to contractual maturity: Within one year $127,668 $ 80,528 After one but within two years 12,492 26,638 After two but within three years 10,387 10,495 After three years 12,218 33,724 -------- -------- Total $162,765 $151,385 ======== ========
The aggregate amount of certificates of deposit with minimum denominations of $100,000 or more was approximately $100.1 million at March 31, 2003.
Interest expense on deposits for the the years ended March 31 consists of the following:
2003 2002 2001 ------- ------- ------- (In thousands)
Demand $ 131 $ 237 $ 253 Savings and club 1,477 2,342 3,081 Money market 189 302 412 Certificates of deposit 3,975 5,263 4,739 ------- ------- ------- 5,772 8,144 8,485 Penalty for early withdrawal of certificates of deposit (12) (17) (29) ------- ------- ------- Total interest expense $ 5,760 $ 8,127 $ 8,456 ======= ======= =======
NOTE 8. BORROWED MONEY
FHLB Advances. FHLB advances and weighted average interest rates at March 31 are summarized as follows, by remaining period to maturity:
March 31, ---------------------------------------------------- 2003 2002 ------------------------- ------------------------ Maturing Year Ended Weighted Weighted March 31, Average Rate Amount Average Rate Amount ---------- ------------ ------ ------------ ------ 2003 --% $ -- 2.41% $15,500 2004 1.93 18,250 4.28 3,500 2005 4.05 26,000 4.05 26,000 2006 3.46 32,840 5.29 10,490 2007 4.42 28,134 5.17 19,484 2008 3.49 3,300 -- -- 2012 3.50 265 3.50 288 ---- -------- ---- ------- 3.59% $108,789 4.18% $75,262 ==== ======== ==== =======
As a member of the FHLB, the Bank may have outstanding FHLB borrowings in a combination of term advances and overnight funds of up to 25% of its total assets, or approximately $126.7 million at March 31, 2003. Borrowings are secured by the Bank's investment in FHLB stock and by a blanket security agreement. This agreement requires the Bank to maintain as collateral certain qualifying assets (principally securities and residential mortgage loans) not otherwise pledged. At March 31, 2003 and 2002,
the advances were secured by pledges of the Bank's investment in the capital stock of the FHLB-NY totaling $5.4 million and $3.8 million, respectively and a blanket assignment of the Bank's unpledged qualifying mortgage, mortgage-backed securities and investment portfolios.
Securities Sold Under Agreements to Repurchase. In securities sold under agreements to repurchase, the Bank borrows funds through the transfer of debt securities to the FHLB, as counterparty, and concurrently agrees to repurchase the identical securities at a fixed price on a specified date. Repurchase agreements are collateralized by the securities sold and, in certain cases, by additional margin securities. At March 31, 2003 and 2002 there were no securities sold under agreements to repurchase outstanding.
The following table sets forth certain information regarding Carver's borrowed money at the dates and for the periods indicated:
NOTE 9. INCOME TAXES
The components of income tax expense for the years ended March 31 are as follows:
The reconciliation of the expected federal tax rate to the consolidated effective tax rate for the fiscal years ended March 31 is as follows:
At March 31, 2001, Carver had net operating loss carryforwards for federal income tax purposes of approximately $5.7 million. These net operating loss carryforwards were fully utilized during fiscal 2002.
Carver's stockholders' equity includes approximately $2.8 million and $4.2 million at March 31, 2003 and 2002, respectively, which has been segregated for federal income tax purposes as a bad debt reserve. The use of this amount for purposes other than to absorb losses on loans may result in taxable income for federal income taxes at the then current tax rate.
The tax effects of existing temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at March 31 of the years indicated as follows:
Management believes it is more likely than not that the results of future operations will generate sufficient future taxable income to realize the deferred tax asset. Therefore, a valuation allowance against the deferred tax assets at March 31, 2003 and 2002 was not considered necessary.
