ITEM 1B.
UNRESOLVED STAFF COMMENTS.
Not Applicable.
The Bank currently conducts its business through two administrative offices and nine branches (including the 125th Street branch) and eleven separate ATM locations. During fiscal 2010 the Bank opened a new branch at 833 Flatbush Avenue in Brooklyn, NY relocated its Bedford-Stayvesant branch from 1281 Fulton to Restoration Plaza, 1392 Fulton Street, Brooklyn, NY and closed its Sunset Park branch located at 140 58th Street Brooklyn, NY. The following table sets forth certain information regarding Carver Federal’s offices and other material properties at March 31, 2010. The Bank believes that such facilities are suitable and adequate for its operational needs.
*
Stand alone ATMs, not under real estate lease agreements.
From time to time, Carver Federal is a party to various legal proceedings incident to its business. Certain claims, suits, complaints and investigations (collectively “proceeding”) involving Carver Federal, arising in the ordinary course of business, have been filed or are pending. The Company is unable at this time to determine the ultimate outcome of each proceeding, but believes, after discussions with legal counsel representing Carver Federal in these proceedings, that it has meritorious defenses to each proceeding and Carver Federal is taking appropriate measures to defend its interests.
ITEM 4.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended March 31, 2010, no matters were submitted to a vote of the Company’s 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 has been listed on the NASDAQ Global Market under the symbol “CARV” since July 10, 2008. Previously, the Company’s stock was listed on the American Stock Exchange under the symbol “CNY.” As of June 28, 2010, there were 2,474,719 shares of common stock outstanding, held by 909 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.
Each quarter the Board meets to determine the dividend amount per share to be declared. On July 14, 2010, the Company’s Board of Directors declared a $0.025 cash dividend to shareholders for the fourth quarter of fiscal 2010. The decision to reduce the fourth quarter dividend to $0.025 per share from the $0.10 per share paid in the previous three quarters of fiscal 2010 was made in order to preserve capital during this challenging economic environment. Any future decision to change the quarterly cash dividend will be based on, among other things, the dividend payout ratio compared to industry peers coupled with the Bank’s strategy to retain capital in the current economic environment. As in the past, the Company’s Board of Directors reviews the payment of dividends quarterly and plans to continue to maintain a regular quarterly dividend in the future, dependent upon earnings, financial condition and other factors.
Under OTS regulations, 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. Since the Bank incurred a net loss in fiscal 2009, prior approval of the OTS is required for any capital distribution to the Holding Company. For information concerning the Bank’s liquidation account, see Note 12 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 is dependent, primarily, 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 repurchase up to 231,635 shares of its outstanding common stock. As of March 31, 2010, 49,972 shares of its common stock have been repurchased in open market transactions at an average price of $13.75 per share. 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. No shares were repurchased during fiscal 2010. As a result of the Company’s participation in the TARP CPP, the U.S. Treasury’s prior approval is required to make further repurchases.
Carver has four equity compensation plans as follows:
(1) The Management Recognition Plan (“MRP”) which provides for automatic grants of restricted stock to certain employees and non-employee directors as of the date the plan became effective in June of 1995. Additionally, the MRP makes provision for added discretionary grants of restricted stock to those employees so selected by the Compensation Committee of the Board, which administers the plan. There are no shares available for grant under the MRP.
(2) The Incentive Compensation Plan (“ICP”) provides for grants of cash bonuses, restricted stock and stock options to the employees selected by the Compensation Committee. Carver terminated this plan in 2006 and there are no grants outstanding under it.
(3) The 1995 Stock Option Plan provides for automatic option grants to certain employees and directors as of the date the plan became effective in September of 1995, and like the MRP, also makes provision for added discretionary option grants to those employees so selected by the Compensation Committee. The 1995 Stock Option Plan expired in 2005; however, options are still outstanding under this plan.
(4) The 2006 Stock Incentive Plan became effective in September of 2006 and provides for discretionary option grants, stock appreciation rights and restricted stock to those employees and directors so selected by the Compensation Committee.
Additional information regarding Carver’s equity compensation plans is incorporated by reference from the section entitled “Securities Authorized for Issuance Under Equity Compensation Plans” in the Proxy Statement (as defined below in Item 10).
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA.
The following selected consolidated financial and other data is as of and for the years ended March 31 and is derived in part from, and should be read in conjunction with the Company’s consolidated financial statements and related notes (dollars in thousands):
(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 divided by the sum of net interest income and non-interest 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 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.
*
NA-Not applicable.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and Notes to Consolidated Financial Statements presented elsewhere in this report. 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.
Executive Summary
The following overview should be read in conjunction with the Company’s Management’s Discussion and Analysis of Financial condition and results of Operation in its entirety.
The financial services industry continues to face unprecedented challenges in the face of the current national and global economic crisis. The global and U.S. economies are experiencing significantly reduced business activity as a result of among other factors, disruptions in the financial system. Dramatic declines in the housing market coupled with high unemployment rates, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities spread to credit default swaps and other derivative securities, and caused many financial institutions to seek additional capital; to merge with larger and stronger institutions; and, in some cases, to fail. The Company is fortunate that while it has been adversely affected by the weaker economic and financial market conditions, the markets it serves have been impacted to a lesser extent than many areas around the country.
In response to the financial crises affecting the banking system and financial markets, there have been several recent announcements of Federal programs designed to purchase assets from, provide equity capital to, and guarantee the liquidity of the industry.
On January 20, 2009, the Company announced that it completed the sale of $19 million in preferred stock to the Treasury in connection with Carver’s participation in the TARP CPP. Importantly, Carver is exempt from the requirement to issue a warrant to the Treasury to purchase shares of common stock, as the Bank is a certified Community Development Financial Institution (“CDFI”), conducting most of its depository and lending activities in disadvantaged communities. Therefore the investment will not dilute current common stock stockholders. Carver issued 18,980 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, with a liquidation preference of $1,000 per share. The preferred stock investment represents approximately 3 percent of Carver’s risk weighted assets as of March 31, 2010. The Bank’s capital ratios exceed minimum regulatory capital requirements. The Treasury investment substantially increased the Bank’s capital ratios producing a tangible capital ratio of 7.86%; core capital ratio of 7.88%; and risk-based capital ratio of 11.71%. The Bank used the funds from TARP CPP to increase its securities and loan portfolios.
As part of President Obama’s ongoing commitment to improving access to credit for small businesses, the U.S. Department of the Treasury announced in February 2010 the Community Development Capital Initiative. This new TARP program will invest lower-cost capital in Community Development Financial Institutions that lend to small businesses in the country’s hardest-hit communities. CDFI banks and thrifts are eligible to receive investments of capital with an initial dividend rate of 2 percent, compared to the 5 percent rate offered under the CPP. CDFIs may apply to receive capital up to 5 percent of risk-weighted assets. To encourage repayment while recognizing the unique circumstances facing CDFIs, the dividend rate will increase to 9 percent after eight years, compared to five years under CPP. Carver has applied to exchange its $18.98 million of CCP TARP funds to this new CDCI which would decrease dividend payments by $0.6 million per annum. Carver believes it would be eligible to participate in this CDFI program.
Fiscal 2010 was another challenging year for Carver as it reported a net loss of $1.0 million as compared to a net loss of $7.0 million in fiscal 2009. The lower net loss for fiscal 2010 reflects an improved net interest margin and higher fee revenue resulting primarily from Carver’s New Market Tax Credit (NMTC) transactions, offset by an increase in provision for loan losses.
The increased provision for loan losses recorded during fiscal 2010 reflects the increase in and composition of loan delinquencies, non-performing loans, net loan charge-offs and overall loan portfolio, as well as evaluation of the continued deterioration of the housing and real estate markets and increasing weakness in the overall economy, particularly the accelerating pace of job losses. At March 31, 2010 non-performing loans represent 7.10% of total loans as compared to 4.01% at March 31, 2009.
Net interest income was $4.0 million higher than the prior year with a net interest margin increase of 37 basis points to 3.92%. During fiscal 2010 overall interest rates declined, however the Bank was able to take advantage of its favorable asset/liability position by matching the reduction in the yield on its interest-earning assets with a reduction in its costs of interest-bearing deposits. As interest rates declined, the bank has benefited from the repricing of CD maturities and borrowings at significantly lower rates of interest more than offsetting the effect of the decline in the yields on loans and securities.
The business climate continues to present significant challenges. Carver Federal expects a notable decline in loan balances in fiscal 2011 as economic conditions continue to strain small business community and regulatory limitation on Bank’s exposure to commercial real estate reduces the Company’s ability to pursue opportunities for new lending. The Bank expects to reduce the risk in its loan portfolio, given the very challenging credit environment, by curtailing the origination of construction loans for the time being, and refocusing on small business and non-profit lending, which have historically produced lower loss ratios, even during difficult economic times. The Bank expects deposit growth in fiscal 2011, particularly as the intense competition for core community deposits which the Bank experienced in prior years has abated. Carver Federal intends to continue to focus on cost control. In fiscal 2009, the Bank took very difficult steps including eliminating 20% of its workforce, closing a branch and outsourcing the residential loan division. In fiscal year 2010 the Bank focused on additional efficiencies, targeting vendor consolidation. However, industry-wide increases in FDIC insurance premiums coupled with higher regulatory costs have had a negative impact on fiscal 2010 earnings. With respect to asset quality, continued weakness in the local real estate market exacerbated by a severe downturn in the economy has and will continue to present challenges for all financial institutions operating in the New York metropolitan area in the year ahead. Continued unemployment coupled with depressed real estate values may put increased pressure on the loan portfolio which may result in higher delinquencies and non-performing loans in fiscal 2011.
New Markets Tax Credit Award
In June 2006, Carver Federal was selected by the U.S. Department of Treasury, in a highly competitive process, to receive an award of $59 million in New Markets Tax Credits. The NMTC award is used to stimulate economic development in low- to moderate-income communities. The NMTC award enables the Bank to invest with community and development partners in economic development projects with attractive terms including, in some cases, below market interest rates, which may have the effect of attracting capital to underserved communities and facilitating the revitalization of the community, pursuant to the goals of the NMTC program. The NMTC award provides a credit to Carver Federal against Federal income taxes when the Bank makes qualified investments. The credits are allocated over seven years from the time of the qualified investment.
Recognition of the Bank’s $59.0 million NMTC award began in December 2006 when the Bank invested $29.5 million, one-half of its $59 million award. In December 2008, the Bank invested an additional $10.5 million and transferred rights to $19.2 million to an investor in a NMTC project. The Bank’s NMTC allocation was fully invested as of December 31, 2008. During the seven year period, assuming the Bank meets compliance requirements, the Bank will receive 39% of the $40.0 million invested award amount in tax benefits (5% over each of the first three years, and 6% over each of the next four years). The Company expects to receive the remaining NMTC tax benefits of approximately $7.8 million from its $40.0 million investment over the next four years.
In May 2009, the Bank received an additional award of $65 million in NMTC. In December 2009, the Bank transferred rights to an investor in a NMTC project totaling $10.5 million and recognized a gain on the transfer of rights of $0.4 million. The Bank and CCDC have involvements with special purpose entities that were created to facilitate the ultimate investment made by the investor. Specifically, the Bank has funded, on a secured basis, $7.7 million of the investor’s $10.5 million investment in the NMTC project. In addition, CCDC has retained a 0.01% interest in another entity created to facilitate the investment with the investor owning the remaining 99.99%. CCDC also provides certain administrative services to these special purpose entities. The Bank has determined that its and CCDC’s involvement with these special purpose entities does not expose it to the majority of expected loss or residual returns and therefore it is not the primary beneficiary of these entities.
In March 2010, the Bank transferred rights to investors in NMTC projects totaling $44.5 million and recognized a gain on the transfer of rights of $0.4 million. The Bank and CCDC have involvements with special purpose entities that were created to facilitate the ultimate investments to be made by the investor. The Bank also recorded deferred income of $0.6 million related to the transfer that is expected to be recognized into income in future periods after the ultimate investments are made. In addition, CCDC has retained a 0.01% interest in three other entities created to facilitate the investments with the investor owning the remaining 99.99%. CCDC also provides certain administrative services to these special purpose entities. The Bank has determined that its and CCDC’s involvement with these special purpose entities does not expose it to the majority of expected loss or residual returns and therefore it is not the primary beneficiary of these entities.
Critical Accounting Policies
Various elements of accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Carver’s policy with respect to the methodologies used to determine the allowance for loan and lease losses and assessment of the recoverability of the deferred tax asset are the most critical accounting policies. These policies is important to the presentation of Carver’s 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 the Company’s results of operations or financial condition.
See Note 2 of the Notes to Consolidated Financial Statements for a description of the Company’s summary of significant accounting policies, including those related to allowance for loan losses, and an explanation of the methods and assumptions underlying their application.
Deferred Tax Asset
The determination of whether deferred tax assets will be realizable is predicated on estimates of future taxable income. Such estimates are subject to management’s judgment. A valuation reserve is established when management is unable to conclude that it is more likely than not that it will realize deferred tax assets based on the nature and timing of these items.
Allowance for Loan and Lease Losses
The adequacy of the Bank’s ALLL is determined by the Bank, in consideration of the Interagency Policy Statement on the Allowance for Loan and Lease Losses (the “Interagency Policy Statement”) released by the Office of Thrift Supervision on December 13, 2006 and in accordance with Accounting Standards Codification (“ASC”) Topic 450 (formerly known as Statement of Financial Account Standards (“SFAS”) No. 5, Accounting for Contingencies) and ASC Topic 310 (formerly known as SFAS No. 114, Accounting by Creditors for Impairment of a Loan). The ALLL reflects management’s evaluation of the loans presenting identified loss potential, as well as the risk inherent in various components of the portfolio. There is a great amount of judgment applied to developing the ALLL. As such, there can never be assurance that the ALLL provision accurately reflects the actual loss potential embedded in a loan portfolio. Further, an increase in the size of the portfolio or any of its components could necessitate an increase in the ALLL even though there may not be a decline in credit quality or an increase in potential problem loans.
