ITEM 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
CARVER BANCORP, INC.
Carver Bancorp, Inc., a Delaware corporation (on a stand-alone basis, the "Holding Company" or "Registrant"), is the holding company for Carver Federal Savings Bank, a federally chartered savings bank, and its subsidiaries (collectively, the "Bank"
or "Carver Federal"), Carver Statutory Trust I (the "Trust") and Alhambra Holding Corporation, a Delaware corporation ("Alhambra"). The Trust, which was formed in September 2003, exists for the sole purpose of issuing trust preferred securities and investing the proceeds in an equivalent amount of subordinated debentures of the Holding Company. The Holding Company formed Alhambra to hold the Holding Company's investment in a commercial office building that was subsequently sold in March 2000. Alhambra is currently inactive. 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
Carver Federal 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 it obtained federal deposit insurance and became a member of the Federal Home Loan Bank (the "FHLB") of New York. Carver Federal converted to a federal savings bank in 1986 and changed its name at that time to Carver Federal Savings Bank. On October 24, 1994, Carver Federal 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 six 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, 2004, Carver Federal is the largest African-American operated financial institution in the United States.
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, 2004, this subsidiary had $220,000 in total capital and a net operating loss of approximately $1,300. At March 31, 2004 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 the fiscal year ended March 31, 2003 ("fiscal 2003"), Carver Federal formed Carver Asset Corporation, a wholly owned subsidiary which qualifies as a real estate investment trust ("REIT") 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 its formation, Carver Federal transferred approximately $119 million of mortgage loans to Carver Asset Corporation.
Carver Federal's current operating strategy consists primarily of: (1) the origination and purchase of one- to four-family residential, commercial, construction and multifamily real estate in its primary market area; (2) investing funds not utilized for loan originations or purchases in the purchase of United States Government Agency securities and mortgage-backed securities; (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) continuing to lower its expense ratio by efficiently utilizing personnel, branch facilities and alternative delivery channels (telephone banking, online banking, and ATMs) to service its customers. Carver Federal plans to generate additional fee income by utilizing third party providers to sell non-deposit investment products and to offer a Carver Federal credit card. The business is not operated in such a way that would require segment reporting.
Carver Federal's primary market area for deposits consists of the areas served by its six branches. Carver Federal considers its primary lending market to include Bronx, Kings, New York, 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 six branch offices (including the main office) and two stand-alone ATM centers. Carver does not share its owned or leased spaces with any other businesses. The following table sets forth certain information regarding Carver Federal's offices and other material properties at March 31, 2004. The Bank believes that such facilities are suitable and adequate for its operational needs.
The net book value of Carver Federal's investment in premises and equipment totaled approximately $11.8 million at March 31, 2004.
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 Carver Federal 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, 2004, except as set forth below, there were no material legal proceedings to which the Company or its subsidiaries was a party or to which any of their property was subject.
On or about April 29, 1999, plaintiff Reginald St. Rose ("St. Rose"), a former Carver Federal employee, filed suit against Carver Federal in the Supreme Court of the State of New York, County of New York (the "St. Rose Action"). On or about January 12, 1999, Carver Federal and St. Rose entered into an agreement (the "Agreement") providing that St. Rose would resign from Carver Federal on the terms and conditions set forth in the Agreement. In the St. Rose Action, St. Rose alleged breach of contract, promissory estoppel, and fraudulent misrepresentation related to the Agreement and St. Rose's separation from Carver Federal. St. Rose sought damages in an amount not less than $50,000 with respect to the breach of contract cause of action and sought undisclosed damages with respect to the promissory estoppel claim. Carver Federal had unasserted counterclaims against St. Rose for, among other claims, payment of certain financial obligations to Carver Federal. The parties reached a final settlement during the fourth quarter of fiscal 2004, which settlement will not have a material impact on the Bank's financial condition or results of operations.
Carver Federal was a defendant in two actions brought by Ralph Williams ( "Williams Action I" and "Williams Action II") and an action brought by Janice Pressley (the "Pressley Action") both of which arose 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 former treasurer of Northeastern. Northeastern was a federal credit union, and it maintained accounts with Carver Federal and other banks in the New York metropolitan area (collectively, the "Bank Defendants"). Plaintiffs alleged that the National Credit Union Administration ("NCUA") acted improperly when it placed Northeastern into conservatorship and subsequent liquidation. In or about July 1998, Williams commenced Williams Action I in the United States District Court, District of Columbia, seeking to restrain the NCUA from executing on the conservatorship order and an order directing the Bank Defendants to "restore [their] accounts to their original status." The Bank Defendants were not served with the pleadings in Williams Action I, and the court entered judgment against them on default. After the Bank Defendants learned of this case, they made a motion in September 2001 to vacate the default judgment. In January 2004, Williams Action I was dismissed without prejudice.
On or about November 22, 2000, Williams filed Williams Action II in the United States District Court, District of Columbia, against the NCUA and the Bank Defendants seeking damages in the amount of $1 million plus certain additional unspecified amounts 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. Plaintiff Pressley filed the Pressley Action in the same court against the same defendants seeking unspecified compensatory and punitive damages based on identical allegations as Williams, except that she also alleged certain claims of employment discrimination. The Bank Defendants filed a joint motion to dismiss Williams Action II, which motion was granted by the District Court and appealed by Williams. The Bank Defendants collectively filed a motion for summary affirmance of the District Court's decision on October 9, 2003, which motion was granted on April 1, 2004, resolving Williams Action I and Williams Action II in the Bank Defendants' favor. The Bank Defendants also made a joint motion to dismiss the Pressley Action. After grant of the motion and appeal by Pressley, the Court of Appeals dismissed the appeal in August 2003 and, in October 2003 with the consent of Pressley's counsel, the District Court ordered the dismissal of Pressley's case against the Bank Defendants, resolving the Pressley Action in its entirety.
In or about January 2004, Michael Lee & Company, former accountants for Hale House Center, Inc. ("Michael Lee"), filed an action against Carver Federal in New York County Supreme Court, asserting a single claim for contribution against Carver Federal. The complaint alleges that Carver Federal should be liable to Michael Lee in the event that Michael Lee is found liable to non-parties Hale House Center, Inc. and its affiliated corporations ("Hale House plaintiffs") in a separate action that the Hale House plaintiffs have filed against Michael Lee. The Hale House plaintiffs have asserted claims of professional malpractice and breach of contract against Michael Lee for providing deficient accounting services to Hale House. The basis of Michael Lee's contribution claim against Carver Federal is that Carver Federal allegedly breached a legal duty it owed Hale House by improperly opening and maintaining a checking account on behalf of one of the Hale House affiliates. Michael Lee seeks contribution from Carver Federal in the amount of at least $8.5 million or the amount of any money judgment entered against Michael Lee in favor of the Hale House plaintiffs. On February 4, 2004 Carver Federal filed a motion to dismiss the complaint in its entirety and, on February 11, 2004, Michael Lee served a cross-motion for summary judgment against Carver Federal. In May 2004, the court ruled in favor of Carver Federal and judgment was entered in Carver Federal's favor on June 14, 2004. Michael Lee's time to appeal will run until July 20, 2004.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended March 31, 2004, no matter was submitted to a vote of our security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Holding Company's common stock is listed on the American Stock Exchange under the symbol "CNY." As of May 31, 2004, there were 2,286,380 shares of the common stock outstanding, held by approximately 1,135 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 dependent upon its earnings, financial condition and other factors. In each of the four fiscal years prior to fiscal 2003, the Company 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 capital distributions 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.
On August 6, 2002 the Holding Company announced a stock repurchase program. To date, 29,100 shares of its common stock have been repurchased in open market transactions at an average price of $13.84 per share as part of this program. The Holding Company intends to use repurchased shares to fund its stock-based benefit and compensation plans and for any other purpose the Board deems advisable in compliance with applicable law. The Holding Company did not make any purchases of its equity securities during the fourth quarter of fiscal 2004.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(1) Net income divided by average total assets (2) Net income divided by average total equity (3) Net interest income divided by average interest-earning assets. (4) The difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (5) 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). (6) Non-interest expense less real estate owned expenses, divided by average total assets. (7) Dividends paid to common stockholders as a percentage of net income (loss) available to common stockholders. (8) Non performing assets consist of non-accrual loans, loans accruing 90 days or more past due, and property acquired in settlement of loans.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
EXECUTIVE SUMMARY
The Company's results of operations are significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies, changes in accounting standards and actions of regulatory agencies.