NOTE 10. EARNINGS PER COMMON SHARE
The following table reconciles the earnings (loss) available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted earnings per share for the periods presented:
NOTE 11. STOCKHOLDERS' EQUITY
Conversion and Stock Offering. On October 24, 1994, the Bank issued in an initial public offering 2,314,375 shares of common stock (par value $0.01) at a price of $10 per share resulting in net proceeds of $21.5 million. As part of the initial public offering, the Bank established a liquidation account at the time of conversion, in an amount equal to the surplus and reserves of the Bank at September 30, 1994. In the unlikely event of a complete liquidation of the Bank (and only in such event), eligible depositors who continue to maintain accounts shall be entitled to receive a distribution from the liquidation account. The total amount of the liquidation account may be decreased if the balances of eligible deposits decreased as measured on the annual determination dates. The balance of the liquidation account was approximately $2.1 million (unaudited), and $2.5 million (unaudited) at March 31, 2003 and 2002, respectively, based on an assumed decrease of 15.25% of eligible deposits per annum. On October 17, 1996, the Bank completed the Reorganization and became the wholly owned subsidiary of the Holding Company. Pursuant to an Agreement and Plan of Reorganization, dated May 21, 1996, each share of the Bank's outstanding common stock was exchanged for one share of the Holding Company's common stock. In connection with the Reorganization, a shareholder of the Bank exercised appraisal rights and 100 shares of the Bank's common stock were purchased from such shareholder in the fourth fiscal quarter of 1997. Accordingly, 2,314,275 shares of the Holding Company's common stock were outstanding. The Bank is not permitted to pay dividends to the Holding Company on its capital stock if the effect thereof would cause its net worth to be reduced below either: (i) the amount required for the liquidation account or (ii) the amount required for the Bank to comply with applicable minimum regulatory capital requirements.
Convertible Preferred Stock. On January 11, 2000, the Holding Company sold, pursuant to a Securities Purchase Agreement, dated January 11, 2000, in a private placement 40,000 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock") to Morgan Stanley & Co. Incorporated ("MSDW") and 60,000 Shares of Series B Convertible Preferred Stock (the "Series B Preferred Stock") to Provender Opportunities Fund L.P. ("Provender"). In addition, Carver entered into a Registration Rights Agreement, dated January 11, 2000, with MSDW and Provender. The gross proceeds from the private placement were $2.5 million.
The Series A Preferred Stock and Series B Preferred Stock (collectively the "Preferred Stock") accrue annual dividends at $1.97 per share. Dividends are payable semi-annually on June 15 and December 15 of each year. Each share of Preferred Stock is convertible at the option of the holder, at any time, into 2.08333 shares of Carver's Common Stock, subject to certain antidilution adjustments. The Holding Company may redeem the Preferred Stock beginning January 15, 2004. In the event of any liquidation, dissolution or winding up of Carver, whether voluntary or involuntary, the holders of the shares of Preferred Stock shall be entitled to receive $25 per share of Preferred Stock plus all dividends accrued and unpaid thereon. Each share of Preferred Stock is entitled to one vote for each share of Common Stock into which the Preferred Stock can be converted.
At March 31, 2003 unpaid accrued dividends related to the Preferred Stock amounted to $57,000.
Regulatory Capital. The operations and profitability of the Bank are significantly affected by legislation and the policies of the various regulatory agencies. The Office of Thrift Supervision ("OTS") has promulgated capital requirements for financial institutions consisting of minimum tangible and core capital ratios of 1.5% and 3.0%, respectively, of the institution's adjusted total assets and a minimum risk-based capital ratio of 8.0% of the institution's risk weighted assets. Although the minimum core capital ratio is 3.0%, the Federal Deposit Insurance Corporation Improvement Act, as amended ("FDICIA"), stipulates that an institution with less than 4.0% core capital is deemed undercapitalized. At March 31, 2003 and 2002, the Bank exceeded all of its regulatory capital requirements.
The following is a summary of the Bank's actual capital amounts and ratios as of March 31, 2003 and 2002, compared to the OTS requirements for minimum capital adequacy and for classification as a well-capitalized institution:
The following table reconciles the Bank's stockholders' equity at March 31, 2003, in accordance with accounting principles generally accepted in the U.S. to regulatory capital requirements:
(1) Reflects Bank only.
Comprehensive Income. Comprehensive income represents net income and certain amounts reported directly in stockholders' equity, such as the net unrealized gain or loss on securities available for sale. The Holding Company has reported its
comprehensive income for fiscal 2003, 2002 and 2001 in the consolidated statements of changes in stockholders' equity and comprehensive income. Carver's other comprehensive income or loss (other than net income), which is attributable to unrealized gains and losses on securities available-for-sale, for the year ended March 31, 2003 and 2002 was $750,000 and $116,000, respectively. Included in the March 31, 2003 amount is $464,000 relating to an unrealized gain on available-for-sale securities that were transferred during fiscal 2003 to held-to-maturity. This unrealized gain is an unrealized gain reported as a separate component of stockholders' equity and is amortized over the remaining lives of the securities as an adjustment to yield. There was no other comprehensive income or loss for the year ended March 31, 2001.