Compliance with the Interagency Policy Statement includes management’s review of the Bank’s loan portfolio, including the identification and review of individual problem situations that may affect a borrower’s ability to repay. In addition, management reviews the overall portfolio quality through an analysis of delinquency and non-performing loan data, estimates of the value of underlying collateral, current charge-offs and other factors that may affect the portfolio, including a review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and composition of the loan portfolio are all taken into consideration.
The Bank maintains a general reserve allowance in accordance with ASC Topic 450 that is comprised of two principal components: (1) a general reserve allowance for performing loans and (2) an allocation of a general reserve allowance for certain Criticized and Classified loans. The Bank believes that the loan review of Criticized and Classified loans provides a more accurate general reserve provision.
The Bank also maintains a specific reserve allowance for Criticized and Classified loans that are reviewed for impairment in accordance with ASC Topic 310 guidelines and deemed to be impaired.
In accordance with the Interagency and GAAP guidance, the Bank maintains a general allowance for performing loans based upon a review of 10 different factors. The first factor utilized is actual historical loss experience by major loan category expressed as a percentage of performing loans. As the loss experience for a particular loan category increases or decreases, the level of reserves required for that particular loan category also increases or decreases. Because actual loss experience may not adequately predict the level of losses inherent in a portfolio, the Bank reviews nine qualitative factors (policy & procedures, economy, nature & volume, management, loan review, collateral value, concentrations and external forces) to determine if reserves should be increased based upon any of those factors.
All non-performing loans and certain delinquent loans, as identified through the ALLL review process, are evaluated individually for potential losses in accordance with Interagency and GAAP guidance and consistent with the Bank’s ALLL policy and methodology. The individuals evaluating the loans include the Chief Risk Officer, Chief Lending Officer, Credit Officer, Workout Officer, Loan Officers and consultants. The conclusions reached as a result of the evaluation process are submitted to management and Board of Directors committees for their review and approval. Management believes that this review provides a better assessment of the possible losses imbedded in this portion of the portfolio. The resulting reserves under this review still constitute a general allowance that has been allocated to the loans reviewed in this section and may be utilized in accordance with ASC Topic 450.
ASC Topic 310 is the primary basis for valuing the impairments of specific loans whose collectability has been called into question. The amount assigned to this aspect of the ALLL is the individually determined (i.e., loan by loan) portion. The standard requires the use of one of three approved methods to estimate the amount to be reserved for such credits. The three methods are as follows: i) the present value of expected future cash flows discounted at the loan’s effective interest rate, ii) the loan’s observable market price, or iii) the fair value of the collateral if the loan is collateral dependent.
For loans individually evaluated for impairment under ASC Topic 310, the institution may choose the appropriate measurement basis, except for an impaired collateral-dependent loan. This guidance requires impairment of a collateral dependent loan to be measured using the fair value of collateral method.
Criticized and Classified loans with at risk balances of $1,000,000 or more are identified and reviewed for individual evaluation for impairment in accordance with ASC Topic 310. If it is determined that it is probable the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement, the loan is impaired. If the loan is determined to be not impaired, it is then grouped with the other loans to be individually evaluated for potential losses. The impaired loans are then evaluated to determine the measure of impairment amount based on one of the three measurement methods noted above. If it is determined that there is an impairment amount, the Bank then determines whether the impairment amount is permanent (that is a confirmed loss), in which case the impairment is charged off, or if it is other than permanent, in which case the Bank establishes a specific valuation reserve that is included in the total ALLL. However, in accordance with GAAP guidance, if there is no impairment amount, no reserve is established for the loan.
The Company has historically been primarily a commercial real estate (“CRE”) and multi-family mortgage lender, with a significant portion of its loan portfolio secured by buildings in the New York City metropolitan area. Payments on multi-family and CRE loans generally depend on the income produced by the underlying properties which, in turn, depends on their successful operation and management. Accordingly, the ability of the Company’s borrowers to repay these loans may be impacted by adverse conditions in the local real estate market and the local economy. While the Company generally requires that such loans be qualified on the basis of the collateral property’s current cash flows, appraised value, and debt service coverage ratio, among other factors, there can be no assurance that the Bank’s underwriting policies will protect the Bank from credit-related losses or delinquencies.
The Company seeks to minimize the risks involved in commercial small business lending by underwriting such loans on the basis of the cash flows produced by the business; by requiring that such loans be collateralized by various business assets, including inventory, equipment, and accounts receivable, among others; and by requiring personal guarantees. However, the capacity of a borrower to repay a commercial small business loan is substantially dependent on the degree to which his or her business is successful. In addition, the collateral underlying such loans may depreciate over time, may not be conducive to appraisal, or may fluctuate in value, based upon the business’ results.
Although the New York City metropolitan area fared better in fiscal 2010 than many other parts of the country, the Bank’s marketplace was nonetheless impacted by the widespread economic decline. The ability of the Bank’s borrowers to repay their loans, and the value of the collateral securing such loans, could be adversely impacted by further significant changes in local economic conditions, such as a decline in real estate values or a rise in unemployment. This, in turn, could not only result in the Company experiencing an increase in charge-offs and/or non-performing assets, but could also necessitate an increase in the provision for loan losses. These events would have an adverse impact on the Company’s results of operations and capital, if they were they to occur.
Asset/Liability Management
The Company’s primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between the rates on interest-earning assets and interest-bearing liabilities, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and the credit quality of earning assets. Management’s asset/liability objectives are to maintain a strong, stable net interest margin, to utilize its capital effectively without taking undue risks, to maintain adequate liquidity and to manage its exposure to changes in interest rates.
The economic environment is uncertain regarding future interest rate trends. Management monitors the Company’s cumulative gap position, which is the difference between the sensitivity to rate changes on the Company’s interest-earning assets and interest-bearing liabilities. In addition, the Company uses various tools to monitor and manage interest rate risk, such as a model that projects net interest income based on increasing or decreasing interest rates.
Stock Repurchase Program
Refer to “ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.”
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 are short term in maturity. Since virtually all of the Company’s interest-bearing assets and liabilities are held by the Bank, most of the Company’s interest rate risk exposure is retained by the Bank. As a result, all significant interest rate risk management procedures are performed at the Bank. 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 interest rate risk 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 that 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 maturing or 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 -10.74% of total rate sensitive assets at March 31, 2010. As a result, Carver Federal’s net interest income may be negatively affected by rising interest rates and may be 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, 2010. 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 (dollars in thousands):
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, credit risk may increase as many borrowers may experience an inability to service their debt in the event of a rise in interest rate. 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 risks associated with changing interest rates, management also uses the NPV methodology. NPV is the present value of expected net cash flows from existing assets less the present value of expected cash flows from existing liabilities plus the present value of net expected cash inflows from existing financial derivatives and off-balance-sheet contracts.
Under this methodology, interest rate risk exposure is assessed by reviewing the estimated changes in NPV that would hypothetically occur if interest rates rapidly rise or fall along the yield curve. Projected values of 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, 2010, is an analysis of the Bank’s interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts of 50 basis points and 100 basis points plus or minus changes in market interest rates and a sustained parallel shift of plus 200 basis points and 300 basis points change 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 considers its level of interest rate risk for fiscal 2010, as measured by changes in NPV, to be “minimal”. The information set forth below relates solely to the Bank; however, because virtually all of the Company’s interest rate risk exposure lies at the Bank level, management believes the table below also similarly reflects an analysis of the Company’s interest rate risk (dollars in thousands):
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV require the making of certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV table presented assumes that the composition of 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 interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on Carver Federal’s net interest income and may 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 related yields for the years ended March 31, 2010, 2009, and 2008. The table also presents information for the fiscal 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 (dollars in thousands):
(1)
The average balance of loans includes nonaccrual loans, loans held for sale, and deferred fees and expenses.
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 fiscal years ended March 31, 2010, 2009, and 2008 (in thousands) For each category of interest-earning assets and interest-bearing liabilities, information is provided for changes attributable to: (1) changes in volume (changes in volume multiplied by prior rate); (2) changes in rate (change in rate multiplied by old volume). Changes in rate/volume variance are allocated proportionately between changes in rate and changes in volume.
Comparison of Financial Condition at March 31, 2010 and 2009
Assets
At March 31, 2010, total assets increased $14.0 million, or 1.8%, to $805.5 million compared to $791.4 million at March 31, 2009. Cash and cash equivalents increased $25.0 million, total loans receivable, net increased $3.0 million, other assets increased $4.6 million, and the deferred tax asset increased $4.1 million. These increases were partially offset by a decrease in investment securities of $19.4 million and a decrease in office properties and equipment of $3.2 million.
Cash and cash equivalents increased $25.0 million, or 187.4%, to $38.3 million at March 31, 2010, compared to $13.3 million at March 31, 2009. This increase was driven by a $29.3 million increase in cash and due from banks, partially offset by a $4.3 million decrease in money market investments. The Company took steps in the third and fourth quarters of fiscal 2010 to improve its liquidity position through its $14.1 million participation in the FDIC’s TLGP, a successful deposit campaign focused on increasing the Bank’s core deposit base and rightsizing the Company’s loan to deposit ratio, investing in shorter duration liquid investments and reducing the Bank’s outstanding borrowings from the Federal Home Loan Bank of New York. The Company expects to maintain excess liquidity until more unconstrained access to funding returns to the markets. By maintaining this extra liquidity on our balance sheet during the fourth quarter of fiscal 2010, the Company chose to forgo $0.1 million in potential revenue.
Total securities decreased $19.4 million, or 25.9%, to $55.4 million at March 31, 2010, compared to $74.8 million at March 31, 2009, reflecting a decrease of $16.9 million in available-for-sale securities and a $2.5 million decrease in held-to-maturity securities. Cash flows generated from the Bank’s securities portfolio were not immediately reinvested in the fourth quarter of fiscal 2010 in an effort to maintain flexibility as we waited for the higher than normal volatility in the securities markets to dissipate.
Total loans increased $7.8 million, or 1.2%, to $670.0 million at March 31, 2010, compared to $662.2 million at March 31, 2009. The increase was primarily the result of an increase in commercial business loans of $17 million, offset by a decrease in real estate mortgage loans (including loans held for sale) of $8 million (adjusted for a $7 million reclassification made between commercial business loans and commercial non-residential mortgage loans for regulatory reporting purposes). Construction loans decreased $33 million as we ceased originations of new construction loans given both the extended downturn in the local real estate markets and our efforts to reduce our risk in this market segment. One-to-four family residential mortgage loans decreased $16 million as loan pay downs exceeded new loan originations. These reductions were offset by growth in commercial non-residential mortgage loans which increased $14 million and multifamily mortgage loans which increased $10 million on net new originations.
Office properties and equipment decreased $3.1 million, or 20.7%, to $12.1 million at March 31, 2010, compared to $15.2 million at March 31, 2009, primarily due to the sale of a bank-owned building and the write-down of certain fixed assets as a result of the relocation and closure of two other branches. An integral part of this strategy was the opening of Carver’s two newest branches located at 1392 Fulton Street at Restoration Plaza and at 833 Flatbush Avenue in Brooklyn, NY. These branches are located in historically high growth neighborhoods in Brooklyn and represent a central “gateway” for the Caribbean community to the New York Region and beyond. These new branches represent a tremendous opportunity for Carver given the substantial presence of small businesses, non-profit institutions, and consumers, in a geography where Carver’s brand is well recognized.
The deferred tax asset increased $4.1 million, or 39.8%, to $14.3 million at March 31, 2010, compared to $10.2 million at March 31, 2009 primarily due to increased tax credits on NMTC investments. The Company expects to receive additional NMTC tax benefits of approximately $7.8 million through the period ending March 31, 2014. The Company’s ability to utilize the deferred tax asset generated by NMTC income tax benefits, as well as other deferred tax assets, depends on its ability to meet the NMTC compliance requirements and its ability to generate sufficient taxable income from operations or from potential tax strategies to generate taxable income in the future.
Other assets increased $4.6 million, or 92.7%, to $9.6 million at March 31, 2010, compared to $5.0 million at March 31, 2009, primarily due to an increase in prepaid expenses of $3.4 million related to the prepayment of FDIC charges.
Liabilities and Stockholders’ Equity
Liabilities
Total liabilities increased $16.7 million, or 2.3%, to $743.8 million at March 31, 2010, compared to $727.1 million at March 31, 2009. The increase in total liabilities was primarily due to a $14.1 million two-year term borrowing issued under the FDIC’s TLGP in the third quarter of fiscal 2010.
Deposits decreased $0.2 million, or 0.03%, to $603.2 million at March 31, 2010, compared to $603.4 million at March 31, 2009. Deposits were essentially flat year over year as we replaced $25 million of institutional deposits with increased core deposits, money market accounts, and customers’ operating accounts.
Advances from the FHLB-NY and other borrowed money increased $16.5 million, or 14.4%, to $131.6 million at March 31, 2010, compared to $115.0 million at March 31, 2009. The increase in advances and other borrowed money was primarily the result of issuing a $14.1 million two-year term borrowing under the FDIC’s TLGP via a private placement to take advantage of the low interest rate environment. The interest rate on the TLGP borrowing of 1.69% is substantially lower than the weighted average rate of 3.40% on the remainder of the Bank’s borrowings.