Success in Carver the Company's Federal's fiscal 2004 performance reflects multiple factors:
o A strong net interest margin o Strong credit quality o Continued loan and deposit growth o Prudent investment portfolio management o Active capital management
During fiscal 2004, net interest margin was strong. However, net interest margin compression impacted earnings growth due to the historically low interest rate environment. Net interest margin declined to 3.56% for fiscal 2004 from 4.26% for fiscal 2003. Prepayments continued at an accelerated rate over the last two fiscal years due to the sustained low interest rate environment. Prepayments on mortgage-backed securities and mortgage loans contributed to net interest margin compression as these cash flows were reinvested at lower market yields. Partially offsetting the decline in net interest margin was the increase in average interest-earning assets of $61.2 million to $493.0 million for fiscal 2004 from $431.8 million for fiscal 2003.
Structurally, the Bank's balance sheet exhibits an asset sensitive bias over the long term. As a result, the Bank's greatest exposure is to a sustained lower rate environment as asset yields would be expected to decline further while deposit costs would be expected to stabilize. Should rates begin to rise, additional margin compression would be expected in the near term; however, management anticipates that the Bank's balance sheet would benefit over time from a prolonged rising rate environment. In the fiscal year ending March 31, 2005 ("fiscal 2005"), it is anticipated that the Bank will be operating with a lower net interest margin relative to fiscal 2004.
Asset quality of the Bank's loan portfolio remained strong. To accomplish this objective the Company seeks to follow its loan policies and underwriting practices, which include (1) granting loans on a sound and collectible basis; (2) understanding the needs of borrowers and the economic conditions in the Company's target market, while maintaining a balance between yield and risk; (3) ensuring that primary, secondary and tertiary sources of repayment are adequate in relation to the amount of the loan; (4) developing and maintaining adequate diversification of the Bank's loan portfolio as a whole and within loan categories; (5) ensuring that each loan is properly documented; and (6) developing and applying adequate collection procedures.
The Bank experienced strong growth in its core business with increases in net loans receivable and deposits of 20.2% and 7.6%, respectively, compared to March 31, 2003. While the average balance of interest earning assets increased, the higher volume was more than offset by a decrease in yields. Management is mindful of growth levels and the long-term effects of adding assets to the balance sheet in this low interest rate environment. Management believes that its loans are priced sensibly, and as the rate environment shifts management is cognizant of potentially repositioning assets. Management continues its strategy not to take undue risks by extending asset maturities or to compromise credit quality to record higher yielding assets. Lowering the Bank's efficiency ratio remains a priority while continuing to expand Carver's franchise value, through delivery channel expansion and new product offerings. Financial results were achieved while maintaining an efficiency ratio of 67.86% for fiscal 2004.
For fiscal 2004, net gains from sales of securities available-for-sale totaled $31,000. The Bank sold investment securities that were susceptible to increased prepayment risk in a continued low interest rate environment. Additional securities were sold as part of ongoing investment portfolio strategies. Mortgage-backed securities are sometimes sold when they pay down to a certain level to mitigate increased price risk. Government securities are sometimes sold to take advantage of changes in the yield curve. Cash flows from the investment and loan portfolios, as well as deposit growth, were deployed into loans and investment securities.
Earnings growth outpaced asset growth for the fiscal year, adding to the importance of active capital management. During fiscal 2003, the Company approved a stock repurchase plan, allowing the repurchase of up to 10% of its then current outstanding common shares. Since inception of the stock repurchase program, the Company has purchased 29,100 shares of its common stock in open market transactions at an average price of $13.84 per share, representing 1.3% of its outstanding shares. In addition, in fiscal 2003 the Company established a regular quarterly dividend. Despite the change from an annual to a quarterly dividend, Carver's capital levels remain high and at a level that should be sufficient to support our intended acquisition of Independence and our planned branch expansion and organic growth. In April 2004, the Bank successfully opened a full service state-of-the-art branch in Jamaica, Queens and has plans to open an additional branch in fiscal 2005 in Fort Greene, Brooklyn. Additionally, in the last 12 months the Bank opened two 24/7 ATM banking centers in Harlem.
Each of these elements is discussed in the analysis of our financial results and the accompanying financial statements and
footnotes.
PENDING MERGER WITH INDEPENDENCE FEDERAL SAVINGS BANK
On March 15, 2004, the Company entered into a definitive merger agreement to acquire Independence in a cash transaction valued at approximately $33 million. Under the terms of the merger agreement, Independence's stockholders will receive $21.00 in cash for each share of their common stock. The merger agreement has been approved by the directors of Independence, the Company and the Bank. The transaction, which is expected to close before the end of 2004, is subject to customary closing conditions, including regulatory approvals and the approval of Independence's shareholders. The merger agreement requires Independence to pay the Company a termination fee of $1.6 million if the merger agreement is terminated under certain circumstances following Independence's receipt of a superior acquisition proposal or $325,000 if the merger is not approved by Independence's shareholders.
The Holding Company has made an Amended Share Voting Stipulation and Undertaking in favor of the OTS and entered into a Trust Agreement with American Stock Transfer & Trust Company pursuant to which it has placed 72,400 of the common shares of Independence owned by the Holding Company, representing approximately 4.7% of the outstanding common shares of Independence, in a non-voting trust. The shares held in the trust are shares of Independence owned by the Holding Company in excess of the 5% limit set forth in Section 10(e)(1)(A)(iii) of HOLA prior to the OTS approving the Holding Company's H-(e)3 Application to acquire Independence. Section 10(e)(1)(A)(iii) provides that a savings and loan holding company may not acquire or retain more than 5% of the outstanding voting shares of a savings association that is not a subsidiary without the prior approval of the OTS. The Trust Agreement will terminate, and the Independence common shares held in the trust will be transferred back to the Holding Company, upon the receipt by the Holding Company of the approval of the OTS to retain more than 5% of Independence's outstanding voting stock.
GENERAL
Carver Federal'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.
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 interest rates, primarily on competing investments, account maturities, and the levels of personal income and savings.
CRITICAL ACCOUNTING POLICIES
Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Our policy with respect to the methodologies used to determine the allowance for loan losses is our most critical accounting policy. This policy is important to the presentation of our financial condition and results of operations, and it involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in our results of operations or financial condition.
See Note 1 of Notes to Consolidated Financial Statements for a description of our critical accounting policy related to allowance for loan losses and an explanation of the methods and assumptions underlying its application.
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of Carver Federal'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 Federal's interest-bearing liabilities consist primarily of shorter term deposit accounts, Carver Federal'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. The Bank has sought to reduce its 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 mortgage 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 mortgage loans originated into the secondary market.
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 the Company's interest-bearing liabilities and virtually all of the Company's interest-earning assets are located at the Bank, most of the Company'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 Federal seeks to manage its IRR by monitoring and controlling the variation in repricing intervals between its assets and liabilities. To a lesser extent, Carver Federal 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 Federal had a negative one-year gap equal to 8.46% of total rate sensitive assets at March 31, 2004. As a result, Carver Federal's 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 Federal as of March 31, 2004. Maturity repricing dates have been projected by applying estimated prepayment rates based on the current rate environment. 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.
TOTAL ----- (DOLLARS IN THOUSANDS) RATE SENSITIVE ASSETS: Loans and Mortgage Backed Securities $ 473,248 Federal Funds Sold 8,200 Investment Securities 26,130 ------------ Total interest-earning assets 507,578 RATE SENSITIVE LIABILITIES: NOW demand 23,100 Savings and clubs 131,122 Money market savings 30,842 Certificates of Deposit 168,065 Borrowings 91,541 ------------ Total interest-bearing liabilities $ 444,670
Interest Sensitivity Gap $ 62,908
Cumulative Interest Sensitivity Gap - Ratio of Cumulative Gap to Total Rate Sensitive assets
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 Federal'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 while managing 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, 2004, 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 Bank's level of IRR, as measured by changes in NPV, for fiscal 2004 is substantially unchanged from fiscal 2003. 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.