NOTE 12. EMPLOYEE BENEFIT AND STOCK COMPENSATION PLANS
Pension Plan. Carver has a non-contributory defined benefit pension plan covering all eligible employees. The benefits are based on each employee's term of service. Carver's policy is to fund the plan with contributions which equal the maximum amount deductible for federal income tax purposes. The plan was curtailed during the fiscal year ended March 31, 2002.
The following table sets forth the plan's changes in benefit obligation, changes in plan assets and funded status and amounts recognized in Carver's consolidated financial statements at March 31:
Net periodic pension benefit included the following components for the years ended March 31 are:
Significant actuarial assumptions used in determining plan benefits for the years ended March 31 are:
(1) The annual salary increase rate is not applicable as the plan is frozen.
Savings Incentive Plan. Carver has a savings incentive plan, pursuant to Section 401(k) of the Code, for all eligible employees of the Bank. Through December 31, 2000, employees had the option to elect to defer up to the lesser of 15% or the maximum amount allowed under law of their compensation and receive a 50% matching contribution from Carver up to the maximum allowed by law. Effective January 1, 2001, the plan was modified. In connection with this modification, Carver will make an annual non-elective contribution to the 401(k) plan on behalf of each eligible employee equal to 2% of the employee's annual pay, subject to IRS limitations. This 2% Carver contribution will be made regardless of whether or not the employee makes a contribution to the 401(k) plan. To be eligible for the 2% Carver contribution, the employee must have completed at least one year of service and be employed as of the last day of the plan year or December 31 of each year. In addition, effective January 1, 2001, Carver matches contributions to the plan equal to 100% of the pre-tax contributions made by each employee up to a maximum of 4% of their pay. All such matching contributions to the plan will be fully vested and non-forfeitable at all times regardless of the years of service. However, the one-year to five-year vesting schedule that previously applied to matching contributions will apply to the new 2% Carver contribution. Total incentive plan expenses for the years ended March 31, 2003, 2002 and 2001 were $127,000, $60,000 and $45,000, respectively.
Directors' Retirement Plan. Concurrent with the conversion to the stock form of ownership, Carver adopted a retirement plan for non-employee directors. The plan was curtailed during the fiscal year ended March 31, 2001. The benefits are payable based on the term of service as a director. The following table sets forth the plan's changes in benefit obligation, changes in plan assets and funded status and amounts recognized in Carver's consolidated financial statements at March 31:
Net periodic pension cost for the years ended March 31, 2003, 2002 and 2001 included the following:
The actuarial assumptions used in determining plan benefits include a discount rate of 6.5%, 7.25% and 7.25% for the years ended March 31, 2003, 2002 and 2001, respectively.
Management Recognition Plan. The MRP provides for automatic grants of restricted stock to certain employees as of the September 12, 1995 adoption of the MRP. In addition, the MRP provides for additional discretionary grants of restricted stock to those employees selected by the committee established to administer the MRP. Awards generally vest in three to five equal annual installments commencing on the first anniversary date of the award, provided the recipient is still an employee of the Holding Company or the Bank on such date. Awards will become 100% vested upon termination of service due to death or disability. When shares become vested and are distributed, the recipients will receive an amount equal to any accrued dividends with respect thereto Pursuant to the MRP, the Bank recognized $79,000, $119,000 and $0 as expense for the years ended March 31, 2003, 2002 and 2001, respectively.
Employee Stock Ownership Plan. Effective upon conversion, an ESOP was established for all eligible employees. The ESOP used $1,821,320 in proceeds from a term loan obtained from a third-party institution to purchase 182,132 shares of Bank common stock in the initial public offering. The term loan principal is payable over forty equal quarterly installments through September 2004. Interest on the term loan is payable quarterly, at a rate of 3.00% over the average federal funds rate. On May 20, 2002, the term loan was modified to provide for interest at a fixed rate of 4% per annum. Each year, the Bank intends to make discretionary contributions to the ESOP, which will be equal to principal and interest payments required on the term loan less any dividends received by the ESOP on unallocated shares.
Shares purchased with the loan proceeds were initially pledged as collateral for the term loan and are held in a suspense account for future allocation among the participants on the basis of compensation, as described by the Plan, in the year of allocation.
Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP shares in the consolidated statements of financial condition. As shares are committed to be released from collateral, the Bank reports compensation expense equal to the current market price of the shares, and the shares become outstanding for net income per common share computations. ESOP compensation expense was $172,000, $174,000 and $298,000 for the years ended March 31, 2003, 2002 and 2001, respectively.