Stockholders’ Equity
Total stockholders’ equity decreased $2.7 million, or 4.1%, to $61.7 million at March 31, 2010, compared to $64.3 million at March 31, 2009. The decrease in total stockholders’ equity was primarily attributable to the net loss for the year ended March 31, 2010 totaling $1.0 million plus dividends paid of $1.9 million (common dividends of $1.0 million and U.S. Treasury Capital Purchase Program (CPP) dividends of $0.9 million). The Bank’s capital levels exceed all regulatory requirements of a well-capitalized financial institution.
Comparison of Operating Results for the Years Ended March 31, 2010 and 2009
Net Loss
Net loss for fiscal 2010, was $1.0 million compared to a net loss of $7.0 million for the prior year. The improvement for fiscal 2010 was the result of an increase in net interest income, an increase in non-interest income, and a decrease in non-interest expense primarily due to the non-cash goodwill impairment charge booked in fiscal 2009. These improvements were partially offset by an increase in provision for loan losses and a decrease in income tax benefit.
Net Interest Income
Interest income decreased $1.5 million, or 3.7%, to $40.5 million for fiscal 2010 compared to $42.0 million for the prior year. The decrease was primarily the result of a $1.9 million decrease in interest income on loans partially offset by an increase in interest income on securities. The decrease in interest income reflects a reduction in the yield on interest-earning assets of 46 basis points to 5.39% for fiscal 2010 compared to a yield of 5.85% for the prior year period. This decrease in yield on interest earning assets was primarily the result of a 47 basis point reduction in the yield on loans of which 19 basis points was due to a higher level of non-performing loans and the remainder primarily due to new loan originations coming on at lower interest rates due to lower market interest rates. The increase in interest income on mortgage-backed securities was primarily the result of an increase in the average balance of mortgage-backed securities from $50.0 million in the prior year period to $64.7 million in the current period.
Interest expense decreased $5.5 million, or 33.3%, to $11.0 million in fiscal 2010 compared to $16.5 million for the prior year. The decrease in interest expense resulted primarily from an 88 basis point decrease in the average cost of interest-bearing liabilities to 1.63% for fiscal 2010 compared to an average cost of 2.51% for the prior year as higher cost institutional deposits were replaced by lower cost core deposits and transactional accounts. This improvement was partially offset by growth in the average balance of interest-bearing liabilities of $17.5 million, or 2.7%, to $675.6 million at March 31, 2010, compared to $658.1 million for the prior year.
Provision for Loan Losses
The Bank recorded a $7.8 million provision for loan losses in fiscal 2010 compared to $2.7 million for the prior year. The increased provision is in response to the Company’s current levels of delinquencies and non-performing loans and the uncertainty caused by the uneven economic recovery in the real estate market and the New York City economy. At March 31, 2010, non-performing assets totaled $47.6 million, or 5.91% of total assets compared to $26.2 million or 3.31% of total assets at March 31, 2009. Total delinquencies declined year-over-year by 1.52% to $70.7 million or 8.8% of total assets. The allowance for loan losses was $12.0 million at March 31, 2010, which represents a ratio of the allowance for loan losses to non-performing loans of 31.18% compared to 27.40% at March 31, 2009. The ratio of the allowance for loan losses to total loans was 1.79% at March 31, 2010 up from 1.10% at March 31, 2009.
Non-interest Income
Non-interest income decreased $0.1 million to $5.1 million in fiscal 2010 compared to $5.2 million for the prior year period. The decrease is primarily due to the write down in the carrying value of loans previously held for sale of $2.1 million, mostly offset by $1.0 million of fees recognized during fiscal 2010 related to several NMTC transactions, a gain on the sale of securities of $0.4 million and a $1.2 million gain on the sale of a bank-owned building. The sale of this building was an essential part of the Bank’s strategy to optimize branch locations.
Non-interest Expense
Non-interest expense decreased $7.3 million, or 19.2%, to $30.6 million in fiscal 2010 compared to $37.8 million for the prior year. This improvement is primarily due to the $7.1 million non-cash goodwill impairment charge incurred in the prior year. Additionally, there were decreases of $0.9 million in employee compensation and benefits on lower staffing levels and discretionary compensation, $0.5 million in occupancy and equipment expense resulting from the branch optimization strategy, and $0.4 million in consulting fees. These decreases in expense were partially offset by increases of $1.1 million in FDIC insurance premiums and $0.9 million related to the write-down of an advance to a vendor (see paragraph below).
On February 8, 2010, the president of a money services firm which the Bank used to service its remote ATM locations was arrested on charges of defrauding another financial institution. The Bank has a claim pending for $850,000 for funds which we had advanced to the money services firm. The money service firm is now under the oversight of a bankruptcy trustee. Carver has fully reserved the $850,000 but we continue to pursue all avenues available to us for the return of our funds. There was no adverse impact on the operations of our remote ATMs as a result of this event.
Income Taxes
The Bank recorded a tax benefit of $2.9 million in fiscal 2010 compared to a tax benefit of $3.2 million for the prior year period. The lower tax benefit in fiscal 2010 is a result of the smaller loss generated versus the prior period. The total tax benefit for fiscal 2010 reflects tax credits of $2.3 million generated by our NMTC investment transactions versus tax credits on NMTC investment transactions of $2.0 million in fiscal 2009.
Comparison of Operating Results for the Years Ended March 31, 2009 and 2008
Net Income
The Company reported net loss of $7.0 million and a loss per share of $(2.87) for fiscal 2009 compared to net income of $4.0 million and diluted earnings per share of $1.55 for fiscal 2008. The net loss for fiscal 2009 was the result of an increase in non-interest expense of $8.0 million and provision for loan losses of $2.5 million, a decrease in non-interest income of $2.7 million, partially offset by an increase in income tax benefit of $2.3 million. The increase in non-interest expense is primarily the result of a non-cash goodwill impairment charge of $7.1 million.
Interest Income
Interest income decreased $6.1 million, or 12.7%, to $42.0 million in fiscal 2009 compared to $48.1 million for the prior year period. The decrease was primarily the result of decreases in interest income on loans of $5.3 million and interest income on investment securities of $1.2 million, partially offset by an increase in interest income on mortgage-backed securities of $0.4 million. The decrease in interest income reflects a reduction in the yield on interest-earning assets of 98 basis points to 5.85% compared to 6.83% for the prior year period. The decrease in yield on interest earning assets was primarily the result of a 100 basis points reduction in the yield on loans as LIBOR and prime rate based construction loans repriced at lower rates. The decrease in interest income on investment securities was primarily the result of a decline in the average balance of investment securities from $22.9 million in the prior year period to $5.7 million. The higher level of interest income on mortgage-backed securities was primarily the result of an increase in the average balance of mortgage backed securities from $39.1 million to $50.0 million.
Interest income on loans decreased by $5.3 million, or 11.9%, to $39.2 million for fiscal 2009 compared to $44.5 million for fiscal 2008. These results were primarily driven by a yield decrease of 100 basis points to 5.96% for fiscal 2009 compared to 6.96% for fiscal 2008.
Interest income on securities decreased by $0.8 million, or 22.9%, to $2.7 million for fiscal 2009 compared to $3.5 million for fiscal 2008. Interest income on mortgage-backed securities increased by $0.4 million, or 19.7%, to $2.5 million for fiscal 2009 compared to $2.1 million for fiscal 2008. The increase in interest income on mortgage-backed securities for fiscal 2009 was primarily the result of a $10.9 million, or 27.9%, higher average averages balances of mortgage-backed securities to $50.0 million, compared to $39.1 million for fiscal 2008. This was partially offset by a decrease in yield of mortgage-backed securities of 34 basis points to 4.96%, compared to 5.30% in fiscal 2008.
Additionally, the increase in interest income on mortgage-backed securities was partially offset by a decrease in investment securities interest of $1.2 million, or 83.3%, to $0.2 million for fiscal 2009 compared to $1.4 million for fiscal 2008. The decrease was primarily the result of a decrease in the yield on investment securities by 207 basis points to 4.19% compared to 6.26% in fiscal 2008. Also contributing to the decrease was the reduction of $17.2 million, or 75.1%, in the average balances of investment securities to $5.7 million compared to $22.9 million for fiscal 2008.
Interest Expense
Interest expense decreased by $6.2 million, or 27.1%, to $16.5 million for fiscal 2009 compared to $22.7 million for fiscal 2008. The decrease in interest expense reflects a 98 basis point decrease in the average cost of interest-bearing liabilities to 2.51% in fiscal 2009 compared to 3.49% in fiscal 2008 partially offset by an increase in the average balance of interest-bearing liabilities of $9.6 million, or 1.5%, to $658.1 million for fiscal 2009 compared to $648.5 million for fiscal 2008.
Interest expense on deposits decreased $6.0 million, or 31.6%, to $12.9 million for fiscal 2009 compared to $18.9 million for fiscal 2008. This decrease was primarily the result of interest paid on certificates of deposit decreasing $5.1 million, or 30.9%, to $11.4 million for fiscal 2009 compared to $16.5 million for fiscal 2008. Additionally, a 101 basis point decrease in the rate paid on deposits to 2.27% in fiscal 2009 compared to 3.28% in fiscal 2008 contributed to the decrease. Historically, the Bank’s customer deposits have provided a relatively low cost funding source from which its net interest income and net interest margin have benefited. In addition, the Bank’s relationship with various government entities has been a source of relatively stable and low cost funding.
Interest expense on advances and other borrowed money decreased $0.2 million, or 5.3%, to $3.6 million for fiscal 2009 compared to $3.8 million for fiscal 2008. This was primarily the result of a 115 basis point decrease in the cost of borrowed money to 3.98% in fiscal 2009 compared to 5.13% in fiscal 2008 partially offset by a $16.5 million decrease in the average balance of outstanding borrowings to $90.4 million for fiscal 2009 compared to $73.9 million in fiscal 2008.
Net Interest Income Before Provision for Loan Losses
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. The Company’s 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 the results of operations.
Net interest income before the provision for loan losses remained flat at $25.5 million for fiscal 2009 and 2008.
Provision for Loan Losses and Asset Quality
The Bank provided $2.7 million in provision for loan losses for fiscal 2009 compared to $0.2 million for fiscal 2008, an increase of $2.5 million. 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, trends in the local and national economy and trends in the real estate market.
The Bank had net charge-offs of $0.5 million for fiscal 2009 compared to $0.8 million for fiscal 2008. At March 31, 2009 and 2008, the Bank’s allowance for loan losses was $7.0 million and $4.9 million, respectively. The ratio of the allowance for loan losses to non-performing loans was 28.17% at March 31, 2009 compared to 170.89% at March 31, 2008. The ratio of the allowance for loan losses to total loans was 1.06% at March 31, 2009 compared to 0.74% at March 31, 2008. Additionally, the level of non-performing loans to total loans receivable is 3.89%. The Bank’s future levels of non-performing loans will be influenced by economic conditions, including the impact of those conditions on the Bank’s customers, interest rates and other internal and external factors existing at the time. The Bank believes its reported allowance for loan losses at March 31, 2009 is 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 depository fees and charges, loan fees and service charges, fee income from banking services and charges, gains or losses from the sale of securities, loans and other assets and other non-interest income. Non-interest income decrease by $2.7 million, or 34.2%, to $5.2 million for fiscal 2009 compared to $7.9 for fiscal 2008. The decrease was primarily due to the loss of several one-time gains in the prior year primarily related to sale of securities and NMTC fees as well as lower loan fee income.
Non-Interest Expense
Non-interest expense increased by $7.9 million, or 26.5%, to $37.8 million for fiscal 2009 compared to $29.9 million for fiscal 2008. The increase was primarily due a $7.1 million non-cash goodwill impairment charge as well as increases of $1.2 million in occupancy and equipment expense, $0.4 million in FDIC insurance and $0.6 million in professional fees, partially offset by decreases of $1.6 million in consulting fees and $0.2 million in employee compensation and benefits.
Income Tax Expense
Income tax benefit was $3.2 million for fiscal 2009 compared to $0.9 million for fiscal 2008. The increase in tax benefit in fiscal 2009 is reflective of the net loss in fiscal 2009 as well recognition of $2.0 million of NMTC.
Liquidity and Capital Resources
Liquidity is a measure of the Bank’s ability to generate adequate cash to meet its 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 ongoing operating expenses. The Bank’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. Carver Federal monitors its liquidity utilizing guidelines that are contained in a policy developed by its management and approved by its Board of Directors. Carver Federal’s several liquidity measurements are evaluated on a frequent basis. The Bank was in compliance with this policy as of March 31, 2010.
Management believes Carver Federal’s short-term assets have sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash requirements. Additionally, Carver Federal has other sources of liquidity including the ability to borrow from the FHLB-NY utilizing unpledged mortgage-backed securities and certain mortgage loans, the sale of available-for-sale securities and the sale of certain mortgage loans. Net borrowings increased $16.5 million during fiscal 2010 primarily as a result of the bank allowing higher cost certificates of deposit to runoff and replaced them with lower cost borrowings. At March 31, 2010, the Bank had $78.2 million in borrowings with a weighted average rate of 3.06% maturing over the next three years. The continued disruption in the credit markets has not materially impacted the Company’s ability to access borrowings. At March 31, 2010, based on available collateral held at the FHLB-NY, Carver Federal had the ability to borrow from the FHLB-NY an additional $51.2 million on a secured basis, utilizing mortgage-related loans and securities as collateral.
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, 2010 and 2009, assets qualifying for short-term liquidity, including cash and short-term investments, totaled $38.3 million and $13.3 million, respectively.