MARCH 31, 2004 -------------- RISK MEASURES: +200 BP RATE SHOCK Pre-Shock NPV Ratio: NPV as % of PV of Assets 15.47% Post-Shock NPV Ratio 14.31% Sensitivity Measure; Decline in NPV Ratio 116 bp
Certain shortcomings are inherent in the methodology used in the above IRR measurements. Modeling changes in NPV require the making of certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV table presented assumes that the composition of Carver Federal'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 Federal'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 Federal'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 Federal'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. The use of average monthly balances instead of average daily balances on all other accounts should not result in 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 (1) changes in volume (changes in volume multiplied by new rate), (2) changes in rates (change in rate multiplied by old volume) and (3) 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, 2004 AND 2003
At March 31, 2004, total assets increased by $29.0 million, or 5.7%, to $538.8 million compared to $509.8 million at March 31, 2003. The increase in total assets was primarily attributable to an increase in loans receivable, partially offset by decreases in securities. The increase in loans receivable and the decrease in securities reflects the decision to reinvest funds received from the maturities and repayments of securities into higher yielding real estate loans.
Loans receivable, net, increased by $59.2 million, or 20.2%, to $351.9 million as of March 31, 2004 compared to $292.7 million one year ago. The loan growth during fiscal 2004 represented loan originations of $87.1 million and loan purchases of $93.7 million, offset by principal repayments of $111.9 million and loans sold to Fannie Mae of $9.4 million. The increase in mortgage loan principal repayments, originations and purchases in fiscal 2004 and fiscal 2003 is primarily a result of the lower interest rate environment during both fiscal years, which has significantly increased the level of mortgage refinance activity. One- to four-family mortgage loans increased by $26.9 million, or 37.5%, to $98.6 million at March 31, 2004 compared to $71.7 million at March 31, 2003. The increase in one- to four-family loans is primarily due to increased loan purchases as well as $8.3 million in increased loan originations. Multifamily real estate loans decreased by $11.4 million, or 8.7%, to $120.3 million at March 31, 2004 compared to $131.7 million at March 31, 2003. Non-residential real estate loans (including church loans) increased by $23.4 million, or 29.5%, to $102.6 million at March 31, 2004 compared to $79.2 million at March 31, 2003. Construction loans increased by $15.9 million, or 138.3%, to $27.4 million at March 31, 2004 compared to $11.5 million at March 31, 2003 primarily due to purchases. The Bank continues to focus on the origination of multifamily, non-residential and construction real estate loans in the markets it serves and will augment these originations with loan purchases. Consumer and business loans increased by $3.9 million, or 182.8%, to $6.0 million at March 31, 2004 compared to $2.1 million at March 31, 2003. The increase in consumer and business loans comprises four separate secured business loans in the amount of $1.0 million each originated during fiscal 2004.
Total securities at March 31, 2004 decreased $25.7 million to $139.9 million from $165.6 million at March 31, 2003, reflecting a $32.7 million decrease in available-for-sale securities and a $6.9 million increase in held-to-maturity securities. The decrease in available-for-sale securities primarily reflects $65.1 million in principal repayments, maturities and calls, $23.9 million in proceeds from sales of securities, and an $860,000 decrease in the market value of the portfolio, substantially offset by purchases of $58.5 million. The increase in held-to-maturity securities reflects securities purchases of $19.9 million offset by principal payments and maturities of $12.7 million. Available-for-sale securities represented 68.9% of the total securities portfolio at March 31, 2004 compared to 77.9% at March 31, 2003. The Bank invests in securities to help diversify its asset portfolios and satisfy collateral requirements for certain deposits and borrowings.
At March 31, 2004, total liabilities increased $25.4 million, or 5.4%, to $494.2 million compared to $468.8 million at March 31, 2003. Deposits increased $26.5 million, or 7.6%, to $373.7 million at March 31, 2004 from $347.2 million at March 31, 2003.
The increase in deposits was primarily attributable to increases of $10.1 million in money market accounts, $8.9 million in demand accounts, $5.3 million in certificates of deposit and $2.2 million in regular savings and club accounts. Funds from deposit growth were used to pay down higher cost advances from the FHLB-NY, resulting in a net decrease in total borrowed money of $4.7 million, or 4.3%, to $104.3 million at March 31, 2004, from $109.0 million one year ago. Advances from the FHLB-NY declined by $17.5 million which were partially offset by new borrowings from the issuance of $12.7 million of trust preferred securities.
At March 31, 2004, stockholders' equity increased $3.6 million, or 8.7%, to $44.6 million compared to $41.1 million at March 31, 2003. The increase in stockholders' equity was primarily attributable to net income of $4.8 million partially offset by other comprehensive losses, net of taxes, of $492,000, a net increase in treasury stock holdings of $200,000 and dividends declared of $659,000. The Bank's capital levels meet regulatory requirements of a well capitalized financial institution.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2004 AND 2003
NET INCOME
The Bank reported net income for fiscal 2004 of $4.8 million compared to $3.8 million for the prior fiscal year. Net income available to common stockholders for fiscal 2004 was $4.6 million, or $1.87 per diluted common share compared to $3.6 million, or $1.52 per diluted common share, for fiscal 2003. The increase in net income was primarily due to a $2.1 million increase in non-interest income and a $540,000 reduction in income tax expense partially offset by an $873,000 decrease in net interest income and a $776,000 increase in non-interest expense.
INTEREST INCOME
Interest income for fiscal 2004 was $26.2 million, a decrease of $1.2 million, or 4.2%, from the prior fiscal year. The average balance of interest-earning assets increased to $493.0 million for fiscal 2004 from $431.8 million for the prior fiscal year. This increase was more than offset by a decline in the average yield on interest-earning assets to 5.32% for fiscal 2004 compared to 6.34% for fiscal 2003.
Interest income on loans decreased by $1.1 million, or 5.1%, to $20.1 million for fiscal 2004 compared to $21.2 million for the prior fiscal year. The decrease in interest income from loans reflects a 110 basis point decrease in the average rate earned on loans to 6.40% for fiscal 2004 from 7.50% for the prior fiscal year, the effects of which were partially offset by an increase of $31.9 million, or 11.3%, in the average balance of loans to $314.3 million for fiscal 2004 compared to $282.4 million for fiscal 2003. The increase in the average balance of loans reflects originations and purchases in excess of principal collections. The decline in the average rate earned on loans was principally due to the downward pricing on loan products during the low interest rate environment experienced during fiscal 2004, see "Item 7. Management Discussion and Analysis--Liquidity and Capital Resources."
Interest income on mortgage-backed securities increased by $507,000, or 11.8%, to $4.8 million for fiscal 2004 compared to $4.3 million for the prior fiscal year, reflecting an increase of $33.8 million in the average balance of mortgage-backed securities to $126.8 million for fiscal 2004 compared to $93.0 million for fiscal 2003. 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 an 82 basis point decrease in the average rate earned on mortgage-backed securities to 3.78% for fiscal 2004 from 4.60% for the prior fiscal year.
Interest income on investment securities decreased by approximately $453,000, or 28.1%, to $1.2 million for fiscal 2004 compared to $1.6 million for the prior fiscal year. The decrease in interest income on investment securities reflects a 49 basis point decrease in the average rate earned on investment securities to 3.91% for fiscal 2004 from 4.40% for the prior fiscal year and a decrease of $7.0 million in the average balance of investment securities to $29.7 million for fiscal 2004 compared to $36.7 million for fiscal 2003.
Interest income on federal funds decreased $133,000, or 44.3%, to $167,000 for fiscal 2004 compared to $300,000 for the prior fiscal year. The decrease is attributable to a 77 basis point decrease in the average rate earned on federal funds, partially offset by a $2.5 million increase in the average balance of federal funds.
INTEREST EXPENSE
Interest expense decreased by $283,000, or 3.2%, to $8.7 million for fiscal 2004 compared to $9.0 million for the prior fiscal year. The decrease in interest expense reflects a decline of 34 basis points in the average cost of interest-bearing liabilities. This decline in average rate paid was partially offset by a $54.9 million increase in the average balance of interest-bearing liabilities to $452.8 million in fiscal 2004 from $397.9 million in fiscal 2003. The increase in the average balance of interest-bearing liabilities in fiscal 2004 compared to fiscal 2003 was due to increases in the average balance of interest-bearing deposits, as well as increases in
the average balance of borrowed money.