The ESOP shares at March 31 are as follows:
2003 2002 ---- ---- (In thousands) Allocated shares 163 149 Unreleased shares 19 33 ---- ---- Total ESOP shares 182 182 ==== ==== Fair value of unreleased shares $261 $374
Stock Option Plan. During 1995, the Holding Company adopted the 1995 Stock Option Plan (the "Plan") to advance the interests of the Bank through providing select key employees and directors of the Bank and its affiliates. The number of shares reserved for issuance under the plan is 338,862. At March 31, 2003, there were 192,176 options outstanding and 106,020 were exercisable. Options are granted at the fair market value of Carver common stock at the time of the grant for a period not to exceed ten years. Under the Plan, as amended, option grants generally vest on an annual basis ratably over either three or five years, commencing after one year of service. In some instances, portions of option grants vest at the time of the grant. All options are exercisable immediately upon a participant's disability, death or a change in control, as defined in the Plan.
Information regarding stock options as of and for the years ended March 31 follows:
The following table summarizes information about stock options at March 31, 2003:
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.
These financial instruments primarily include commitments to extend credit and to sell loans. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements of financial condition. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies making commitments as it does for on-balance-sheet instruments.
The Bank has outstanding various loan commitments as follows:
March 31, 2003 2002 ------- ------- (In thousands)
Commitments to originate mortgage loans $10,643 $14,723 Consumer loans 2,464 2,877 ------- ------- Total $13,107 $17,600 ======= =======
At March 31, 2003, of the $10.6 million in outstanding commitments to originate mortgage loans, $2.1 million represented commitments to originate non-residential mortgage loans at fixed rates within a range of 6.75% to 7.25%, $1.7 million represented the balance of all other real estate loans at fixed rates between 4.75% to 7.00% and $6.8 million represented construction loans at an average rate of 5.96%.
At March 31, 2003, undisbursed funds from approved consumer lines of credit, primarily credit cards, totaled $2.5 million. Such lines consist of unsecured and secured lines of credit of $2.2 million and $242,000 respectively. All such lines carry adjustable rates. At March 31, 2003, undisbursed funds from approved unsecured commercial lines of credit totaled $45,000. At March 31, 2003, the Bank maintains one letter of credit in the amount of $1.9 million.
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 $186,000, $142,000, and $191,000 for the years ended March 31, 2003, 2002 and 2001, respectively. As of March 31, 2003, minimum rental commitments under all noncancellable leases with initial or remaining terms of more than one year and expiring through 2012 are as follows:
Year Ending Minimum March 31, Rental --------- ------ (In Thousands) 2004 218 2005 222 2006 227 2007 144 2008 131 Thereafter 499 ----- 1,441 =====
The Bank also has, in the normal course of business, commitments for services and supplies. Management does not anticipate losses on any of these transactions.
Legal Proceedings. From time to time, Carver Federal is a party to various legal proceedings incident to its business. Certain claims, suits, complaints and investigations involving Carver Federal, arising in the ordinary course of business, have been filed or are pending. The Company is of the opinion, after discussion with legal counsel representing the Bank in these proceedings, that the aggregate liability or loss, if any, arising from the ultimate disposition of these matters would not have a material adverse effect on the Company's consolidated financial position or results of operations. At March 31, 2003, except as set forth below, there were no material legal proceedings to which the Company or its subsidiaries was a party or to which any of their property was subject.
On or about April 29, 1999, plaintiff Reginald St. Rose ("St. Rose") filed suit against Carver Federal in the Supreme Court of the State of New York, County of New York (the "St. Rose Action"). St. Rose is a former Carver Federal employee. On or about January 12, 1999, Carver Federal and St. Rose entered into an agreement (the "Agreement") providing that St. Rose would resign from Carver Federal on the terms and conditions set forth in the Agreement. In the St. Rose Action, St. Rose alleged the following causes of action, which relate to the Agreement and St. Rose's separation from Carver Federal: (1) breach of contract; (2) promissory estoppel; and (3) fraudulent misrepresentation. St. Rose seeks damages in an amount not less than $50,000 with respect to the breach of contract cause of action and seeks undisclosed damages with respect to the promissory estoppel and fraudulent misrepresentation causes of action.