The most significant liquidity challenge the Bank faces is variability in its cash flows as a result of mortgage refinance activity. When 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 contrast, when mortgage interest rates increase, refinance activities tend to slow, causing a reduction of liquidity. However, in a rising rate environment, customers generally tend to prefer fixed rate mortgage loan products over variable rate products. Because Carver Federal generally sells its one-to-four family 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 Carver Federal’s liquidity.
The OTS requires that the Bank meet minimum capital requirements. Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. At March 31, 2010, the Bank exceeded all regulatory minimum capital requirements and qualified, under OTS regulations, as a well-capitalized institution. See “-Regulatory Capital Position” below for certain information relating to the Bank’s regulatory capital compliance at March 31, 2010.
The Consolidated Statements of Cash Flows present the change in cash from operating, investing and financing activities. During fiscal 2010, total cash and cash equivalents increased by $25.0 million reflecting cash provided by financing activities of $14.4 million, and cash provided by operating activities of $1.5 million, and cash provided by investing activities of $9.2 million.
Net cash provided by financing activities was $14.4 million, primarily resulting from increased borrowings of $16.5 million, offset partially by reductions in deposits of $0.2 million and the payment of common dividends of $1.9 million. Net cash provided by operating activities during this period was $1.5 million and was primarily the result of an increase in provision for loan losses of $7.8 million, a write-down of loans held for sale of $2.1 million, a decrease in cash flow from other assets of $9.1 million and changes in other non-cash charges. Net cash provided by investing activities was $9.2 million, primarily the result of principal paydowns, maturities, and calls on securities of $19.4 million and disposals of premises and equipment of $3.1 million, partially offset by a net outflow of funds caused by loan activity of $12.0 million.
Off-Balance Sheet Arrangements and Contractual Obligations
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), these instruments are not recorded in the consolidated financial statements. Such instruments primarily include lending commitments.
Lending commitments include commitments to originate mortgage and consumer loans and commitments to fund unused lines of credit. The Bank also has contractual obligations related to operating leases. Additionally, the Bank has a contingent liability related to a standby letter of credit. See Note 14 of Notes to Consolidated Financial Statements for the Bank’s outstanding lending commitments and contractual obligations at March 31, 2010.
The Bank has contractual obligations at March 31, 2010 as follows (in thousands):
Variable Interest Entities
The Holding Company’s subsidiary, Carver Statutory Trust I, is not consolidated with Carver Bancorp Inc. for financial reporting purposes in accordance with the FASB’s ASC Topic 810 regarding the consolidation of variable interest entities (formerly FIN 46(R)). Carver Statutory Trust I was formed in 2003 for the purpose of issuing $13.0 million aggregate liquidation amount of floating rate Capital Securities due September 17, 2033 (“Capital Securities”) and $0.4 million of common securities (which are the only voting securities of Carver Statutory Trust I), which are 100% owned by Carver Bancorp Inc., and using the proceeds to acquire Junior Subordinated Debentures issued by Carver Bancorp Inc. Carver Bancorp Inc. has fully and unconditionally guaranteed the Capital Securities along with all obligations of Carver Statutory Trust I under the trust agreement relating to the Capital Securities.
The Bank’s subsidiary, Carver Community Development Corporation (“CCDC”), was formed to facilitate its participation in local economic development and other community-based activities. Per the NMTC Award’s Allocation Agreement between the CDFI Fund and CCDC, CCDC is permitted to form and sub-allocate credits to subsidiary Community Development Entities (“CDEs”) to facilitate investments in separate development projects. The Bank was originally awarded $59 million of NMTC and received a second award in May 2009 of $65 million of NMTC.
With respect to $40 million of the original award of NMTC awards, the Bank has established various special purpose entities through which its investments in NMTC eligible activities are conducted. As the Bank is exposed to all of the expected losses and residual returns from these investments the Bank is deemed the primary beneficiary. Accordingly, all of these special purpose entities are consolidated in the Bank’s Statement of Financial Condition as of March 31, 2010 and 2009 resulting in the consolidation of assets of approximately $40.0 million and $36.9 million, respectively.
In fiscal 2009, the Bank transferred rights to an investor in a NMTC project totaling $19.2 million and recognized a gain on the transfer of rights of $1.7 million. The Bank was required to maintain a 0.01% interest in the entity with the investor owning the remaining 99.99%. The entity was called CDE-10. For financial reporting purposes, the $19.2 million transfer of rights to an investor in a NMTC project was reflected in the other assets and the minority interest sections of the balance sheet as the entity to which the rights were transferred was required to be consolidated based on an evaluation of certain contractual arrangements between the Bank and the investor. In fiscal 2009, following certain amendments to the agreement between CCDC and the investor that resulted in a reconsideration event under the accounting guidance, the Bank deconsolidated the entity for financial statement reporting purposes. However, under the current arrangement, the Bank has a contingent obligation to reimburse the investor for any loss or shortfall incurred as a result of the NMTC project not being in compliance with certain regulations that would void the investor’s ability to otherwise utilize tax credits stemming from the award. The maximum possible loss to Carver from such an arrangement is approximately $7.4 million. At March 31, 2010, Carver has not recorded any liability with respect to this obligation in accordance with the FASB’s ASC Topic 450 regarding Accounting for Contingencies.
In December 2009, the Bank transferred rights to an investor in a NMTC project totaling $10.5 million and recognized a gain on the transfer of rights of $0.5 million. The Bank was required to maintain a 0.01% interest in the entity with the investor owning the remaining 99.99%. The entity was called CDE-13. This entity has been reviewed for possible consolidation under the accounting guidance related to variable interest entities and based on an evaluation of the design of the entity and its exposure to risks and rewards from its variable interests in the entity, the Bank is not required to consolidate the entity.
In March 2010, the Bank transferred rights to investors in a NMTC projects totaling $20.5 million and recognized a gain on the transfer of rights of $0.5 million and expects to receive additional income of $0.5 million in the future contingent upon certain events occurring. The Bank was required to maintain a 0.01% interest in each of the newly created entities with the investor owning the remaining 99.99%. The entities were called CDE-15, CDE-16 and CDE-17. These entities have been reviewed for possible consolidation under the accounting guidance related to variable interest entities and based on an evaluation of the design of the entity and its exposure to risks and rewards from its variable interests in the entity, the Bank is not required to consolidate the entity.
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, 2010, the Bank had tangible equity ratio, core capital ratio, and total risk-based capital ratio of 7.86%, 7.88% and 11.71%, respectively, and was considered well capitalized. For additional information regarding Carver Federal’s Regulatory Capital and Ratios, refer to Note 12 of Notes to Consolidated Financial Statements, “Stockholders’ Equity.”
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. The Company believes that there has been no material change in the Company’s market risk at March 31, 2010 as compared to March 31, 2009.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
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 as of March 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended March 31, 2010. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 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 Carver Bancorp, Inc. and subsidiaries as of March 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2010, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
July 15, 2010
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except per share data)
See accompanying notes to consolidated financial statements
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
See accompanying notes to consolidated financial statements
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(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. ORGANIZATION
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 subsidiaries are Carver Federal Savings Bank (the “Bank” or “Carver Federal”), Alhambra Holding Corp., an inactive Delaware corporation, and Carver Federal’s wholly-owned subsidiaries, CFSB Realty Corp., Carver Community Development Corp. (“CCDC”) and CFSB Credit Corp., which is currently inactive. The Bank has a majority owned interest in Carver Asset Corporation, a real estate investment trust formed in February 2004.
“Carver,” the “Company,” “we,” “us” or “our” refers to the Holding Company along with its consolidated subsidiaries. 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. On October 24, 1994, the Bank converted from a mutual holding company 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. 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.”
In September 2003, the Holding Company formed Carver Statutory Trust I (the “Trust”) for the sole purpose of issuing trust preferred securities and investing the proceeds in an equivalent amount of floating rate junior subordinated debentures of the Holding Company. In accordance with Accounting Standards Codification (“ASC”) 810, “Consolidations”, Carver Statutory Trust I is not consolidated for financial reporting purposes.
Carver Federal’s principal business consists of attracting deposit accounts through its branches and investing those funds in mortgage loans and other investments permitted by federal savings banks. The Bank has nine branches located throughout the City of New York that primarily serve the communities in which they operate.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidated financial statement presentation
The consolidated financial statements include the accounts of the Holding Company, the Bank and the Bank’s wholly-owned or majority owned subsidiaries, Carver Asset Corporation, CFSB Realty Corp., Carver Community Development Corporation, and CFSB Credit Corp. All significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the period then ended. Amounts subject to significant estimates and assumptions are items such as the allowance for loan losses, realization of deferred tax assets, intangibles, pensions and the fair value of financial instruments. Management believes that prepayment assumptions on mortgage-backed securities and mortgage loans are appropriate and the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, 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 has extended mortgages and other credit instruments. Actual results could differ significantly from those assumptions. Current market conditions increase the risk and complexity of the judgments in these estimates.
In June 2009, the FASB released the Codification as the single source of authoritative non-governmental GAAP. The Codification is effective for interim and annual periods ended after September 15, 2009. All previously existing non-SEC accounting standards documents are superseded. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) are also sources of authoritative GAAP for SEC registrants. The Company’s policies were not affected by the conversion to ASC. However, references to specific accounting guidance in the Company’s financial statements have been changed to the appropriate section of the ASC.
In addition, the Office of Thrift Supervision (“OTS”), Carver Federal’s regulator, as an integral part of its examination process, periodically reviews Carver Federal’s allowance for loan losses and, if applicable, real estate owned valuations. The OTS 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
For the purpose of reporting cash flows, cash and cash equivalents include cash, amounts due from depository institutions, federal funds sold and other short-term instruments with original maturities of three months or less. Federal funds sold are generally sold for one-day periods. The amounts due from depository institutions include a non-interest bearing account held at the Federal Reserve Bank (“FRB”) where any additional cash reserve required on demand deposits would be maintained. Currently, this reserve requirement is zero since the Bank’s vault cash satisfies cash reserve requirements for deposits.
Investment Securities
When purchased, investment securities are designated as either investment securities held-to-maturity or investment securities available-for-sale. Securities are classified as held-to-maturity and carried at amortized cost only if the Bank has a positive intent and ability to hold such securities to maturity. 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.
If not classified as held-to-maturity, securities are classified as available-for-sale demonstrating management’s ability to sell in response to actual or anticipated changes in interest rates and resulting prepayment risk or any other factors. Available-for-sale securities are reported at fair value. Estimated fair values of securities are based on either published or security dealers’ market value if available. If quoted or dealer prices are not available, fair value is estimated using quoted or dealer prices for similar securities.
The Company conducts periodic reviews to identify and evaluate each investment that has an unrealized holding loss. Unrealized holding gains or losses for securities available-for-sale are excluded from earnings and reported net of deferred income taxes in accumulated other comprehensive income (loss), a component of Stockholders’ Equity. Any other-than-temporary impairment is recognized in earnings when there are non-credit losses on a debt security which management does not intend to sell, and for which it is more-likely-than-not that the entity will not be required to sell the security prior to the recovery of the non-credit impairment. In those situations, the portion of the total impairment that is attributable to the credit loss would be recognized in earnings, and the remaining difference between the debt security’s amortized cost basis and its fair value would be included in other comprehensive income. Prior to April 1, 2009 the guidance did not require a separate determination of the credit-related and non credit-related components of unrealized gains and losses. During fiscal 2010 no impairment charge was recorded. During fiscal 2009, the Company recognized $52 thousand in other than temporary impairment on a security. No impairment charge was recorded for fiscal 2008. Gains or losses on sales of securities of all classifications are recognized based on the specific identification method.
Loans Held-for-Sale
Loans held-for-sale are carried at the lower of cost or market value as determined on an aggregate loan basis. Premiums paid and discounts obtained on such loans held-for-sale are deferred as an adjustment to the carrying value of the loans until the loans are sold.
Loans Receivable
Loans receivable are carried at unpaid principal balances plus unamortized premiums, purchase accounting mark-to-market adjustments, certain deferred direct loan origination costs and deferred loan origination fees and discounts, less the allowance for loan losses.
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, adjusted for prepayments when applicable, using methodologies which approximate the interest method.
Loans are 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 not probable. 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 collectability is reasonably assured.
The Company defines an impaired loan as a loan for which it is probable, based on current information, that the lender will not collect all amounts due under the contractual terms of the loan agreement. Collateral dependent impaired loans are assessed individually to determine if the loan’s current estimated fair value of the property that collateralizes the impaired loan, if any, is less than the recorded investment in the loan. Cash flow dependent loans are assessed individually to determine if the present value of the expected future cash flows is less than the recorded investment in the loan. Smaller balance homogeneous loans are evaluated for impairment collectively unless they are modified in a trouble debt restructure. Such loans include one-to four family residential mortgage loans and consumer loans.
Allowance for Loan and Lease Losses
The adequacy of the “Bank’s ALLL is determined, in accordance with the Interagency Policy Statement on the Allowance for Loan and Lease Losses (the “Interagency Policy Statement”) released by the Office of Thrift Supervision on December 13, 2006 and in accordance with ASC Topic 450 and ASC Topic 310. The ALLL reflects management’s evaluation of the loans presenting identified loss potential, as well as the risk inherent in various components of the portfolio.
Compliance with the Interagency Policy Statement includes management’s review of the Bank’s loan portfolio, including the identification and review of individual problem situations that may affect a borrower’s ability to repay. In addition, management reviews the overall portfolio quality through an analysis of delinquency and non-performing loan data, estimates of the value of underlying collateral, current charge-offs and other factors that may affect the portfolio, including a review of regulatory examinations, an assessment of current and expected economic conditions and changes in the size and composition of the loan portfolio are all taken into consideration.