Interest expense on deposits decreased $1.1 million, or 19.3%, to $4.6 million for fiscal 2004 compared to $5.8 million for the prior fiscal year. This decrease is attributable to a 48 basis point decrease in the cost of average deposits partially offset by a $27.7 million, or 8.8%, increase in the average balance of interest-bearing deposits to $344.8 million for fiscal 2004 compared to $317.1 million for fiscal 2003. The increase in the average balance of interest-bearing deposits was primarily due to an increase in the average balance of money market accounts of $10.9 million, or 65.2%, and an increase in the average balance of certificates of deposit of $8.2 million, or 5.3%. The increase in average interest-bearing deposits was achieved in part through deposits generated by a new branch and two new ATM centers in fiscal 2004. The decrease in the average rate paid on deposits was principally due to the declining interest rate environment experienced in fiscal 2004.
Interest expense on borrowed money increased by $828,000, or 25.7%, to $4.1 million for fiscal 2004 compared to $3.2 million for the prior fiscal year. The increase in interest expense on borrowed money for fiscal 2004 reflects a $25.5 million increase in the average balance of borrowed money, of which $6.9 million resulted from the issuance of trust preferred securities, partially offset by a decrease of 18 basis points in the average cost of borrowed money. The decrease in average cost of borrowings was due to the continued declining interest rate environment experienced during fiscal 2004.
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 decreased $873,000, or 4.7%, to $17.5 million for fiscal 2004 compared to $18.4 million for the prior fiscal year. The 102 basis point decrease in the return on average interest-earning assets, coupled with a 34 basis point decrease in the cost of interest-bearing liabilities used to fund interest-earning assets, contributed to a 68 basis point decrease in the interest rate spread to 3.40% for fiscal 2004 compared to 4.08% for the prior fiscal year. The net interest margin decreased to 3.56% for fiscal 2004 compared to 4.26% for fiscal 2003.
PROVISION FOR LOAN LOSSES
During fiscal 2004 no provision was recorded for loan losses. 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. Factors considered when evaluating the adequacy of the allowance for loan losses 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 and trends in the local and national economy and trends in the real estate market.
During fiscal 2004, the Bank had net charge-offs of $33,000 compared to net recoveries of $30,000 for fiscal 2003. At March 31, 2004, non-performing loans totaled $2.1 million, or 0.6% of total loans compared to $1.8 million, or 0.6% of total loans, at March 31, 2003. At March 31, 2004, the Bank's allowance for loan losses was $4.1 million, substantially unchanged from that of March 31, 2003, resulting in a ratio of the allowance to non-performing loans of 194.3% at March 31, 2004 compared to 230.7% at March 31, 2003, and a ratio of allowance for possible loan losses to total loans of 1.16% and 1.40% at March 31, 2004 and March 31, 2003, respectively. The Bank believes its reported allowance for loan loss at March 31, 2004 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 "Item 1 - -Business--General Description of Business--Asset Quality" and Note 1 of Notes to the Consolidated Financial Statements.
NON-INTEREST INCOME
Non-interest income is comprised 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 $2.1 million, or 67.0%, to $5.3 million for fiscal 2004 compared to $3.2 million for fiscal 2003. The increase is primarily due to a $1.3 million increase in loan fees and service charges and a $590,000 increase in other, or miscellaneous, non-interest income. Loan fees and service charges amounted to $2.6 million for fiscal 2004, a 94.4% increase from the prior fiscal year, primarily resulting from higher mortgage prepayment penalties relating to increased refinancing activity including several loans whose prepayment penalties were based on the yield maintenance method compared to a flat declining rate method usually used by the Bank. The yield maintenance method is calculated by using a stated contractual interest rate for the remaining term of the loan multiplied by the current outstanding balance. Current loan production does not incorporate the yield maintenance method. Additionally, a decline in the refinance market could result in lower prepayment penalty fee income. Other non-interest income amounted to $597,000 for fiscal 2004 compared to
$7,000 for the prior fiscal year. The increase in other non-interest income was primarily a result of a recovery of $558,000 of which $411,000 was related to the recognition of previously unrecognized mortgage loan income from one problem loan that had been held in escrow pending the resolution of certain mechanics' liens. The remaining recovery of $147,000 was from previously unrecognized prepaid mortgage loan income.
NON-INTEREST EXPENSE
Non-interest expense increased by $776,000, or 5.3%, to $15.5 million for fiscal 2004 compared to $14.7 million for the prior fiscal year. The increase in non-interest expense was primarily attributable to increases of $813,000 in salaries and employee benefits and $58,000 in net occupancy and equipment expenses, slightly offset by a decrease of $95,000 in other non-interest expense. The increase in salaries and employee benefits was primarily attributable to annual salary increases, new hires and the increased costs of benefit plans. Net occupancy expenses increased primarily from new and upgraded 24/7 ATM centers and the Bank's recently opened Jamaica Center branch.
INCOME TAX EXPENSE
Income tax expense was approximately $2.5 million for fiscal 2004, a $540,000, or 17.8%, decrease from $3.0 million for fiscal 2003 due to a reduction in the Company's tax rate following the establishment of a REIT. The effective tax rate in fiscal 2004 was 34.0% compared to 44.2% in fiscal 2003.
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 income tax expense, a $1.3 million decrease in non-interest income and a $366,000 increase in non-interest expense partially offset by a $2.1 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 $1.0 million, or 3.5%, from the prior fiscal year. The average balance of interest-earning assets increased to $431.8 million for fiscal 2003 from $399.7 million for the prior fiscal 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 7.10% for fiscal 2002.
Interest income on loans decreased by $1.5 million, or 6.8%, to $21.2 million for fiscal 2003 compared to $22.7 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 7.65% for the prior fiscal 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 of 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 fiscal 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 fiscal 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 fiscal 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 fiscal 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 fiscal 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 fiscal 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 before the provision for loan losses increased $2.1 million, or 12.6%, to $18.4 million for fiscal 2003 compared to $16.3 million for the prior fiscal 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 76 basis point decrease in the return on average interest-earning assets, contributed to a 19 basis point increase in the interest rate spread to 4.08% for fiscal 2003 compared to 3.89% for the prior fiscal year. The net interest margin increased to 4.26% for fiscal 2003 compared to 4.09% 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. Management believes that the decrease in provisions for loan losses compared to fiscal 2002 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, substantially unchanged from that 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 "Item 1 - -Business--General Description of Business--Asset Quality" and Note 1 of Notes 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 of $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 fiscal 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 $366,000, or 2.6%, to $14.7 million for fiscal 2003 compared to $14.3 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, partially offset by a decrease of $210,000 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 $2.5 million for fiscal 2004, a $540,000, or 17.8%, decrease from $3.0 million for fiscal 2003, reflecting the benefit of the Bank's REIT. The effective tax rate in fiscal 2004 was 34.0% compared to 44.2% in fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Bank's ability to generate adequate cash to meet financial obligations. The principal cash requirements of a financial institution are to cover potential deposit outflows, fund increases in its loan and investment portfolios and cover its ongoing operating expenses. The Company's primary sources of funds are deposits, borrowed funds and principal and interest payments on loans, mortgage-backed securities and investment securities. While maturities and scheduled amortization of loans, mortgage-backed securities and investment securities are predictable sources of funds, deposit flows and loan and mortgage-backed securities prepayments are strongly influenced by changes in general interest rates, economic conditions and competition.
Management believes the Bank's short-term assets have sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash requirements. In addition, as previously discussed, the Bank has the ability to borrow funds from the FHLB-NY to further meet any liquidity needs. The Bank monitors its liquidity utilizing guidelines that are contained in a policy developed by management of the Bank and approved by the Bank's Board of Directors. The Bank's several liquidity measurements are evaluated on a frequent basis. The Bank was in compliance with this policy as of March 31, 2004.
Congress eliminated the statutory liquidity requirement which required federal savings banks to maintain a minimum amount of liquid assets of between 4% and 10%, 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. The Bank's most liquid assets are cash and short-term investments. The level of these assets is dependent on the Bank's operating, investing and financing activities during any given period. At March 31, 2004 and 2003, assets qualifying for short-term liquidity, including cash and short-term investments, totaled $28.7 million and $45.3 million, respectively.