On or about August 18, 1999, Carver Federal moved to dismiss St. Rose's fraudulent misrepresentation cause of action. By decision dated November 23, 1999, the Court granted Carver Federal's motion to dismiss and entered an order embodying that decision on January 26, 2000. Carver Federal has not filed an answer in the St. Rose Action. By written stipulation of the parties, Carver Federal's time to file an answer to St. Rose's complaint has been extended without date. Carver Federal has unasserted counterclaims against St. Rose for, among other claims, payment of certain financial obligations to Carver Federal (including, but not limited to, automobile loans, unsecured loans, lines of credit and credit card debts), which obligations remain outstanding as of the date of this Form 10-K. Since January 2000, the St. Rose Action has been largely inactive. The parties have had intermittent settlement discussions but have not reached an agreement. If the parties do not reach a settlement, Carver Federal intends to continue to defend this Action vigorously.
Carver Federal is also a defendant in an action brought by Ralph Williams (the "Williams Action") and an action brought by Janice Pressley (the "Pressley Action" and, together with the Williams Action, the "Actions") both of which arise out of events concerning the Northeastern Conference Federal Credit Union ("Northeastern"). Plaintiff Williams is a former member of the Board of Directors of Northeastern and plaintiff Pressley is a former treasurer of Northeastern.
Northeastern was a federal credit union and it maintained accounts with Carver Federal and with other banks in the New York metropolitan area. Plaintiffs' complaints (which are virtually identical) allege that the National Credit Union Administration (the "NCUA") acted improperly when it placed Northeastern into conservatorship and subsequent liquidation. On or about November 22, 2000, Williams filed his pro se complaint in the United States District Court, District of Columbia against the NCUA, Carver Federal, JPMorgan Chase (formerly Chase Manhattan Bank) ("Chase"), Astoria Federal Savings and Loan Association and Reliance Federal Savings Bank (Carver Federal with the last three defendants, collectively the "Bank Defendants") seeking damages in the amount of $1 million plus certain additional unspecified amounts. On or about November 22, 2000, plaintiff Pressley filed her pro se action in the United States District Court, District of Columbia against the same defendants seeking unspecified compensatory and punitive damages. Williams seeks damages for the allegedly "unauthorized" or "invalid" actions of the NCUA Board in taking control of Northeastern as well as damages for discrimination and civil rights violations. Pressley seeks damages based on identical allegations except that she also alleges certain claims of employment discrimination. While the bulk of both complaints relate to the action of the NCUA Board of Directors, the plaintiffs advance two allegations against the Bank Defendants, including Carver Federal. First, plaintiffs allege that the Bank Defendants "collaborated with the NCUA Board of Directors" in violating unspecified constitutional and privacy rights. Second, plaintiffs allege that the Bank Defendants engaged in discrimination.
On or about December 15, 2000, defendant Chase moved to consolidate the Actions. In anticipation of that consolidation, the Bank Defendants filed a joint motion to dismiss both complaints arguing that both Actions are barred by principles of res judicata and both complaints fail to state claims on which relief can be granted. The Bank Defendants' motion to dismiss was denied without prejudice insofar as it applied to the Williams Action solely for the reason that it was a motion addressed to both Actions prior to the issuance of an order consolidating these cases. The Bank Defendants have refiled their motion to dismiss the Williams Action and it is sub judice. If the motion to dismiss is not granted, Carver Federal intends to defend the Williams Action vigorously. On September 20, 2001, the Court granted the Bank Defendants' motion to dismiss the Pressley Action. Pressley has appealed the dismissal. Carver Federal is vigorously opposing the appeal.
On or about December 28, 2000, plaintiff Thomas L. Clark ("Clark") filed suit against Carver Federal and individual defendants in the Supreme Court of the State of New York, County of New York. Clark is the former President and Chief Executive Officer of Carver Federal. Clark claimed that the defendants should be forced to obtain approval from the OTS to pay severance benefits that Clark believes Carver Federal owes him under an employment agreement. Carver Federal sought injunctive relief and assert claims for breach of contract, equitable estoppel and estoppel by contract. On or about March 30, 2001, Carver Federal and the individual defendants moved to dismiss the complaint in its entirety based on documentary evidence and for failure to state a cause of action. By Decision and Order entered November 27, 2001, the Court granted that motion to the extent of dismissing the first cause of action for breach of contract against all of the individual defendant and dismissing the second cause of action based on estoppel theories as against all the defendants. Carver Federal appealed the Decision and Order insofar as it did not dismiss the complaint in its entirety. On September 26, 2002, the Appellate Division of the Supreme Court reversed the lower court and granted Carver Federals motion in its entirety. Clark did not appeal that decision and his time to do so has expired.