Carver maintains a general reserve allowance in accordance with ASC Topic 450 that is comprised of two principal components: (1) a general reserve allowance for performing loans and (2) an allocation of a general reserve allowance for certain Criticized and Classified loans. Carver believes that the loan review of Criticized and Classified loans provides a more accurate general reserve provision.
Carver also maintains a specific reserve allowance for Criticized and Classified loans that are reviewed for impairment in accordance with ASC topic 310 guidelines and deemed to be impaired.
In accordance with the Interagency and GAAP guidance, Carver maintains a general allowance for performing loans based upon a review of 10 different factors. The first factor utilized is actual historical loss experience by major loan category expressed as a percentage of performing loans. As the loss experience for a particular loan category increases or decreases, the level of reserves required for that particular loan category also increases or decreases. Because actual loss experience may not adequately predict the level of losses imbedded in a portfolio, the Bank reviews nine qualitative factors to determine if reserves should be increased based upon any of those factors.
All non-performing loans and certain delinquent loans, as identified through the ALLL review process, are evaluated individually for potential losses in accordance with Interagency and GAAP guidance and consistent with Carver’s ALLL policy and methodology. The individuals evaluating the loans include the Chief Risk Officer, Chief Lending Officer, Credit Officer, Workout Officer, Loan Officers and consultants. The conclusions reached as a result of the evaluation process are submitted to management and Board of Directors committees for their review and approval. The loans are reviewed in accordance with ASC Topic 450. Management believes that this review provides a better assessment of the possible losses imbedded in this portion of the portfolio. The resulting reserves under this review still constitute a general allowance that has been allocated to the loans reviewed in this section and may be utilized in accordance with ASC Topic 450.
ASC Topic 310 is the primary basis for valuing the impairments of specific loans whose collectability has been called into question. The amount assigned to this aspect of the ALLL is the individually-determined (i.e., loan-by-loan) portion thereof. The standard requires the use of one of three approved methods to estimate the amount to be reserved for such credits. The three methods are as follows: i) the present value of expected future cash flows discounted at the loan’s effective interest rate, ii) the loan’s observable market price, or iii) the fair value of the collateral if the loan is collateral dependent.
For loans individually evaluated for impairment under ASC Topic 310, the institution may choose the appropriate measurement basis, except for an impaired collateral-dependent loan. This guidance requires impairment of a collateral dependent loan to be measured using the fair value of collateral method.
Criticized and Classified loans with at risk balances of $1,000,000 or more are identified and reviewed for individual evaluation for impairment in accordance with ASC Topic 310. If it is determined that it is probable the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement, the loan is impaired. 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, are excluded from the scope of ASC subtopic 310-10-35. If the loan is determined to be not impaired, it is then grouped with the other loans to be individually evaluated for potential losses. The impaired loans are then evaluated to determine the measure of impairment amount based on one of the three measurement methods noted above. If it is determined that there is an impairment amount, the Bank then determines whether the impairment amount is permanent (that is a confirmed loss), in which case the impairment is charged off, or if it is other than permanent, in which case the Bank establishes a specific valuation reserve that is included in the total ALLL. However, in accordance with GAAP guidance, if there is no impairment amount, no reserve is established for the loan.
All new loan originations are assigned a credit risk grade which commences with loan officers and underwriters grading the quality of their loans one to five under a nine-category risk classification scale, the first five categories of which represent performing loans. As part of the approval process, the Credit Officer is responsible for reviewing and approving the assigned credit risk grade at the time of credit approval. All loans are subject to continuous review and monitoring for changes in their credit grading. Loans with credit risk grading that falls into criticized or classified categories (credit grading six through nine) are further evaluated and reserved amounts are established for each loan based on each loan’s potential for loss and includes consideration of the sufficiency of collateral. Any adverse trend in real estate markets could seriously affect underlying real estate collateral values available to protect against loss.
Trouble Debt Restructured Loans
Troubled debt restructured loans are those loans whose terms have been modified because of deterioration in the financial condition of the borrower. Modifications could include extension of the terms of the loan, reduced interest rates, and forgiveness of accrued interest and/or principal. Once an obligation has been restructured because of such credit problems, it continues to be considered restructured until paid in full or, if the obligation yields a market rate (a rate equal to or greater than the rate the Company was willing to accept at the time of the restructuring for a new loan with comparable risk), until the year subsequent to the year in which the restructuring takes place, provided the borrower has performed under the modified terms for at least a six-month period. For a cash flow dependent loans the Company records an impairment charge equal to the difference between the present value of estimated future cash flows under the restructured terms discounted at the original loans effective interest rate, and the original loans carrying value. For a collateral dependent loan, the Company records an impairment when the current estimated fair value of the property that collateralizes the impaired loan, if any, is less than the recorded investment in the loan.
Segment Reporting
The Company has determined that all of its activities constitute one reportable operating segment.
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 New York City. Accordingly, the ultimate collectability of a substantial portion of the Company’s loan portfolio is susceptible to changes in New York’s real estate market conditions.
Office Properties and Equipment
Office properties 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:
Maintenance, repairs and minor improvements are charged to non-interest expense in the period incurred.
Federal Home Loan Bank Stock
The Federal Home Loan Bank of New York (“FHLB-NY”) has assigned to the Bank a mandated membership stock purchase, based on the Bank’s asset size. In addition, for all borrowing activity, the Bank is required to purchase shares of FHLB-NY non-marketable capital stock at par. Such shares are redeemed by FHLB-NY at par with reductions in the Bank’s borrowing levels. On a quarterly basis, these shares are evaluated for other-than-temporary impairment. We do not consider these shares to be other-than-temporarily impaired at March 31, 2010. The Bank carries this investment at historical cost.
Bank Owned Life Insurance
Bank Owned Life Insurance (“BOLI”) is carried at its cash surrender value on the balance sheet and is classified as a non-interest-earning asset. Death benefits proceeds received in excess of the policy’s cash surrender value are recognized in income. Returns on the BOLI assets are added to the carrying value and included as non-interest income in the consolidated statement of income. Any receipt of benefit proceeds is recorded as a reduction to the carrying value of the BOLI asset. At March 31, 2010, Carver held no policy loans against its BOLI cash surrender values or restrictions on the use of the proceeds.
Mortgage Servicing Rights
All separately recognized servicing assets and servicing liabilities are measured at fair value.
Real Estate Owned
Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at the lower of loan carrying amount or the fair value at the date of acquisition 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.
Identifiable Intangible Assets
Goodwill and intangible assets with indefinite useful lives are no longer amortized, rather they are assessed, at least annually, for impairment (See note 3).
Identifiable intangible assets relate primarily to core deposit premiums, resulting from the valuation of core deposit intangibles acquired in the purchase of branches of other financial institutions. These identifiable intangible assets are amortized using the straight-line method over a period of 5 years but not exceeding the estimated average remaining life of the existing customer deposits acquired. Amortization periods for intangible assets are monitored to determine if events and circumstances require such periods to be reduced.
Income Taxes
The Company records income taxes in accordance with ASC 740 “Income Taxes,” as amended, using the asset and liability method. Income tax expense (benefit) consists of income taxes currently payable/(receivable) and deferred income taxes. 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. Where applicable, deferred tax assets are reduced by a valuation allowance for any portion determined not likely to be realized. This valuation allowance would subsequently be adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant.
Earnings (Loss) per Common Share
Basic earnings (loss) per share (“EPS”) is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per common share includes any additional common shares as if all potentially dilutive common shares were issued (for instance, stock options with an exercise price that is less than the average market price of the common shares for the periods stated). For the purpose of these calculations, unreleased Employee Stock Ownership Program (“ESOP”) shares are not considered to be outstanding. For the year ended March 31, 2009 the Bank sustained net losses, therefore, the effects of stock options were not considered in computing fully diluted earnings per common share as they would be anti-dilutive.
Preferred and Common Dividends
On January 20, 2009, the Company issued 18,980 shares of fixed rate cumulative perpetual preferred stock with a liquidation preference of $1 thousand per share, to the U.S. Department of Treasury. These preferred shares pay dividends at a rate of five percent per annum. Carver accrues the obligation for the preferred dividends as earned over the period the senior preferred shares are outstanding.
Cash dividends to common stockholders are payable and accrued when declared by Carver’s Board of Directors.
Treasury Stock
Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity.
Pension Plans
The Company’s pension obligations, and the related costs, are calculated using actuarial concepts, within the framework of the FASB guidance. The measurement of such obligations and expenses requires that certain assumptions be made regarding several factors, most notably including the discount rate and the expected return on plan assets. The Company evaluates these critical assumptions on an annual basis. Other factors considered by the Company include retirement patterns, mortality, turnover, and the rate of compensation increase.
Actuarial gain and losses, prior services cost or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in “accumulated other comprehensive income or loss”, net of taxes effects, until they are amortized as a component of net of periodic benefit cost. In addition, the measurement date (i.e., the date at which plan assets and the benefit obligation are measured for financial reporting purposes) is required to be the company’s fiscal year end.
NMTC fee income
The fee income the Company receives related to the transfers of its New Market Tax Credits varies with each transaction but all are similar in nature. There are two basic types of fees associated with these transactions. The first is a “sub-allocation fee” which is paid to CCDC when the tax credits are allocated to a subsidiary entity at the time a qualified equity investment is made. This fee is recognized by the Company at the time of allocation. The second type of fee is paid to cover the administrative and servicing costs associated with CCDC’s compliance with NMTC reporting requirements. This fee is recognized as the services are rendered.
Reclassifications
Certain amounts in the consolidated financial statements presented for prior years have been reclassified to conform to the current year presentation.
Restatement to correct error in operating results previously reported for the second quarter of fiscal 2010
The Company has restated its previously reported operating results for the second fiscal quarter ended September 30, 2009 to adjust the estimated fair value of certain residential mortgage loans that were classified as Held for Sale and reported at the lower of cost or fair value as of September 30, 2009. The loans were transferred from Held for Sale to Held for Investment, effective October 1, 2009. This restatement of second fiscal quarter results is reflected in the operating results reported for the full year ended March 31, 2010. Refer to Note 18. Quarterly Financial Data (Unaudited) for further information.
Impact of Recent Accounting Standards and Interpretations
In June 2009, the FASB issued guidance on Variable Interest Entities ((ASC Subtopic 860-10) (formerly SFAS No. 167), which amended the previous guidance applicable to variable interest entities and changed how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. ASC Subtopic 860-10 requires reporting entities to evaluate former qualifying special purpose entities for consolidation, changes the approach to determining a variable interest entity’s (“VIE”) primary beneficiary, increases the frequency of required assessments to determine whether a company is the primary beneficiary of a VIE, clarifies the characteristics that identify a VIE, and requires additional annual and interim disclosures. This standard is effective for fiscal years beginning after November 15, 2009. The Company adopted this guidance on April 1, 2010 and there was no material impact on the Company’s financial condition, results of operations or financial statement disclosures.
In June 2009, the FASB issued a revision to earlier guidance on Transfers of Financial Assets (ASC Subtopic 860-10) (formerly SFAS No. 166), which eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets and includes additional disclosures requiring more information about transfers of financial assets in which entities have continuing exposure to the risks related to the transferred financial assets. This guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period and for interim and annual reporting periods thereafter. Earlier application was prohibited. The Company will adopt this guidance for transfers of financial assets on April 1, 2010 and does not anticipate it to have a material effect on its consolidated financial statements.
In May 2009, the FASB issued guidance related to Subsequent Events (ASC Subtopic 855-10) (formerly SFAS No. 165) which established general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued. Specifically, this standard sets forth the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. Carver has evaluated subsequent events for potential recognition and/or disclosure through the date the consolidated financial statements included in this Annual Report on Form 10-K were issued.
In April 2009, the FASB issued guidance on Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (ASC Subtopic 820-10) (formerly FASB Staff Position FAS 157-4) which provides guidelines for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. It also includes guidance on identifying circumstances that indicate that a transaction is not orderly. This guidance reaffirms the need to use judgment to ascertain if an active market has become inactive and in determining fair values when markets have become inactive. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction, not a forced liquidation or distressed sale, between market participants at the measurement date under current market conditions. Under this guidance, if the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, transactions or quoted prices may not be determinative of fair value. Further analysis is required and significant adjustments to the transactions or quoted prices may be necessary. The Company considered this guidance in estimating the fair value of assets and liabilities at March 31, 2010. The adoption of this guidance on April 1, 2009 did not have material impact on the Company’s consolidated financial statements for the fiscal year ended March 31, 2010.
In April 2009, guidance was issued on Interim Disclosures about Fair Value of Financial Instruments (ASC Subtopic 825-10) (formerly FSP FAS 107-1 and APB 28-1) related to fair value disclosures for any financial instruments that are not currently reflected on a company’s balance sheet at fair value. Prior to issuing this FSP, fair values for such assets and liabilities were disclosed only once a year. The guidance now requires quarterly disclosures that provide qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. The disclosure requirements were effective for interim reporting periods ending after June 15, 2009.
In April 2009, the FASB issued guidance on Recognition and Presentation of Other-Than-Temporary Impairments (“OTTI”) (ASC Subtopic 320-10) (formerly FSP FAS 115-2 and FAS 124-2) which relate to other-than-temporary impairment, are intended to bring greater consistency to the timing of impairment recognition, and to provide greater clarity to investors about the credit and non-credit components of impaired debt securities that are not expected to be sold. The measure of impairment in comprehensive income remains fair value. The guidance also requires increased and more timely disclosure regarding expected cash flows, credit losses, and the aging of securities with unrealized losses. A cumulative effect adjustment is required to be recorded at the ASC’s adoption date with respect to certain previously recognized other-than-temporary impairment losses. This guidance is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance on April 1, 2009 did not have a material impact on the Company’s consolidated financial statements.