The levels of the Bank's short-term liquid assets are dependent on the Bank's operating, financing and investing activities during any given period. The most significant liquidity challenge the Bank currently faces is the variability in its cash flows as a result of mortgage refinance activity, which has resulted in a lag in redeploying lower yielding federal funds into higher yielding mortgage loans, which has had a negative impact on the Company's net interest margin and net interest income. As mortgage interest rates decline, customers' refinance activities tend to accelerate, causing the cash flow from both the mortgage loan portfolio and the mortgage-backed securities portfolio to accelerate. In addition, as mortgage interest rates decrease, customers generally tend to prefer fixed rate mortgage loan products over variable rate products. Since the Bank generally sells its 15-year and 30-year fixed rate loan production into the secondary mortgage market, the origination of such products for sale does not significantly reduce the Bank's liquidity. During fiscal 2002, the Federal Open Market Committee reduced the federal funds rate on eight separate occasions by a total of 325 basis points, resulting in a lower interest rate environment in fiscal 2002 compared to the fiscal year ended March 31, 2001. During fiscal 2003, the federal funds rate was again lowered on three separate occasions a total of 125 basis points. During fiscal 2004 the federal funds rate has remained unchanged. The increase in loan and securities repayments experienced by the Bank over the past two fiscal years was primarily the result of the increase in mortgage loan refinancing activity caused by this lower interest rate environment.
The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During fiscal 2004, cash and cash equivalents decreased by $386,000. Net cash provided by operating activities was $17.0 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 $38.2 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 $20.8 million, reflecting primarily net increases in deposits and borrowed money.
CONTRACTUAL OBLIGATIONS
The following table presents the Bank's contractual obligations at March 31, 2004.
REGULATORY CAPITAL POSITION
The Bank must satisfy three minimum capital standards established by the OTS. For a description of the OTS capital regulation, see "Item 1 - -Regulation and Supervision--Federal Banking Regulation--Capital Requirements."
The Bank presently exceeds all capital requirements as currently promulgated. At March 31, 2004, the Bank had tangible, core, and total risk-based capital ratios of 10.6%, 10.6% and 17.7%, respectively.
The following table reconciles the Bank's stockholders' equity at March 31, 2004 under accounting principles generally accepted in the United States of America ("GAAP") 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 GAAP, 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, 2004 and 2003 and the related consolidated statements of income, changes in stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2004. 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 standards established by the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP New York, New York June 24, 2004
MANAGEMENT'S REPORT
Management of Carver Bancorp is responsible for the preparation and integrity and fair presentation of the consolidated financial statements and other information presented in this annual report. The consolidated financial statements have been prepared in conformity with GAAP and, where necessary, are based on management's best estimates and judgment. Other financial information contained elsewhere in this annual report is consistent with that contained in the consolidated financial statements.
Management maintains accounting systems and internal controls to meet its responsibilities for reliable consolidated financial statements. There are inherent limitations in the effectiveness of internal controls, including the possibility of circumvention of overriding of controls. Furthermore, because of changes in conditions, the effectiveness of internal controls may vary over time. These systems and controls are designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with management's authorization. An internal audit function is maintained to continually evaluate the adequacy and effectiveness of such internal controls, policies and procedures.
KPMG LLP, independent auditors, are engaged to audit the Company's consolidated financial statements in accordance with auditing standards generally accepted in the United States of America and the independent auditor's report expresses their opinion as to the fair representation, in all material respects, of the consolidated financial statements in conformity with GAAP. The audit provides an objective assessment of the degree to which management meet its responsibility for financial reporting.
The Board fulfills its oversight role for the financial statements through the Finance and Audit Committee, which is composed entirely of outside directors. The Finance and Audit Committee meet regularly with management, the internal auditors, and the independent auditors, to discuss internal controls and accounting, auditing and financial reporting matters. The Finance and Audit Committee reviews and approves the scope of internal and external audits, as well as recommendations made with respect to internal controls by the independent and internal auditors and the various regulatory agencies. KPMG LLP and the internal auditors meet with the Finance and Audit Committee with and with and without management present.
Management assessed the Company's system of internal control over financial reporting as of March 31, 2004 based on criteria for effective internal control over financial reporting described in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that as of March 31, 2004, the Company's system of internal controls over financial reporting met those criteria.
/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 STATEMENT OF INCOME (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 AND COMPREHENSIVE INCOME (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. (on a stand-alone basis, the "Holding Company" or "Registrant"), was incorporated in May 1996 and its principal wholly owned subsidiary is Carver Federal Savings Bank (the "Bank" or "Carver Federal"). Carver Statutory Trust I (the "Trust") is another wholly owned subsidiary of the Holding Company. The Trust, which was formed in September 2003, exists for the sole purpose of issuing trust preferred securities and investing the proceeds in an equivalent amount of subordinated debentures of the Holding Company. CFSB Realty Corp. and CFSB Credit Corp. are wholly owned subsidiaries of the Bank. CFSB Credit Corp. is currently inactive. The Bank owns a majority interest in Carver Asset Corporation, a real estate investment trust formed in the fourth quarter of fiscal 2003. 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 of Notes to the Consolidated Financial Statements. 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."
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 six branches located throughout the City of New York that primarily serve the communities in which they operate.
BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the Holding Company, the Bank, the Bank's wholly owned or majority owned subsidiaries, Carver Asset Corporation, CFSB Realty Corp. and CFSB Credit Corp., and Carver Statutory Trust I, a subsidiary of the Holding Company. 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 Federal had extended mortgages and other credit instruments.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review Carver Federal's allowance for loan losses and real estate owned valuations. Such agencies may require Carver Federal 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 less than 90 days past due 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 one- to four-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 City metropolitan area.
The initial allocation or specific-allowance methodology commences with loan officers and underwriters grading the quality of their loans on an eight-category risk classification scale. Loans identified from this process as below investment grade are referred to the Internal Asset Review Committee 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 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 non-accrual status or have been restructured. Consumer credit non-accrual 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:
Buildings and improvements 10 to 40 years Furnishings and equipment 3 to 10 years Leasehold improvements Lesser of useful life or remaining term of lease
Significant renewals and betterments are charged to the property and equipment account. Maintenance and repairs are charged to expense in the year incurred.
REAL ESTATE OWNED
Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at the fair value at the date of acquisition and thereafter carried at the lower of cost or fair value less estimated selling costs. The fair value of such assets is determined based primarily upon independent appraisals and other relevant factors. The amounts ultimately recoverable from real estate owned could differ from the net carrying value of these properties because of economic conditions.
Costs incurred to improve properties or prepare them 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. The Bank had no real estate owned as of March 31, 2004.
IDENTIFIABLE INTANGIBLE ASSETS
Carver Federal 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 Federal 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 annually evaluates long-lived assets, certain identifiable 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 Federal 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 Federal 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 Federal 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 Federal 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 2.50%, 2.50% and 4.50%, for the relevant fiscal years ended March 31, 2004, 2003 and 2002 ("fiscal 2004", "fiscal 2003" and "fiscal 2002"), respectively; volatility of 45% for fiscal 2004 and 30% fiscal 2003 and fiscal 2002; expected dividend yield was calculated using annual dividends of $0.20 per share for fiscal 2004 and fiscal 2003 and $0.05 for fiscal 2002; 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 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, 2004:
The following is a summary of securities at March 31, 2003:
The net unrealized gain on available-for-sale securities was $42,000 ($26,000 after taxes) at March 31, 2004 as compared to $902,000 ($750,000 after taxes) at March 31, 2003. 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 $468,000 was recorded as a separate component of stockholders' equity and is being amortized over the remaining lives of the securities as an adjustment to yield. As of March 31, 2004 the carrying value of these securities is $18.1 million and a related unrealized gain of $232,000 (net of amortization) continues to be reported. Changes in unrealized holding gains and losses between fiscal 2004 and fiscal 2003 resulted in an after-tax decrease in stockholders' equity of $492,000. 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 fiscal 2004 and the fiscal year ended March 31, 2002 of $31,000 and $1.4 million, respectively. There were no sales of securities in fiscal 2003.