On or about November 2001, Monique Barrow filed an action against Carver Federal in the United States District Court for the Southern District of New York alleging that Carver Federal's termination of her employment constituted a violation of the
federal Family and Medical Leave Act, 29 U.S.C. ss. 2601, et seq., the New York State Human Rights Law, N.Y. Executive ss.296 et seq., and the New York City Human Rights Law, N.Y.C. Administrative Code ss. 8-101 et seq. Ms. Barrow seeks back pay, front pay and benefits with interest in an amount not less than $5 million, and punitive, liquidated and other compensatory damages in an amount not less than $10 million. Carver Federal has answered the complaint denying any liability. Carver Federal obtained an order providing for expedited discovery on liability issues. Carver Federal has completed its discovery and has requested permission to make a motion for summary judgment. Carver Federal intends to make that motion as soon as permission is received.
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than a forced or liquidation sale. Significant estimations were used by the Bank for the purpose of this disclosure. Estimated fair values have been determined by the Bank using the best available data and estimation methodology suitable for each category of financial instrument. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate their recorded book balances. The estimation methodologies used and the estimated fair values and carrying values of the Bank's financial instruments are set forth below:
Cash and cash equivalents and accrued interest receivable
The carrying amounts for cash and cash equivalents and accrued interest receivable approximate fair value because they mature in three months or less.
Securities
The fair values for securities available-for-sale, mortgage-backed securities held-to-maturity and investment securities held-to-maturity are based on quoted market or dealer prices, if available. If quoted market or dealer prices are not available, fair value is estimated using quoted market or dealer prices for similar securities.
Loans receivable
The fair value of loans receivable is estimated by discounting future cash flows, using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities of such loans.
Deposits
The fair value of demand, savings and club accounts is equal to the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market.
Borrowings
The fair values of advances from the Federal Home Loan Bank of New York, securities sold under agreement to repurchase and other borrowed money are estimated using the rates currently available to the Bank for debt with similar terms and remaining maturities.
Commitments
The fair market value of unearned fees associated with financial instruments with off-balance sheet risk at March 31, 2003 approximates the fees received. The fair value is not considered material.
The carrying amounts and estimated fair values of the Bank's financial instruments at March 31, 2003 and 2002 are as follows:
Limitations
The fair value estimates are made at a discrete point in time based on relevant market information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no quoted market value exists for a significant portion of the Bank's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
In addition, the fair value estimates are based on existing off balance sheet financial instruments without attempting to value anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment and advances from borrowers for taxes and insurance. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.
Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair values.
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly financial data for the fiscal years ended March 31, 2003 and 2002:
NOTE 16. CARVER BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, ----------------------- 2003 2002 ------- ------- (Dollars in thousands)
ASSETS Cash on deposit with the Bank $ 87 $ 439 Investment in the Bank 41,055 37,567 ------- ------- Total assets $41,142 $38,006 ======= =======
LIABILITIES Accounts payable to the Bank $ 1 $ 14 Other liabilities 68 1,250 ------- ------- Total liabilities 69 1,264 ------- -------
Stockholders' equity 41,073 36,742 ------- ------- Total liabilities and stockholders' equity $41,142 $38,006 ======= =======
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31, ------------------------------- 2003 2002 2001 ------ ------ ----- (Dollars in thousands) INCOME Equity in net income from the Bank $7,320 $6,247 $ 624 Interest income from deposit with the Bank 6 33 48 ------ ------ ----- Total income 7,326 6,280 672
EXPENSES Salaries and employee benefits 52 82 64 Legal expense 102 236 233 Shareholder expense 248 296 510 Other 60 72 156 ------ ------ ----- Total expense 462 686 963
Income (loss) before income taxes 6,864 5,594 (291) Income tax expense 3,033 881 98 ------ ------ ----- Net income (loss) $3,831 $4,713 $(389) ====== ====== =====
CONDENSED STATEMENTS OF CASH FLOWS
NOTE 17. RECENT ACCOUNTING PRONOUNCEMENTS
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTNESS OF OTHERS
In November 2002, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtness of Others" ("FIN 45"), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees.
FIN 45 requires the guarantor to recognize a liability for the non-contingent component of the guarantee; this is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements.
The Company will adopt the disclosure requirements of FIN 45 and will apply the recognition and measurement provisions for all guarantees entered into or modified after March 31, 2003. As of March 31, 2003 the Company maintains one letter of credit in the amount of $1.9 million and therefore management does not anticipate that the adoption of this interpretation will have a significant effect on the Company's earnings or financial position.