In December 2008, the FASB issued guidance on Employers’ Disclosures about Postretirement Benefit Plan Assets (ASC Subtopic 715-20) (formerly FSA FAS 132(R)-1), which provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The ASC clarifies that the objectives of the disclosures about postretirement benefit plan assets are to provide users of financial statements with an understanding of: (1) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (2) the major categories of plan assets; (3) the inputs and valuation techniques used to measure the fair value of plan assets; (4) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (5) significant concentrations of risk within plan assets. In addition, the ASC expands the disclosures related to these overall objectives. These new disclosure requirements under ASC 715 became effective for the Company’s financial statement for the year ended March 31, 2010 and are reported in Note 13 to Carver’s consolidated financial statements.
In June 2008, the FASB issued guidance on Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (ASC 260) (formerly FSP EITF 03-6-1), which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing EPS. The guidance concluded that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of EPS pursuant to the two-class method. The Company’s restricted stock awards are considered participating securities. This guidance is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented was adjusted retrospectively to conform to these provisions. Early application was not permitted. Adoption of this guidance did not have a material impact on the Company’s computation of EPS.
In December 2007, the FASB issued guidance regarding Non-controlling Interests in Consolidated Financial Statements (ASC Subtopic 810-10) (formerly SFAS No. 160), which established accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Among other things, this guidance clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. This statement was effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 and applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements which are to be applied retrospectively for all periods presented. The adoption of this statement did not have a material impact on the Company’s financial condition or results of operations.
NOTE 3. IMPAIRMENT AND GOODWILL
The company reported Goodwill from its acquisition of Community Capital Bank in 2006 in the amount of $7.1 million. In accordance with FASB guidance goodwill and intangible assets with indefinite useful lives are no longer amortized, rather they are assessed, at least annually, for impairment. The Company conducted an interim goodwill impairment analysis during the second quarter of fiscal year 2009, based on indications that the fair value of the Company’s reporting unit may have declined below its carrying value as a result of factors previously defined such as the further decline in the Company’s market capitalization relative to the book value of shareholders’ equity and the adverse market conditions impacting the financial services sector generally. This analysis was completed during the third quarter ended December 31, 2008. A valuation specialist was engaged to assist management in its fair value assessment of goodwill and the Company determined that goodwill was impaired and recorded an impairment charge of $7.1 million in fiscal 2009 reducing the carrying value of the goodwill to zero as of March 31, 2009.
NOTE 4. SECURITIES
The following is a summary of securities at March 31, 2010 (in thousands):
The following is a summary of securities at March 31, 2009 (in thousands):
The following is a summary of securities at March 31, 2008 (in thousands):
The following is a summary regarding securities sales and/or calls of the available-for-sale portfolio at March 31, 2010 (in thousands):
The Bank’s investment portfolio is comprised primarily of fixed rate mortgage-backed securities guaranteed by a Government Sponsored Enterprise (“GSE”) as issuer. Carver Federal maintains a portfolio of mortgage-backed securities in the form of Government National Mortgage Association (“GNMA”) pass-through certificates, Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corp (“FHLMC”) participation certificates. GNMA pass-through certificates are guaranteed as to the payment of principal and interest by the full faith and credit of the United States Government while FNMA and FHLMC certificates are each guaranteed by their respective agencies as to principal and interest. Based on the high quality of the Bank’s investment portfolio, current market conditions have not significantly impacted the pricing of the portfolio or the Bank’s ability to obtain reliable prices.
The net unrealized gain on available-for-sale securities was $0.3 million ($224 thousand after taxes) at March 31, 2010 and $0.2 million ($110 thousand after taxes) at March 31, 2009. 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 $0.5 million 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, 2010 the carrying value of these securities was $6.9 million and a related net unrealized gain of $72 thousand continues to be reported. There were no sales of held-to-maturity securities in fiscal 2010, 2009 or 2008.
At March 31, 2010 the Bank pledged securities of $20.4 million as collateral for advances from the FHLB-NY, $34.1 million as collateral for its repo agreements and $0.4 million against certain large deposits.
The following is a summary of the carrying value (amortized cost) and fair value of securities at March 31, 2010, 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. The table below does not consider the effects of possible prepayments or unscheduled repayments.
The unrealized losses and fair value of securities in an unrealized loss position at March 31, 2010 for less than 12 months and 12 months or longer were as follows (in thousands):
The unrealized losses and fair value of securities in an unrealized loss position at March 31, 2009 were as follows (in thousands):
A total of 12 securities had an unrealized loss at March 31, 2010 compared to 31 at March 31, 2009, based on estimated fair value. The majority of the securities in an unrealized loss position were Government National Mortgage Association - Mortgage backed securities, which represented 90% and 72.8% of total securities which had an unrealized loss at March 31, 2010 and 2009, respectively. The cause of the temporary impairment is directly related to changes in interest rates. In general, as interest rates decline, the fair value of securities will rise, and conversely as interest rates rise, the fair value of securities will decline. Management considers fluctuations in fair value as a result of interest rate changes to be temporary, which is consistent with the Bank’s experience. The impairments are deemed temporary based on the direct relationship of the rise in fair value to movements in interest rates, the life of the investments and their high credit quality. Unrealized losses identified as other than temporary are recognized in earnings when there are losses on a debt security which management does not intend to sell, and for which it is more-likely-than-not that the entity will not be required to sell the security prior to the recovery of the non-credit impairment. In those situations, the portion of the total impairment that is attributable to the credit loss would be recognized in earnings, and the remaining difference between the debt security’s amortized cost basis and its fair value would be included in other comprehensive income. At March 31, 2009, the Bank held a private-label mortgage-backed security which was determined to be other than temporarily impaired in the amount of $52 thousand. The Bank continues to hold this security but has deemed there to be no further other than temporary impairment. At March 31, 2010, the Bank does not have any other securities that may be classified as having other than temporary impairment in its investment portfolio. At March 31, 2008, the Bank did not have any securities that would be classified as having other than temporary impairment in its investment portfolio.
NOTE 5. LOANS RECEIVABLE, NET
The following is a summary of loans receivable, net of allowance for loan losses at March 31 (dollars in thousands):
(1)
Includes loans held for sale
(2)
Includes personal, credit card, and home improvement
Substantially all of the Bank’s real estate loans receivable are principally secured by properties located in New York City. Accordingly, as with most financial institutions in the market area, the ultimate collectability of a substantial portion of the Company’s loan portfolio is susceptible to changes in market conditions in this area. See note 14 for further discussion of concentration of credit risk.
Mortgage loan portfolios serviced for Federal National Mortgage Association (“FNMA”) and other third parties are not included in the accompanying consolidated financial statements. The unpaid principal balances of these loans aggregated $52.0 million, $56.7 million and $52.0 million at March 31, 2010, 2009, and 2008, respectively.
At March 31, 2010 the Bank pledged $279.0 million in total mortgage loans as collateral for advances from the FHLB-NY.
The following is an analysis of the allowance for loan losses for the years ended March 31 (in thousands):
At March 31, 2010, 2009 and 2008, the recorded investment in impaired loans was $47.6 million, $25.7 million and $2.9 million, respectively. The related allowance for loan losses for these impaired loans was approximately $3.5 million, $0.3 million and $0.8 million at March 31, 2010, 2009 and 2008, respectively. The impaired loans at March 31, 2010, were comprised of $36.1 of non-accrual loans and $11.5 million of non-accrual 1-4 Family, residential and construction TDRs. The impaired loan portfolio is collateral dependent with the exception of the residential TDRs. The average recorded investment in impaired loans during the fiscal years ended March 31, 2010, 2009 and 2008 was approximately $15.8 million, $4.7 million and $3.6 million, respectively. Interest income of $3.3 million, $1.5 million, and $0.6 million for fiscal year 2010, 2009 and 2008, respectively, would have been recorded on impaired loans had they performed in accordance with their original terms. At March 31, 2010, and 2009, loans past due 90 days or more and still accruing were $1.4 million, $0.9 million, respectively. At March 31, 2008 there were no loans past due 90 days or more and still accruing.
Non-accrual loans consist of loans for which the accrual of interest has been discontinued 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 based upon the collectability of the loan. Total non-accrual loans amounted to $47.6 million and $26.2 million at March 31, 2010 and 2009, respectively. TDR 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. Total TDR loans at March 31, 2010 were $15.2 million of which $7.9 million were recorded on an accrual basis as they had been performing in accordance with their restructured terms for at least 6 months and $7.3 million were non-accrual as they had not been performing in accordance with the restructured terms for a period of at least 6 months.
At March 31, 2010, other non-performing assets totaled $0.1 million which consists of other real estate owned. Other real estate owned of $0.1 million reflects two foreclosed properties.
At March 31, 2010 and 2009, there were no loans to officers or directors of the Company.
NOTE 6. OFFICE PROPERTIES AND EQUIPMENT, NET
The detail of office properties and equipment as of March 31 is as follows (in thousands):
Depreciation and amortization charged to operations for fiscal year 2010, 2009 and 2008 amounted to $1.7 million, $2.0 million and $1.7 million, respectively.
As part of the Company’s strategy to consolidate and optimize branch locations the Bank decided during fiscal 2010 to relocate two of its branch facilities to new locations. The Company also vacated a facility that was not being used. The Company recorded a net gain of $1.2 million on the sale of one owned building and net occupancy expense and net charge-offs of $1.1 million related to the exiting and relocation of the other facilities.
NOTE 7. ACCRUED INTEREST RECEIVABLE
The detail of accrued interest receivable as of March 31 is as follows (in thousands):
NOTE 8. DEPOSITS
Deposit balances and weighted average stated interest rates as of March 31 are as follows (dollars in thousands):
Scheduled maturities of certificates of deposit are as follows for the year ended March 31, 2010 (in thousands):
As of March 31, 2010 the Bank had pledged $0.4 million in fair value of investment securities as collateral for certain large deposits.
The following table represents the amount of certificates of deposit of $100,000 or more at March 31, 2010 maturity during the periods indicated (in thousands):
Interest expense on deposits is as follows for the years ended March 31 (in thousands):
NOTE 9. BORROWED MONEY
Federal Home Loan Bank Advances, Repurchase agreements and Guaranteed Debt Securities. FHLB-NY advances and repurchase agreements weighted average interest rates by remaining period to maturity at March 31 are as follows (dollars in thousands):
Federal Home Loan Bank Advances. As a member of the FHLB-NY, the Bank may have outstanding FHLB-NY borrowings in a combination of term advances and overnight funds of up to 25% of its total assets, or approximately $201.6 million at March 31, 2010. Borrowings are secured by the Bank’s investment in FHLB-NY stock and by a blanket security agreement. This agreement requires the Bank to maintain as collateral certain qualifying assets (principally mortgage loans and securities) not otherwise pledged. At March 31, 2010, advances were secured by pledges of the Bank’s investment in the capital stock of the FHLB-NY totaling $4.1 million and a blanket assignment of the Bank’s pledged qualifying mortgage loans of $279.0 million and mortgage-backed and investment securities with a market value of $20.4 million. The Bank has sufficient collateral at the FHLB-NY to be able to borrow an additional $51.2 million from the FHLB-NY at March 31, 2010. At March 31, 2010, the accrued interest on FHLB advances amounted to $0.2 million and the interest expense was $1.9 million for the year ended March 31, 2010. At March 31, 2009, the accrued interest on FHLB advances amounted to $0.4 million and the interest expense was $1.4 million for the year ended March 31, 2009.
Repurchase agreements. Repurchase agreements (“REPO”) are contracts for the sale of securities owned or borrowed by the Bank with an agreement to repurchase those securities at an agreed-upon price and date. The Banks’ repurchase agreements are primarily collateralized by $34.1 million in market value of government obligations and other mortgage-related securities, and are entered into with either the “FHLB-NY or selected brokerage firms. Repurchase agreements totaled $30.0 million at March 31, 2010 and March 31, 2009. At March 31, 2010, the accrued interest on repurchase agreements amounted to $0.2 million and the interest expense was $1.4 million for the year ended March 31, 2010. At March 31, 2009, the accrued interest on repurchase agreements amounted to $0.2 million and the interest expense was $1.4 million for the year ended March 31, 2009.
Guaranteed Debt Securities. In October 2009, the Bank raised $14.1 million in a private placement of Senior Notes bearing an interest rate of 1.69%, maturing in October 2011. This debt is guaranteed under the Federal Deposit Insurance Corporation’s (the “FDIC”) Temporary Liquidity Guarantee Program (TLGP). For this guarantee, the Bank is assessed a fee by FDIC in the amount of 1.25%. At March 31, 2010, the accrued interest on the TLGP debit was $0.1 million and the interest expense for the year ended March 31, 2010 was $0.1 million.
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 debt securities of $13.0 million, and proceeds from the sale of the trust’s common securities of $0.4 million, 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 debt securities are redeemable at par quarterly at the option of the Company beginning on or after September 17, 2008 and have a mandatory redemption date of September 17, 2033. Cash distributions on the trust preferred debt securities are cumulative and payable at a floating rate per annum resetting quarterly with a margin of 3.05% over the three-month LIBOR.
On September 30, 2009, The Bank raised $5.0 million in a private placement of subordinated debt maturing December 30, 2018. The maximum contractual interest rate for the debt is 12.00% per annum, however, for the first seven years, and so long as Carver maintains its certification as a Community Development Entity (“CDE”) and remains in compliance with all of the NMTC requirements, the interest rate shall be reduced by 500 basis points to 7.00% per annum. This subordinated debt has been approved by the OTS to qualify as Tier II capital for the Bank’s regulatory capital calculations.