The following is a summary of the carrying value (amortized cost) and fair value of securities at March 31, 2004, 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 ------------ ------------ (IN THOUSANDS)
AVAILABLE-FOR-SALE : Less than one year $ 6,452 $ 6,461 One through five years 15,707 16,058 Five through ten years - - After ten years 74,202 73,884 ------------ ------------ $96,361 $96,403 ============ ============ HELD-TO-MATURITY: Less than one year 12 12 One through five years 174 183 Five through ten years - - After ten years 43,288 43,599 ------------ ------------ $43,474 $43,794 ============ ============
The unrealized losses and fair value of securities that have been in a continuous unrealized loss position for less than 12 months and 12 months or longer were as follows:
NOTE 3. LOANS RECEIVABLE, NET
A summary of loans receivable, net follows:
At March 31, 2004, 91.0% 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 Fannie Mae are not included in the accompanying consolidated financial statements. The unpaid principal balances of these loans aggregated $11.7 million, $4.1 million and $2.9 million at March 31, 2004, 2003 and 2002, respectively. Custodial escrow balances, maintained in connection with the foregoing loan servicing, were approximately $40,000, $16,000 and $28,000 at March 31, 2004, 2003 and 2002, respectively. During the year ended March 31, 2004 the Bank sold $9.4 million in loans with a gain of $118,000 recognized, as compared to $2.5 million in loans sold during fiscal 2003 and a minimal gain 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, 2004, 2003 and 2002 the recorded investment in impaired loans was $2.1 million, $1.8 million and $2.8 million, respectively all of which represented non-accrual loans. The related allowance for credit losses was approximately $317,000 and $195,000 at March 31, 2004 and 2003, respectively. The impaired loan portfolio is primarily collateral dependent. The average recorded investment in impaired loans during the fiscal years ended March 31, 2004, 2003 and 2002 was approximately $2.0 million, $1.8 million and $2.3 million, respectively. For the fiscal years ended March 31, 2004, 2003 and 2002, the Company did not recognize any interest income on these impaired loans. Interest income of $185,000, $173,000 and $288,000, respectively, for the fiscal years ended March 31, 2004, 2003 and 2002 would have been recorded on impaired loans had they performed in accordance with the original contract.
At March 31, 2004 and 2003, there were no loans to officers or directors.
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, 2004, 2003 and 2002 amounted to $1.1 million, $1.2 million and $1.2 million, respectively.
NOTE 5. ACCRUED INTEREST RECEIVABLE
The detail of accrued interest receivable is as follows:
NOTE 6. IDENTIFIABLE INTANGIBLE ASSETS
The identifiable intangible assets relate to the acquisition of the Bedford-Stuyvesant branch office. Details follow:
NOTE 7. DEPOSITS
Deposit balances and weighted average stated interest rates at March 31 follow:
Scheduled maturities of certificates of deposit follow:
MARCH 31, ----------------------------- 2004 2003 ------------- ------------- (IN THOUSANDS) Certificates of deposit by remaining term to contractual maturity: Within one year $ 127,739 $ 127,668 After one but within two years 15,817 12,492 After two but within three years 6,573 10,387 After three years 17,937 12,218 ------------- ------------- Total $ 168,066 $ 162,765 ============= =============
The aggregate amount of certificates of deposit with minimum denominations of $100,000 or more was approximately $104.3 million at March 31, 2004 compared to $100.1 million at March 31, 2003.
Interest expense on deposits for the years ended March 31 follows:
NOTE 8. BORROWED MONEY
FEDERAL HOME LOAN BANK ADVANCES ("FHLB"). FHLB advances and weighted average interest rates at March 31 follow, by remaining period to maturity:
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 $134.7 million at March 31, 2004. 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 residential mortgage loans and securities) not otherwise pledged. At March 31, 2004 and 2003, advances were secured by pledges of the Bank's investment in the capital stock of the FHLB of New York totaling $4.6 million and $5.4 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, 2004 and 2003 there were no securities sold under agreements to repurchase outstanding.
SUBORDINATED DEBT SECURITIES. On September 17, 2003, Carver Statutory Trust I, issued 13,000 shares, liquidation amount $1,000 per share, of floating rate capital securities. Gross proceeds from the sale of these trust preferred securities were $13.0 million, and, together with the proceeds from the sale of the trust's common securities, were used to purchase approximately $13.4 million aggregate principal amount of the Holding Company's floating rate junior subordinated debt securities due 2033. The trust preferred securities are redeemable quarterly at the option of the Company beginning on or after July 7, 2007 and have a mandatory redemption date of September 17, 2033. Cash distributions on the trust preferred securities are cumulative and payable at a floating rate per annum (reset quarterly) equal to 3.05% over three-month LIBOR, with a current rate of 4.16%.
The following table sets forth certain information regarding Carver Federal's borrowings at the dates and for the periods
(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.
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 income tax rate to the consolidated effective tax rate for fiscal years ended March 31 follows:
Carver Federal's stockholders' equity includes approximately $2.8 million at each of March 31, 2004, 2003 and 2002 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.
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 follow:
A valuation allowance against the deferred tax assets at March 31, 2004 and 2003 was not established since it is more likely than not that the results of future operations will generate sufficient future taxable income to realize the deferred tax asset.
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 $2.1 million (unaudited) at March 31, 2004 and 2003, 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 Federal 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. On June 1, 2004, Provender sold all 60,000 of its Series B Preferred Stock to Keefe Bruyette & Woods, Inc.
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 Federal'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 Federal, 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, 2004 unpaid accrued dividends related to the Preferred Stock amounted to $58,000.
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 2.0% 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, 2004 and 2003, 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, 2004 and 2003 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, 2004, in accordance with accounting principles generally accepted in the U.S. to regulatory capital requirements:
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 2004 and 2003 in the consolidated statements of changes in stockholders' equity and comprehensive income. Carver Federal's other comprehensive income or loss (other than net income), which is attributable to unrealized gains and losses on securities, for the year ended March 31, 2004 and 2003 were $258,000 and $750,000, respectively. Included in the amounts at March 31, 2004 and 2003 was $232,000 and $255,000, respectively, 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.
NOTE 12. EMPLOYEE BENEFIT AND STOCK COMPENSATION PLANS
PENSION PLAN. Carver Federal has a non-contributory defined benefit pension plan covering all eligible employees. The benefits are based on each employee's term of service. Carver Federal'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, 2001.
The following table sets forth the plan's changes in benefit obligation, changes in plan assets and funded status and amounts recognized in Carver Federal'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. Pursuant to the plan, Carver may make an annual non-elective contribution to the 401(k) plan on behalf of each eligible employee up to 2% of the employee's annual pay, subject to IRS limitations. This non-elective Carver contribution may be made regardless of whether or not the employee makes a contribution to the 401(k) plan. To be eligible for the non-elective 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, December 31. In addition, Carver matches contributions to the plan equal to 100% of pre-tax contributions made by each employee up to a maximum of 4% of their pay, subject to IRS limitations. 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 non-elective Carver contribution, if awarded,
vests over a five-year period. Total savings incentive plan expenses for the years ended March 31, 2004, 2003 and 2002 were $95,000, $127,000 and $60,000, respectively.
DIRECTORS' RETIREMENT PLAN. Concurrent with the conversion to the stock form of ownership, Carver Federal 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 Federal's consolidated financial statements at March 31:
Net periodic pension cost for the years ended March 31, 2004, 2003 and 2002 included the following:
The actuarial assumptions used in determining plan benefits include a discount rate of 6.5%, 6.5% and 7.25% for the years ended March 31, 2004, 2003 and 2002, respectively.
MANAGEMENT RECOGNITION PLAN ("MRP"). 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. On September 23, 2003, the MRP was amended to increase the number of shares available to 119,431. Pursuant to the MRP, the Bank recognized $128,000, $79,000 and $119,000 as expense for the years ended March 31, 2004, 2003 and 2002, 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, initially 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 $0, $172,000 and $174,000 for the years ended March 31, 2004, 2003 and 2002, respectively.