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In October 2001, the FASB issued Statement No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business (as previously defined in that Opinion). This statement also amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary.
SFAS No. 144 improves financial reporting by requiring that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and by broadening the presentation of discontinued operations to include more disposal transactions. Carver Federal adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 was not material to Carver Federal's financial condition or results of operations.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The Statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by this standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. Previous accounting guidance was provided by Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 replaces EITF Issue No. 94-3. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.
ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE
In December 2002, the FASB issued Statement No. 148 (SFAS No. 148), "Accounting for Stock-Based Compensation -- Transition and Disclosure" -- an amendment of FASB Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation". SFAS No. 148 amends SFAS No.123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
SFAS No. 148 requires disclosure of comparable information for all companies regardless of whether, when, or how an entity adopts the fair value based method of accounting. This statement improves the prominence and clarity of the pro forma disclosures required by SFAS No. 123 by prescribing a specific tabular format and by requiring disclosure in the "Summary of
Significant Accounting Policies" or its equivalent. In addition, this statement improves the timeliness of those disclosures by requiring their inclusion in financial reports for interim periods.
The annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. Carver Federal adopted the annual disclosure provisions of SFAS No. 148 on December 31, 2002. Prior year disclosures have been amended in the accompanying financial statement footnotes to conform with the new disclosure requirements.
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY
On May 15, 2003 the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". The statement requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer.
Generally, the statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Carver Federal will adopt the provisions of the statement on July 1, 2003.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning Executive Officers of the Company which responds to this Item is incorporated by reference from Item 1 contained in Part I of this Form 10-K. The information that responds to this Item with respect to Directors is incorporated by reference from the section entitled "Election of Directors" in the Holding Company's definitive Proxy Statement. Information with respect to compliance by the Company's Directors and Executive Officers with Section 16(a) of the Exchange Act is incorporated by reference from the subsection entitled "SEC Beneficial Ownership Reporting Compliance" in the Proxy Statement.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in response to this Item is incorporated by reference from the section entitled "Compensation of Executive Officers" in the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required in response to this Item is incorporated by reference from the section entitled "Security Ownership of Certain Beneficial Owners And Management" in the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in response to this Item is incorporated by reference from the section entitled "Transactions With Certain Related Persons" in the Proxy Statement.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures. The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective and timely in alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings.
Changes in internal controls. The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the Chief Executive Officer and Chief Financial Officer.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) List of Documents Filed as Part of this Report
(1) Financial Statement Schedules. All financial statement schedules have been omitted, as the required information is either inapplicable or included in the Financial Statements or related notes.
(b) Reports on Form 8-K Filed During the Last Quarter of the Registrant's Fiscal Year Ended March 31, 2003 - None.
(c) Exhibits required by Item 601 of Regulation S-K:
See Index of Exhibits on page E-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CARVER BANCORP, INC.
June 27, 2003 By /s/ Deborah C. Wright ------------------------------------- Deborah C. Wright President and Chief Executive Officer (Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below on June 27, 2003 by the following persons on behalf of the registrant and in the capacities indicated.
/s/ Deborah C. Wright President, Chief Executive Officer and Director - ------------------------ (Principal Executive Officer) Deborah C. Wright
/s/ William Gray Senior Vice President and Chief Financial Officer - ------------------------ (Principal Financial and Accounting Officer) William Gray
/s/ Frederick O. Terrell Chairman - ------------------------ Frederick O. Terrell
/s/ Carol Baldwin Moody Director - ------------------------ Carol Baldwin Moody
/s/ David L. Hinds Director - ------------------------ David L. Hinds
/s/ Robert Holland, Jr. Director - ------------------------ Robert Holland, Jr.
/s/ Pazel Jackson Director - ------------------------ Pazel G. Jackson, Jr.
/s/ Edward E. Ruggiero Director - ------------------------ Edward B. Ruggiero
/s/ Strauss Zelnick Director - ------------------------ Strauss Zelnick
CERTIFICATION
I, Deborah C. Wright, President and Chief Executive Officer of Carver Bancorp, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Carver Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date : June 27, 2003 /s/ Deborah C. Wright ----------------------- Deborah C. Wright President and Chief Executive Officer
CERTIFICATION
I, William C. Gray, Senior Vice President and Chief Financial Officer of Carver Bancorp, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Carver Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: June 27, 2003 /s/ William C. Gray ------------------------- William C. Gray Senior Vice President and Chief Financial Officer