At March 31, 2010, the accrued interest on subordinated debt securities amounted to $0.1 million and the interest expense was $0.7 million for the year ended March 31, 2010. At March 31, 2009, the accrued interest on subordinated debt securities amounted to $24 thousand and the interest expense was $0.8 million for the year ended March 31, 2009.
The following table sets forth certain information regarding Carver Federal’s borrowings as of and for the years ended March 31 (dollars in thousands):
NOTE 10. INCOME TAXES
The components of income tax benefit for the years ended March 31 are as follow (in thousands):
The following is a reconciliation of the expected Federal income tax rate to the consolidated effective tax rate for the years ended March 31 (dollars in thousands):
Carver Federal’s stockholders’ equity includes approximately $2.9 million at the end of each year ended March 31, 2010, 2009 and 2008, 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. For the year ended March 31, 2010, the total income tax benefit of $2.9 million included a $0.5 million tax receivable deemed no longer collectible.
Tax effects of existing temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are included in other assets at March 31 are as follows (in thousands):
In June 2006, Carver Federal was selected by the U.S. Department of Treasury to receive an award of $59 million in New Markets Tax Credits. The NMTC award is used to stimulate economic development in low- to moderate-income communities. The NMTC award enables the Bank to invest with community and development partners in economic development projects with attractive terms including, in some cases, below market interest rates, which may have the effect of attracting capital to underserved communities and facilitating the revitalization of the community, pursuant to the goals of the NMTC program. The NMTC award provides a credit to Carver Federal against Federal income taxes when the Bank makes qualified investments. The credits are allocated over seven years from the time of the qualified investment. Recognition of the Bank’s NMTC award began in December 2006 when the Bank invested $29.5 million, one-half of its $59 million award. In December 2008, the Bank invested an additional $10.5 million and transferred rights to $19.0 million of its $59 million NMTC award to an investor pursuant to its investment in a NMTC project. The Bank’s NMTC allocation has been fully invested as of December 31, 2007. During the seven year period following the investment, assuming the Bank meets compliance requirements, the Bank will receive 39% of the $40.0 million invested award amount (5% over each of the first three years, and 6% over each of the next four years). The Company expects to receive additional NMTC tax benefits of approximately $7.8 million from its $40.0 million investment over approximately four years for which utilization is contingent upon sufficient taxable income being generated to utilize such credits.
At March 31, 2010, the Company had net operating carryovers for state purposes of approximately $4.8 million which are available to offset future state income and which expire over varying periods from March 2028 through March 2009.
Where applicable, deferred tax assets are reduced by a valuation allowance for any portion determined not likely to be realized. This valuation allowance would subsequently be adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant. A valuation allowance against the deferred tax asset at March 31, 2010 and 2009 was not required as management believes the Company will generate sufficient taxable income to realize the deferred tax asset.
The Company has no uncertain tax positions. The Company and its subsidiaries are subject to U.S. federal, New York State and New York City income taxation. The Company is no longer subject to examination by taxing authorities for years before March 31, 2006.
The Company has adopted the FASB guidance related to accounting for uncertainty in income taxes as of April 1, 2008. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. This adoption had no affect on the Company’s financial statements.
NOTE 11. (LOSS) 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 (loss) per share for years ended March 31 (in thousands):
NOTE 12. 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 (the “Common Stock”), 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 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.
Regulatory Capital. The operations and profitability of the Bank are significantly affected by legislation and the policies of the various regulatory agencies. The OTS has promulgated capital requirements for financial institutions consisting of minimum tangible and core capital ratios of 1.5% and 3.0%, respectively, of the institution’s adjusted total assets and a minimum risk-based capital ratio of 8.0% of the institution’s risk weighted assets. Although the minimum core capital ratio is 3.0%, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), as amended, stipulates that an institution with less than 4.0% core capital is deemed undercapitalized. At March 31, 2010 and 2009, the Bank exceeded all of its regulatory capital requirements.
The following is a summary of the Bank’s actual capital amounts as of March 31, 2010 compared to the OTS requirements for minimum capital adequacy and for classification as a well-capitalized institution (in thousands):
Comprehensive Income (Loss). Comprehensive income (loss) represents net income (loss) and certain amounts reported directly in stockholders’ equity, such as the net unrealized gain or loss on securities available for sale and loss on pension liability. The Holding Company has reported its comprehensive income (loss) for fiscal 2010, 2009 and 2008 in the Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income/(Loss). Carver Federal’s accumulated other comprehensive income (loss) included net unrealized losses on securities at March 31, 2010 and 2009 of $0.4 million and $0.2 million, respectively. Also included in accumulated other comprehensive income (loss) was a loss on the Bank’s pension plan liabilities of $0.2 million at March 31, 2010, net of taxes, and a gain of $0.3 million, net of taxes, at March 31, 2009.
NOTE 13. EMPLOYEE BENEFIT AND STOCK COMPENSATION PLANS
Pension Plan. Carver Federal has a non-contributory defined benefit pension plan covering all who were participants prior to curtailment of the plan during the fiscal year ended March 31, 2001. The benefits are based on each employee’s term of service through the date of curtailment. Carver Federal’s policy was 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 (in thousands):
Net periodic pension benefit includes the following components for the years ended March 31 (in thousands):
Significant actuarial assumptions used in determining plan benefits for the years ended March 31 are as follows:
(1)
The annual salary increase rate is not applicable as the plan is frozen and no new benefits accrue.
Carver Federal plan assets are invested in a diversified investment fund and a guaranteed deposit account (“GDA”). The diversified investment fund is held in a Separate Account (the “Fund”) and is advised by Victory Capital Management and follows a diversified equity strategy. It seeks to provide long-term growth of capital by investing primarily in equity securities and securities convertible into common stocks traded on U.S. exchanges and issued by large, established companies. The Fund invests in both value and growth securities. The GDA is managed by Prudential Investment Management, Inc. and is designed to provide liquidity and safety of principal with a competitive rate of return. The GDA invests in a broadly diversified, fixed-income portfolio and is primarily invested in public bonds, commercial mortgages and private placement bonds.
The long-term investment objectives of the Carver Federal Plan are to maintain plan assets at a level that will sufficiently cover long-term obligations and to generate a return on plan assets that will meet or exceed the rate at which long-term obligations will grow.
The following table presents the plan assets held by the Carver Federal Plan as of March 31, 2010 at fair value by level within the fair value hierarchy under ASC Topic 820. Financial assets are classified in their entirety based upon the lowest level of input that is significant to their fair value measurement. See note 15 for further details regarding the fair value hierarchy.
(1)
This category contains large-cap stocks or securities convertible into common stocks. The portfolio is invested in 88% U.S. Equity and 12% International Equity.
(2)
This category contains a broadly diversified portfolio with guaranteed protection of principal and accumulated interest from market volatility.
Current Asset Allocation
The weighted average asset allocations for Carver Federal’s Plan as of March 31, 2010 and 2009, were as follows:
Expected Future Annuity Payments
The following annuity payments, which reflect expected future service, as appropriate, are expected to be paid by Carver Federal’s Plan during the years indicated:
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 through the date of curtailment. As of March 31, 2010, $13 thousand remained payable under this plan.
Savings Incentive Plan. Carver has a savings incentive plan, pursuant to Section 401(k) of the Code, for all eligible employees of the Bank. The Bank matches contributions to the 401(k) 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 are fully vested and non-forfeitable at all times regardless of the years of service with the Bank.
Under the profit-sharing feature, if the Bank achieves a minimum of 70% of its net income goal as mentioned previously, the Compensation Committee may authorize 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 contribution may be made regardless of whether the employee makes a contribution to the 401(k) Plan. Non-elective Bank contributions, if awarded, vest 20% each year for the first five years of employment and are fully vested thereafter.
To be eligible for the matching contribution, the employee must be 21 years of age and have completed at least three months of service. To be eligible for the non-elective Carver contribution, the employee must also be employed as of the last day of the plan year. There was no savings incentive expense recorded for fiscal year 2010 as the Bank did not hit the minimum net income goal. Total savings incentive plan expenses for fiscal year 2009 and 2008 were $0.1 million and $0.1 million, respectively.
BOLI. The Bank owns one BOLI plan which was formed to offset future employee benefit costs and provide additional benefits due to its tax exempt nature. Only officer level employees are covered under this program.
An initial investment of $8.0 million was made to the BOLI program on September 21, 2004. At March 31, 2010 the Consolidated Statement of Conditions reflects a net cash surrender value of $9.8 million. The related income is reflected in the Consolidated Statement of Operations as a component of other non-interest income.
Management Recognition Plan (“MRP”). The MRP provided for grants of restricted stock to certain employees at September 12, 1995 adoption of the MRP. On March 28, 2005 the plan was amended for all future awards. The MRP provides for additional discretionary grants of restricted stock to those employees selected by the committee established to administer the MRP. Awards granted prior to March 28, 2005, 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. Under the amended plan awards granted after March 28, 2005 vest based on a five-year performance-accelerated vesting schedule. Ten percent of the awarded shares vest in each of the first four years and the remainder in the fifth year but the Compensation Committee may accelerate vesting at any time. 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. There are no shares available to grant under the MRP. Pursuant to the MRP, the Bank recognized $133,000, $41,000 and $155,000 as expense for fiscal year 2010, 2009 and 2008, respectively.
Employee Stock Ownership Plan. Effective upon conversion, an ESOP was established for all eligible employees. The ESOP used $1,821,000 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. Each year until the loan paid off in June of 2004, the Bank made discretionary contributions to the ESOP, which was 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.
Upon distribution of the initial ESOP shares, additional ESOP shares were purchased in the open market in accordance with Carver’s common stock repurchase program and were 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. In May 2006, Carver amended the ESOP so that no new participants are eligible to enter after December 31, 2006 and the Compensation Committee voted to cease discretionary contributions after the 2006 allocation. For fiscal 2010 and fiscal 2009, there was no ESOP compensation expense and there were no remaining unallocated shares at March 31, 2010. ESOP compensation expense was $0.1 million for the years ended March 31, 2008.
Stock Option Plans. 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 was 338,862. The 1995 plan expired by its term and no new options may be granted under it, however, stock options granted under the 1995 Plan continue in accordance with their terms. At March 31, 2010, there were 163,869 options outstanding and 154,644 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 1995 Plan option grants generally vest on an annual basis ratably over either three or five years, commencing after one year of service and, in some instances, portions of option grants vest at the time of the grant. On March 28, 2005, the plan was amended and vesting of future awards is based on a five-year performance-accelerated vesting schedule. Ten percent of the awarded options vest in each of the first four years and the remainder in the fifth year, but the Committee may accelerate vesting at any time. All options are exercisable immediately upon a participant’s disability, death or a change in control, as defined in the Plan.
In September 2006, Carver stockholders approved the 2006 Stock Incentive Plan which provides for the grant of stock options, stock appreciation rights and restricted stock to employees and directors who are selected to receive awards by the Committee. The 2006 Incentive Plan authorizes Carver to grant awards with respect to 300,000 shares, but no more than 150,000 shares of restricted stock may be granted. Options are granted at a price not less than fair market value of Carver Federal common stock at the time of the grant for a period not to exceed 10 years. Shares generally vest in 20% increments over 5 years, however, the Committee may specify a different vesting schedule. At March 31, 2010, there were 26,862 options outstanding under the 2006 Incentive Plan and 13,493 were exercisable. All options are exercisable immediately upon a participant’s disability, death or a change in control, as defined in the Plan, if the person is employed on that date.
Information regarding stock options as of and for the years ended March 31 is as follows:
Information regarding stock options as of and for the year ended March 31, 2010 is as follows:
There were no stock options awarded during the year ended March 31, 2010.
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 for the years ended March 31:
The Company recorded compensation expense of $48 thousand in fiscal 2010 and $28 thousand in fiscal 2009.
Performance Compensation Plan. In 2006, Carver adopted the Performance Compensation Plan of Carver Bancorp, Inc. This plan provides for cash payments to officers or employees designated by the Compensation Committee, which also determines the amount awarded to such participants. Vesting is generally 20% a year over 5 years and awards are fully vested on a change in control (as defined), or termination of employment by death or disability, but the Committee may accelerate vesting at any time. Payments are made as soon as practicable after the end of the fiscal year in which amounts vest. In fiscal year 2008, the Company granted its first awards under the new Plan. The total fair value of options granted was $0.4 million. The amount of compensation expense recognized in fiscal year 2010 and 2009 were $142 thousand and $242 thousand, respectively.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Credit Related Commitments. 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 had outstanding commitments at March 31 as follows (in thousands):
At March 31, 2010, of the $18.9 million in outstanding commitments to originate mortgage loans, $16.3 million represented construction loans at variable interest rates, $2.0 million represented commitments to originate one-to-four family residential loans at a weighted average rate of 5.17% and $0.6 million represented a commercial real estate loan at a weighted average rate of 6.25%.
The balance of commitments on commercial and consumer loans at March 31, 2010 is primarily undisbursed funds from approved unsecured commercial lines of credit. All such lines carry adjustable rates mainly tied to prime.
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.
Lease Commitments. Rentals under long term operating leases for certain branches aggregated approximately $1.7 million, $1.6 million and $1.4 million for fiscal year 2010, 2009 and 2008, respectively. As of March 31, 2010, minimum rental commitments under all non-cancelable leases with initial or remaining terms of more than one year and expiring through 2018 follow (in thousands):
The Bank also has, in the normal course of business, commitments for services and supplies.
Legal Proceedings. From time to time, Carver Federal is a party to various legal proceedings incidental 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, 2010, 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.