The ESOP shares at March 31 follow:
2004 2003 ------------ ------------ (IN THOUSANDS) Allocated shares 177 163 Unreleased shares 5 19 ------------ ------------ Total ESOP shares 182 182 ============ ============
Fair value of unreleased shares $ 117 $ 261 ============ ============
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 stock options to 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, 2004, there were 229,636 options outstanding and 108,925 were exercisable. Options are granted at the fair market value of Carver Federal 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:
Information regarding stock options at March 31, 2004 follows:
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 commitments as follows:
At March 31, 2004, of the $71.1 million in outstanding commitments to originate mortgage loans, $58.8 million represented commitments to originate non-residential mortgage loans at variable rates within a range of 5.45% to 7.25%, $5.9 million represented the balance of all other real estate loans at fixed rates between 4.50% to 6.50% and $6.4 million represented construction loans at an average rate of 4.79%.
At March 31, 2004, undisbursed funds from approved consumer lines of credit, primarily credit cards, totaled $2.4 million. Such lines consist of unsecured and secured lines of credit of $2.1 million and $281,000 respectively. All such lines carry adjustable rates. At March 31, 2004, undisbursed funds from approved unsecured commercial lines of credit totaled $45,000. At March 31, 2004, 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 $245,000, $186,000, and $142,000 for the years ended March 31, 2004, 2003 and 2002, respectively. As of March 31, 2004, minimum rental commitments under all noncancellable leases with initial or remaining terms of more than one year and expiring through 2012 follow:
YEAR ENDING MINIMUM March 31, RENTAL --------- ------ (In Thousands) 2005 $ 370 2006 374 2007 291 2008 281 2009 299 Thereafter 1,004 ------------- $ 2,619 =============
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 Carver Federal 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, 2004, except as set forth below, there were no material legal proceedings to which the Company or its subsidiaries was a party or to which any of their property was subject.
On or about April 29, 1999, plaintiff Reginald St. Rose ("St. Rose"), a former Carver Federal employee, filed suit against Carver Federal in the Supreme Court of the State of New York, County of New York (the "St. Rose Action"). On or about January 12, 1999, Carver Federal and St. Rose entered into an agreement (the "Agreement") providing that St. Rose would resign from Carver Federal on the terms and conditions set forth in the Agreement. In the St. Rose Action, St. Rose alleged breach of contract, promissory estoppel, and fraudulent misrepresentation related to the Agreement and St. Rose's separation from Carver Federal. St. Rose sought damages in an amount not less than $50,000 with respect to the breach of contract cause of action and sought undisclosed damages with respect to the promissory estoppel claim. Carver Federal had unasserted counterclaims against St. Rose for, among other claims, payment of certain financial obligations to Carver Federal. The parties reached a final settlement during the fourth quarter of fiscal 2004, which settlement will not have a material impact on the Bank's financial condition or results of operations.
Carver Federal was a defendant in two actions brought by Ralph Williams ("Williams Action I" and "Williams Action II") and an action brought by Janice Pressley (the "Pressley Action") both of which arose 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 former treasurer of Northeastern. Northeastern was a federal credit union, and it maintained accounts with Carver Federal and other banks in the New York metropolitan area (collectively, the "Bank Defendants"). Plaintiffs alleged that the National Credit Union Administration ("NCUA") acted improperly when it placed Northeastern into conservatorship and subsequent liquidation. In or about July 1998, Williams commenced Williams Action I in the United States District Court, District of Columbia, seeking to restrain the NCUA from executing on the conservatorship order and an order directing the Bank Defendants to "restore [their] accounts to their original status." The Bank Defendants were not served with the pleadings in Williams Action I, and the court entered judgment against them on default. After the Bank Defendants learned of this case, they made a motion in September 2001 to vacate the default judgment. In January 2004, Williams Action I was dismissed without prejudice.
On or about November 22, 2000, Williams filed Williams Action II in the United States District Court, District of Columbia, against the NCUA and the Bank Defendants seeking damages in the amount of $1 million plus certain additional unspecified amounts 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. Plaintiff Pressley filed the Pressley Action in the same court against the same defendants seeking unspecified compensatory and punitive damages based on identical allegations as Williams, except that she also alleged certain claims of employment discrimination. The Bank Defendants filed a joint motion to dismiss Williams Action II, which motion was granted by the District Court and appealed by Williams. The Bank Defendants collectively filed a motion for summary affirmance of the District Court's decision on October 9, 2003, which motion was granted on April 1, 2004, resolving Williams Action I and Williams Action II in the Bank Defendants' favor. The Bank Defendants also made a joint motion to dismiss the Pressley Action. After grant of the motion and appeal by Pressley, the Court of Appeals dismissed the appeal in August 2003 and, in October 2003 with the consent of Pressley's counsel, the District Court ordered the dismissal of Pressley's case against the Bank Defendants, resolving the Pressley Action in its entirety.
In or about January 2004, Michael Lee & Company, former accountants for Hale House Center, Inc. ("Michael Lee"), filed an action against Carver Federal in New York County Supreme Court, asserting a single claim for contribution against Carver Federal. The complaint alleges that Carver Federal should be liable to Michael Lee in the event that Michael Lee is found liable to non-parties Hale House Center, Inc. and its affiliated corporations ("Hale House plaintiffs") in a separate action that the Hale House plaintiffs have filed against Michael Lee. The Hale House plaintiffs have asserted claims of professional malpractice and breach of contract against Michael Lee for providing deficient accounting services to Hale House. The basis of Michael Lee's contribution claim against Carver Federal is that Carver Federal allegedly breached a legal duty it owed Hale House by improperly opening and maintaining a checking account on behalf of one of the Hale House affiliates. Michael Lee seeks contribution from Carver Federal in the amount of at least $8.5 million or the amount of any money judgment entered against Michael Lee in favor of the Hale House plaintiffs. On February 4, 2004 Carver Federal filed a motion to dismiss the complaint in its entirety and, on February 11, 2004, Michael Lee served a cross-motion for summary judgment against Carver Federal. In May 2004, the court ruled in favor of Carver Federal and judgment was entered in Carver Federal's favor on June 14, 2004. Michael Lee's time to appeal will run until July 20, 2004.
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, 2004 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, 2004 and 2003 follow:
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 fiscal years ended March 31, 2004 and 2003:
NOTE 16. CARVER BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF FINANCIAL CONDITION
CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF CASH FLOWS
NOTE 17. RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING AND DISCLOSURE REQUIREMENT RELATED TO THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003
In January 2004, the Financial Accounting Standards Board ("FASB") issued Staff position No. 106-1 "ACCOUNTING AND DISCLOSURE REQUIREMENTS RELATED TO MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003" ("Medicare Act") for annual financial statements of fiscal years ending after December 7, 2003. The Medicare Act introduced both a Medicare prescription-drug benefit and federal subsidy to sponsors of retiree health-care plans that provide a benefit at least "actuarially equivalent" to the Medicare benefit. Carver Federal is not affected by the Medicare Act since it does not provide retiree health-care benefits.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFIT
In December 2003, the FASB issued a revised SFAS No. 132, "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS - AN AMENDMENT OF FASB STATEMENTS NOS. 87, 88 AND 106" (SFAS No. 132(R)). SFAS No. 132 (R) requires additional disclosures to those in the original statement about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined postretirement plans. SFAS No. 132 (R) also amends Accounting Principles Board ("APB") Opinion No. 28, "INTERIM FINANCIAL REPORTING," to require interim disclosure of the components of net periodic benefit cost and, if significantly different from previously disclosed amounts, the amounts of contributions and projected contributions to fund pension plans and other postretirement benefit plans. SFAS No. 132 (R) is effective for financial statements for fiscal years ending after December 15, 2003, except for disclosure of estimated future benefit payments, which is effective for fiscal years ending after June 15, 2004. As the provisions of SFAS No. 132 (R) are disclosure related, the adoption of SFAS No. 132 (R) had no impact on Carver Federal's financial condition or results of operations.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In December 2003, the FASB issued Interpretation No. 46 (revised), "CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51," ("FIN 46R"). Fin 46R addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, should consolidate the variable interest entity ("VIE"). FIN 46R replaces FIN46 that was issued in January 2003. All public companies, such as Carver Federal, are required to fully implement FIN 46R no later than the end of the first reporting period ending after March 15, 2004. The adoption of FIN 46R resulted in the deconsolidation of the Trust, which did not have a material impact on Carver Federal's financial condition or results of operations.