EXHIBIT INDEX
Exhibit Number Description - -------------- -----------
3.1 Certificate of Incorporation of Carver Bancorp, Inc. (1)
3.2 Amended and Restated Bylaws of Carver Bancorp, Inc.
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 (2)
4.5 Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock (4)
4.6 Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock (4)
10.1 Carver Bancorp, Inc. 1995 Stock Option Plan, effective as of September 12, 1995 (1)
10.2 Carver Federal Savings Bank Retirement Income Plan, as amended and restated effective as of January 1, 1997 and as further amended through January 1, 2001
10.3 Carver Federal Savings Bank 401(k) Savings Plan in RSI Retirement Trust, as amended and restated effective as of January 1, 1997 and including provisions effective through January 1, 2002
10.4 Carver Bancorp, Inc. Employee Stock Ownership Plan, effective as of January 1, 1994, incorporating Amendment No. 1, incorporating Second Amendment, incorporating Amendment No. 2, incorporating Amendment No. 2A, incorporating Amendment No. 3 and incorporating Amendment No. 4
10.5 Carver Federal Savings Bank Deferred Compensation Plan, effective as of August 10, 1993 (1)
10.6 Carver Federal Savings Bank Retirement Plan for Nonemployee Directors, effective as of October 24, 1994 (1)
10.7 Carver Bancorp, Inc. Management Recognition Plan, effective as of September 12, 1995 (1)
10.8 Carver Bancorp, Inc. Incentive Compensative Plan, effective as of September 12, 1995 (1)
E-1
Exhibit Number Description - -------------- -----------
10.9 Employment Agreement by and between Carver Federal Savings Bank and Deborah C. Wright, entered into as of June 1, 1999 (3)
10.10 Employment Agreement by and between Carver Bancorp, Inc. and Deborah C. Wright, entered into as of June 1, 1999 (3)
10.11 Securities Purchase Agreement by and among Carver Bancorp, Inc., Morgan Stanley & Co. Incorporated and Provender Opportunities Fund L.P. (5)
10.12 Registration Rights Agreement by and among Carver Bancorp, Inc., Morgan Stanley & Co. Incorporated and Provender Opportunities Fund L.P. (5)
10.13 Settlement Agreement and Mutual Release by and among BBC Capital Market, Inc., The Boston Bank of Commerce, Kevin Cohee and Teri Williams; Carver Bancorp, Inc., Deborah C. Wright, David N. Dinkins, Linda H. Dunham, Robert J. Franz, Pazel G. Jackson, Jr., Herman Johnson and David R. Jones; Morgan Stanley & Co., Incorporated; and Provender Opportunities Fund, L.P. and Frederick O. Terrell (5)
10.14 Amendment to the Carver Bancorp, Inc. 1995 Stock Option Plan (6)
10.15 Amended and Restated Employment Agreement by and between Carver Federal Savings Bank and Deborah C. Wright, entered into as of June 1, 1999 (7)
10.16 Amended and Restated Employment Agreement by and between Carver Bancorp, Inc. and Deborah C. Wright, entered into as of June 1, 1999 (7)
10.17 Form of Letter Employment Agreement between Executive Officers and Carver Bancorp, Inc. (7)
10.18 Employment Agreement by and between Carver Federal Savings Bank and Catherine A. Papayiannis, entered into as of April 22, 2002 (7)
10.19 Carver Bancorp Compensation Plan for Non Employee Directors
10.20 Amendment Number One to Carver Federal Savings Bank Retirement Income Plan, as amended and restated effective as of January 1, 1997 and as further amended through January 1,
10.21 First Amendment to the Restatement of the Carver Federal Savings Bank 401(k) Savings Plan
10.22 Second Amendment to the Restatement of the Carver Federal Savings Bank 401(k) Savings Plan for EGTRRA
21.1 Subsidiaries of the Registrant
23.2 Consent of KPMG LLP
99.1 Certification of Deborah C. Wright, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
99.2 Certification of William C. Gray, Senior Vice President and Chief Financial Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
E-2
- ---------- (1) Incorporated herein by reference to Registration Statement No. 333-5559 on Form S-4 of Carver Bancorp, Inc., filed with the Securities and Exchange Commission on June 7, 1996.
(2) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1998.
(3) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1999.
(4) Incorporated herein by reference to the Exhibits to the Registrant's Current Report on Form 8-K, dated January 14, 2000.
(5) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2000.
(6) Incorporated herein by reference to the Registrant's Proxy Statement dated January 25, 2002.
(7) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2002.
E-3