NOTE 15. FAIR VALUE MEASUREMENTS
On April 1, 2008, the Company adopted ASC Topic 820 (formerly SFAS No. 157, “Fair Value Measurements”) which, among other things, defines fair value; establishes a consistent framework for measuring fair value; and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. ASC 820 clarifies that fair value is an “exit” price, representing the amount that would be received when selling an asset, or paid when transferring a liability, in an orderly transaction between market participants. Fair value is thus a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
• Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
• Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
• Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement
A financial instrument’s categorization within this valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following table presents, by ASC 820 valuation hierarchy, assets that are measured at fair value on a recurring basis as of March 31, 2010 and 2009, and that are included in the Company’s Consolidated Statements of Financial Condition at these dates:
Instruments for which unobservable inputs are significant to their fair value measurement (i.e., Level 3) include mortgage servicing rights. Level 3 assets accounted for 0.1% of the Company’s total assets at March 31, 2010 and 2009.
The Company reviews and updates the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next that are related to the observable inputs to a fair value measurement may result in a reclassification from one hierarchy level to another.
A description of the methods and significant assumptions utilized in estimating the fair value of available-for-sale securities follows:
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and exchange-traded securities.
If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to market information, models also incorporate transaction details, such as maturity and cash flow assumptions. Securities valued in this manner would generally be classified within Level 2 of the valuation hierarchy and primarily include such instruments as mortgage-related securities and corporate debt.
In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. In valuing certain securities, the determination of fair value may require benchmarking to similar instruments or analyzing default and recovery rates. Quoted price information for mortgage servicing rights (“MSR”) is not available. Therefore, MSR are valued using market-standard models to model the specific cash flow structure. Key inputs to the model consist of principal balance of loans being serviced, servicing fees and prepayment rate.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The following table presents information for assets classified by the Company within Level 3 of the valuation hierarchy for the year ended March 31, 2010:
Certain assets are measured at fair value on a non-recurring basis. Such instruments are subject to fair value adjustments under certain circumstances (e.g. when there is evidence of impairment). The following table presents assets and liabilities that were measured at fair value on a non-recurring basis as of March 31, 2010 and 2009, and that are included in the Company’s Consolidated Statements of Financial Condition as these dates:
The valuation methodology for loans held for sale for the year ended March 31, 2010 utilized a discounted cash flow approach. The significant assumptions included the borrowers FICO score, recovery value of the underlying collateral upon liquidation, the liquidation term, default criteria and discount rate. The valuation methodology utilized for the year ended March 31, 2009 was based upon prices of relevant pools of mortgage-backed securities composed of mortgages with similar characteristics, such as contractual coupon rate, loan-to-value ratio, FICO score and maturity, as compared to the loans within the loans held for sale portfolio.
The fair values of collateral-dependent impaired loans are determined using various valuation techniques, including consideration of appraised values and other pertinent real estate market data.
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
According to current GAAP disclosures regarding the fair value of financial instruments are required to include, in addition to the carrying value, the fair value of certain financial instruments, both assets and liabilities recorded on and off balance sheet, for which it is practicable to estimate fair value. Accounting guidance defines financial instruments as cash, evidence of ownership of an entity, or a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument. The fair value of a financial instrument is discussed below. In cases where quoted market prices are not available, estimated fair values have been determined by the Bank using the best available data and estimation methodology suitable for each such category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate their recorded carrying value. 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. The method used to estimate the fair value of loans is extremely sensitive to the assumptions and estimates used. While management has attempted to use assumptions and estimates that best reflect the Company’s loan portfolio and current market conditions, a greater degree of objectivity is inherent in these values than in those determined in active markets. The loan valuations thus determined do not necessarily represent an “exit” price that would be achieved in an active market.
Loans held-for-sale
The valuation methodology for loans held for sale for the year ended March 31, 2010 utilized a discounted cash flow approach. The significant assumptions included the borrowers FICO score, recovery value of the underlying collateral upon liquidation, the liquidation term, default criteria and discount rate. The valuation methodology utilized for the year ended March 31, 2009 was based upon prices of relevant pools of mortgage-backed securities composed of mortgages with similar characteristics, such as contractual coupon rate, loan-to-value ratio, FICO score and maturity, as compared to the loans within the loans held for sale portfolio.
Mortgage servicing rights
The fair value of mortgage servicing rights is determined by discounting the present value of estimated future servicing cash flows using current market assumptions for prepayments, servicing costs and other factors.
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 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, 2010 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 are as follows (in thousands):
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. 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 17. VARIABLE INTEREST ENTITIES
The Holding Company’s subsidiary, Carver Statutory Trust I, is not consolidated with Carver Bancorp Inc. for financial reporting purposes. Carver Statutory Trust I was formed in 2003 for the purpose of issuing $13.0 million aggregate liquidation amount of floating rate Capital Securities due September 17, 2033 (“Capital Securities”) and $0.4 million of common securities (which are the only voting securities of Carver Statutory Trust I), which are 100% owned by Carver Bancorp Inc., and using the proceeds to acquire Junior Subordinated Debentures issued by Carver Bancorp Inc. Carver Bancorp Inc. has fully and unconditionally guaranteed the Capital Securities along with all obligations of Carver Statutory Trust I under the trust agreement relating to the Capital Securities.
The Bank’s subsidiary, Carver Community Development Corporation (“CCDC”), was formed to facilitate its participation in local economic development and other community-based activities. Per the NMTC Award’s Allocation Agreement between the CDFI Fund and CCDC, CCDC is permitted to form and sub-allocate credits to subsidiary Community Development Entities (“CDEs”) to facilitate investments in separate development projects. The Bank was originally awarded $59.0 million of NMTC. In fiscal 2008, the Bank transferred rights to an investor in a NMTC project totaling $19.2 million, of which $19.0 million was a qualified equity investment, and recognized a gain on the transfer of rights of $1.7 million. The Bank was required to maintain a 0.01% interest in the entity with the investor owning the remaining 99.99%. The entity was called CDE-10. For financial reporting purposes, the $19.2 million transfer of rights to an investor in a NMTC project was reflected in the other assets and the minority interest sections of the balance sheet as the entity to which the rights were transferred was required to be consolidated under the then existing accounting guidance based on an evaluation of certain contractual arrangements between the Bank and the investor. In fiscal 2009, following certain amendments to the agreement between CCDC and the investor that resulted in a reconsideration event, the Bank deconsolidated the entity for financial statement reporting purposes. However, under the current arrangement, the Bank has a contingent obligation to reimburse the investor for any loss or shortfall incurred as a result of the NTMC project not being in compliance with certain regulations that would void the investor’s ability to otherwise utilize tax credits stemming from the award. The maximum possible loss to Carver from such an arrangement is approximately $7.4 million. At March 31, 2010, Carver has not recorded any liability with respect to this obligation in accordance with accounting guidance related to accounting for contingencies.
With respect to the remaining $40 million of the original NMTC award, the Bank has established various special purpose entities through which its investments in NMTC eligible activities are conducted. As the Bank is exposed to all of the expected losses and residual returns from these investments the Bank is deemed the primary beneficiary. Accordingly, all of these special purpose entities were consolidated in the Bank’s Statement of Financial Condition as of March 31, 2010 and 2009 resulting in the consolidation of assets of approximately $40.0 million and $36.9 million, respectively.
In May 2009, the Bank received an additional NMTC award in the amount of $65 million.
In December 2009, the Bank transferred rights to an investor in a NMTC project totaling $10.5 million of the second NMTC award and recognized a gain on the transfer of rights of $0.5 million. The Bank was required to maintain a 0.01% interest in the entity with the investor owning the remaining 99.99%. The entity was called CDE-13. This entity has been reviewed for possible consolidation under the accounting guidance related to variable interest entities and found to not be a consolidating entity for financial statement reporting purposes. The Bank has a contingent obligation to reimburse the investor for any loss or shortfall incurred as a result of the NTMC project not being in compliance with certain regulations that would void the investor’s ability to otherwise utilize tax credits stemming from the award. The maximum possible loss to Carver from such an arrangement is approximately $4.1 million. At March 31, 2010, Carver has not recorded any liability with respect to this obligation in accordance with accounting guidance related to accounting for contingencies.
In March 2010, the Bank transferred rights to investors in NMTC projects totaling $20.5 million and recognized a gain on the transfer of rights of $0.5 million and expects to receive additional income of $0.5 million in the future contingent upon certain events occurring. The Bank was required to maintain a 0.01% interest in each of the newly created entities with the investor owning the remaining 99.99%. The entities were called CDE-15, CDE-16 and CDE-17. These entities have been reviewed for possible consolidation under the accounting guidance related to variable interest entities and found to not be consolidating entities for financial statement reporting purposes.
NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly financial data for fiscal years ended March 31, 2010 and 2009 (in thousands, except per share data):
Restatement to correct error in operating results previously reported for the second quarter of fiscal 2010
The Company has restated its previously reported operating results for the second fiscal quarter ended September 30, 2009 to adjust the estimated fair value of certain residential mortgage loans that were classified as Held for Sale and reported at the lower of cost or fair value as of September 30, 2009. This restatement of second fiscal quarter results is reflected in the operating results reported for the full year ended March 31, 2010.
The Company has determined that in preparing the original valuation as of September 30, 2009 for the purpose of recording the loans at the lower of cost or fair value, it did not appropriately apply the provisions of ASC 820, Fair Value Measurements. Specifically, the valuation did not appropriately incorporate the impact on the fair value estimate of assumptions related to credit quality and liquidity risk that a market participant would be expected to use for loans with similar characteristics. The revised valuation resulted in a reduction of $1,826,000 in the estimated fair value as of September 30, 2009. The loans were transferred from Held for Sale to Held for Investment, effective October 1, 2009, and were recorded in Held for Investment at a cost basis equal to their fair value (as revised) as of September 30, 2009.
The table below summarizes the impact of restating the Company’s operating results for the second fiscal quarter ended September 30, 2009 (in thousands, except per share data).
As a result of recording the adjustment in the second fiscal quarter, net income for the six month period ended September 30, 2009 was reduced from $1,544,000 to $412,000, and basic and diluted EPS were reduced from $0.42 to $(0.03). For the nine month period ended December 31, 2009, net income was reduced from $2,301,000 to $1,169,000, and basic and diluted EPS were reduced from $0.64 to $0.18.
NOTE 19. CARVER BANCORP, INC. - PARENT COMPANY ONLY
CONDENSED STATEMENTS OF FINANCIAL CONDITION (in thousands):
CONDENSED STATEMENTS OF INCOME (in thousands):
CONDENSED STATEMENTS OF CASH FLOW (in thousands):
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A.
DISCLOSURE CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. As of March 31, 2010, the Company’s management, including the Company’s Chief Executive Officer and Principal Accounting Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this annual report. Based upon that evaluation, the Chief Executive Officer and Principal Accounting Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Disclosure controls and procedures are the controls and other procedures that are 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 SEC’s rules and forms. Disclosure controls and procedures include, without limitation, 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 accumulated and communicated to management, including the Chief Executive Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s system of internal control is designed under the supervision of management, including the Company’s Chief Executive Officer and Principal Accounting Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).
The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are made only in accordance with the authorization of management and the Boards of Directors of the Parent Company and the subsidiary banks; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate.
As of March 31, 2010, management assessed the effectiveness of the Company’s internal control over financial reporting based upon the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon its assessment, management believes that the Company’s internal control over financial reporting as of March 31, 2010 is effective using these criteria.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.
(c) Changes in Internal Control over Financial Reporting
As discussed in footnote 18 to the financial statements, the Company has restated its previously reported operating results for the fiscal quarter ended September 30, 2009 to adjust the estimated fair value of certain residential mortgage loans that were classified as Held for Sale and reported at the lower of cost or fair value as of September 30, 2009. The Company has determined that in preparing the original valuation for such loans as of September 30, 2009, for the purpose of recording the loans at the lower of cost or fair value, it did not appropriately apply the provisions of ASC Topic 820, Fair Value Measurements. Specifically, the valuation did not appropriately incorporate the impact on the fair value estimate of assumptions related to credit quality and liquidity risk that a market participant would be expected to use for loans with similar characteristics. The revised valuation resulted in a reduction of $1,826,000 in the estimated fair value of the subject loans as of September 30, 2009. The loans were transferred from Held for Sale to Held for Investment, effective October 1, 2009, and were recorded in Held for Investment at a cost basis equal to their fair value (as revised) as of September 30, 2009.
As a result of the restatement management has concluded that a material weakness existed related to management’s accounting and valuation of loans held for sale. Management has revised its valuation methodology for valuing loans held for sale to incorporate market participant assumptions as required by ASC Topic 820. This revision to management’s fair value methodology has been identified by management as a change in the Company’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. No other changes in the Company’s internal control over financial reporting during the fiscal quarter which this report relates, has been identified, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE.
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 to be filed in connection with the 2010 Annual Meeting of Stockholders (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.
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.
Information relating to executive and director compensation and the compensation committee of the Company’s Board of Directors will be in the 2010 Proxy Statement and is incorporated herein by reference.
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 AND DIRECTOR INDEPENDENCE.
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 ACCOUNTING 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.
I.
List of Documents Filed as Part of this Annual Report on Form 10-K
A.
The following consolidated financial statements are included in Item 8 of this annual report:
B.
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”.
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below on July 15, 2010 by the following persons on behalf of the Registrant and in the capacities indicated.
/s/ Deborah C. Wright
Deborah C. Wright
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Chris McFadden
Chris McFadden
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)
/s/ Carol Baldwin Moody
Carol Baldwin Moody
Director
/s/ Dr. Samuel J. Daniel
Samuel J. Daniel
Director
/s/ Robert Holland, Jr.
Robert Holland, Jr.
Lead Director
/s/ Pazel Jackson
Pazel G. Jackson, Jr.
Director
/s/ Robert R. Tarter
Robert R. Tarter
Director
EXHIBIT INDEX