ACCOUNTING FOR CERTAIN LOANS OR DEBT SECURITIES ACQUIRED IN A TRANSFER
In December 2003, the American Institute of Certified Public Accountants issued Statement of Position No. 03-3, "ACCOUNTING FOR CERTAIN LOANS OR DEBT SECURITIES ACQUIRED IN A TRANSFER" (SOP No. 03-3). SOP No. 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP No. 03-3 prohibits "carry over" or creation of valuation allowances in the initial accounting of all loans acquired in transfers within the scope of SOP No. 03-3, which includes loans acquired in a business combination. SOP No. 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP No. 03-3 is not expected to have an impact on Carver Federal's financial condition or results of operations.
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY
In May 2003, the FASB issued Statement No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY"("SFAS No. 150"). The SFAS No. 150 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. The adoption of SFAS No. 150 did not have a material impact on the Company's earnings or financial position.
AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," which amends and clarifies financial accounting and reporting of derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003, and should generally be applied prospectively. The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, the provisions of SFAS No. 149 which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on Carver Federal's financial condition or results of operations.
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS
In November 2002, FASB issued Interpretation No. 45, "GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS 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, 2004. As of March 31, 2004 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.
NOTE 18. PENDING ACQUISITION
On March 15, 2004, the Company entered into a definitive merger agreement to acquire Independence in a cash transaction valued at approximately $33 million. Under the terms of the merger agreement, Independence's stockholders will receive $21.00 in cash for each share of their common stock. The merger agreement has been approved by the directors of Independence, the Company and the Bank. The transaction, which is expected to close before the end of 2004, is subject to customary closing conditions, including regulatory approvals and the approval of Independence's shareholders. The merger agreement requires Independence to pay the Company a termination fee of $1.6 million if the merger agreement is terminated under certain circumstances following Independence's receipt of a superior acquisition proposal or $325,000 if the merger is not approved by Independence's shareholders.
The Holding Company has made an Amended Share Voting Stipulation and Undertaking in favor of the OTS and entered into a Trust Agreement with American Stock Transfer & Trust Company pursuant to which it has placed 72,400 of the common shares of Independence owned by the Holding Company, representing approximately 4.7% of the outstanding common shares of Independence, in a non-voting trust. The shares held in the trust are shares of Independence owned by the Holding Company in excess of the 5% limit set forth in Section 10(e)(1)(A)(iii) of HOLA prior to the OTS approving the Holding Company's H-(e)3 Application to acquire Independence. Section 10(e)(1)(A)(iii) provides that a savings and loan holding company may not acquire or retain more than 5% of the outstanding voting shares of a savings association that is not a subsidiary without the prior approval of the OTS. The Trust Agreement will terminate, and the Independence common shares held in the trust will be transferred back to the Holding Company, upon the receipt by the Holding Company of the approval of the OTS to retain more than 5% of Independence's outstanding voting stock.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. 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 Securities and Exchange Commission (the "SEC"). As of March 31, 2004, 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 Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. 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.
There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting and we did not identify any significant deficiencies or material weaknesses requiring corrective action with respect to those controls.
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 the section entitled "Executive Officers and Key Managers of Carver and Carver Federal" in the Holding Company's definitive proxy statement for the Annual Meeting of Stockholders for the fiscal year ended March 31, 2004 (the "Proxy Statement"). The information that responds to this Item with respect to Directors is incorporated by reference from the section entitled "Election of Directors" in the 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 "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement.
AUDIT COMMITTEE FINANCIAL EXPERT
Information regarding the audit committee of the Company's Board of Directors, including information regarding audit committee financial experts serving on the audit committee, is presented under the heading "Corporate Governance" in the Company's Proxy Statement and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in response to this Item is incorporated by reference from the section entitled "Compensation of Directors and 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. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required in response to this Item is incorporated by reference from the section entitled "Auditor Fee Information" in the Proxy Statement.
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 under Item 8, "Financial Statement and Supplementary Data".
(b) Reports on Form 8-K Filed during the Last Quarter of the Registrant's Fiscal Year Ended March 31, 2004.
(1) Report on Form 8-K, dated January 30, 2004, which includes information being filed pursuant to Item 12 but was not filed under Item 9, an announcement of our financial results for the third quarter ended December 31, 2003.
(2) Report on Form 8-K, dated March 16, 2004, an announcement of the execution of an Agreement and Plan of Merger between Carver Bancorp, Inc., Carver Federal Savings Bank and Independence Federal Savings Bank.
(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 22, 2004 By /s/ Deborah C. Wright ---------------------------------------- Deborah C. Wright President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below on June 22, 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 - --------------------------- Frederick O. Terrell Chairman
/s/ Carol Baldwin Moody - --------------------------- Carol Baldwin Moody Director
/s/ David L. Hinds - --------------------------- David L. Hinds Director
/s/ Robert Holland, Jr. - --------------------------- Robert Holland, Jr. Director
/s/ Pazel G. Jackson - --------------------------- Pazel G. Jackson, Jr. Director
/s/ Edward B. Ruggiero - --------------------------- Edward B. Ruggiero Director
- --------------------------- Strauss Zelnick Director
EXHIBIT INDEX
Exhibit Number Description - -------------- -----------
2.1 Agreement and Plan of Merger dated as of March 15, 2004 by and between Carver Bancorp, Inc., Carver Federal Savings Bank and Independence Federal Savings Bank (10)
3.1 Certificate of Incorporation of Carver Bancorp, Inc. (1)
3.2 Amended and Restated Bylaws of Carver Bancorp, Inc. (9)
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 (9)
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 (9)
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 (9)
10.5 Carver Federal Savings Bank Deferred Compensation Plan, effective as of August 10, 1993 (1)
10.6 Carver Federal Savings Bank Retirement Plan for Nonemployee Directors, effective as of October 24, 1994 (1)
10.7 Carver Bancorp, Inc. Management Recognition Plan, effective as of September 12, 1995 (1)
10.8 Carver Bancorp, Inc. Incentive Compensative Plan, effective as of September 12, 1995 (1)
10.9 Employment Agreement by and between Carver Federal Savings Bank and 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)
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Exhibit Number Description - -------------- -----------
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, Inc. Compensation Plan for Non-Employee Directors (9)
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, 2001 (9)
10.21 First Amendment to the Restatement of the Carver Federal Savings Bank 401(k) Savings Plan (9)
10.22 Second Amendment to the Restatement of the Carver Federal Savings Bank 401(k) Savings Plan for EGTRRA (9)
10.23 Guarantee Agreement by and between Carver Bancorp, Inc. and U.S. Bank National Association, dated as of September 17, 2003 (8)
10.24 Amended and Restated Declaration of Trust by and among, U.S. Bank National Association, as Institutional Trustee, Carver Bancorp, Inc., as Sponsor, and Linda Dunn, William Gray and Deborah Wright, as Administrators, dated as of September 17, 2003 (8)
10.25 Indenture, dated as of September 17, 2003, between Carver Bancorp, Inc., as Issuer, and U.S. Bank National Association, as Trustee (8)
10.26 Second Amendment to the Carver Bancorp, Inc. Management Recognition Plan, effective as of September 23, 2003 (*)
10.27 Amended Share Voting Stipulation and Undertaking made by Carver Bancorp, Inc. in favor of the OTS, made as of April 22, 2004 (*)
10.28 Trust Agreement between Carver Bancorp, Inc. and American Stock & Transfer Trust Company, dated May 3, 2004 (*)
10.29 First Amendment to Employment Agreement by and between Carver Federal Savings Bank and Catherine A. Papayiannis, entered into as of May 27, 2004 (*)
21.1 Subsidiaries of the Registrant (*)
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Exhibit Number Description - -------------- -----------
23.2 Consent of KPMG LLP (*)
31.1 Certifications of Chief Executive Officer (*)
31.2 Certifications of Chief Financial Officer (*)
32.1 Written Statement of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (*)
32.2 Written Statement of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350(*)
(*) Filed herewith. Copies of these exhibits are available at no charge through the SEC website at http://www.sec.gov.
(1) Incorporated herein by reference to Registration Statement No. 333-5559 on Form S-4 of the Registrant 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 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, 2001.
(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.
(8) Incorporated herein by reference to the Exhibits to the Registrant's Quarterly Report on Form 10-Q for the three months ended September 30, 2003.
(9) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2003
(10) Incorporated herein by reference to the Exhibits to the Registrant's Report on Form 8-K, dated March 16, 2004.
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