UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission File Number: 0-21487
CARVER BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3904174
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
75 WEST 125TH STREET, NEW YORK, NEW YORK 10027
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 876-4747
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE AMERICAN STOCK EXCHANGE
(Title of Class) (Name of each Exchange on
which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). |_| Yes |X| No
As of May 31, 2005, there were 2,511,874 shares of common stock of the
registrant outstanding. The aggregate market value of the Registrant's common
stock held by non-affiliates (based on the closing sales price of $17.50 per
share of the registrant's common stock on May 31, 2005) was approximately $44.0
million.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of registrant's proxy statement for the Annual Meeting of stockholders
for the fiscal year ended March 31, 2005 are incorporated by reference into Part
III of this Form 10-K.
CARVER BANCORP, INC.
2005 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business.......................................................
Item 2. Properties.....................................................
Item 3. Legal Proceedings..............................................
Item 4. Submission of Matters to a Vote of Security Holders............
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data........................................
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.....
Item 8. Financial Statements and Supplementary Data....................
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................
Item 9A. Controls and Procedures........................................
Item 9B. Other Information..............................................
PART III
Item 10. Directors and Executive Officers of Carver Bancorp, Inc........
Item 11. Executive Compensation.........................................
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters...............
Item 13. Certain Relationships and Related Transactions.................
Item 14. Principal Accounting Fees and Services.........................
PART IV
Item 15. Exhibits, Financial Statement Schedules .......................
SIGNATURES ...............................................................
EXHIBIT INDEX..............................................................
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 which
may be identified by the use of such words as "may," "believe," "expect,"
"anticipate," "should," "plan," "estimate," "predict," "continue," and
"potential" or the negative of these terms or other comparable terminology.
Examples of forward-looking statements include, but are not limited to,
estimates with respect to our financial condition, results of operations and
business that are subject to various factors which could cause actual results to
differ materially from these estimates. These factors include, but are not
limited to:
o the Company's success in implementing its new business initiatives,
including expanding its product line, adding new branches and ATM
centers and successfully re-branding its image;
o increases in competitive pressure among financial institutions or
non-financial institutions;
o legislative or regulatory changes which may adversely affect the
Company's business;
o technological changes which may be more difficult or expensive than we
anticipate;
o changes in interest rates which may reduce net interest margins and net
interest income;
o changes in deposit flows, loan demand or real estate values which may
adversely affect the Company's business;
o changes in accounting principles, policies or guidelines which may
cause the Company's condition to be perceived differently;
o litigation or other matters before regulatory agencies, whether
currently existing or commencing in the future, which may delay the
occurrence or non-occurrence of events longer than anticipated;
o the ability of the Company to originate and purchase loans with
attractive terms and acceptable credit quality;
o the ability of the Company to realize cost efficiencies; and
o general economic conditions, either nationally or locally in some or
all areas in which the Company does business, or conditions in the
securities markets or the banking industry which could affect liquidity
in the capital markets, the volume of loan origination, deposit flows,
real estate values, the levels of non-interest income and the amount of
loan losses.
Any or all of our forward-looking statements in this Annual Report and in any
other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Consequently, no forward-looking statement can be guaranteed. We
do not intend to update any of the forward-looking statements after the date of
this prospectus or to conform these statements to actual events.
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
CARVER BANCORP, INC.
Carver Bancorp, Inc., a Delaware corporation (on a stand-alone basis,
the "Holding Company" or "Registrant"), is the holding company for Carver
Federal Savings Bank, a federally chartered savings bank, and its subsidiaries
(collectively, the "Bank" or "Carver Federal"), Carver Statutory Trust I (the
"Trust") and Alhambra Holding Corporation, a Delaware corporation ("Alhambra").
The Trust, which was formed in September 2003, exists for the sole purpose of
issuing trust preferred debt securities and investing the proceeds in an
equivalent amount of subordinated debentures of the Holding Company. The Holding
Company formed Alhambra to hold the Holding Company's investment in a commercial
office building that was subsequently sold in March 2000. Alhambra is currently
inactive. Collectively, the Holding Company, the Bank and the Holding Company's
other direct and indirect subsidiaries are referred to herein as the "Company"
or "Carver."
On October 24, 1994, Carver Federal converted from mutual to stock form
and issued 2,314,275 shares of its common stock at a price of $10 per share. On
October 17, 1996, the Bank completed its reorganization into a holding company
structure (the "Reorganization") and became a wholly owned subsidiary of the
Holding Company. Pursuant to an Agreement and Plan of Reorganization, dated May
21, 1996, each share of the Bank's outstanding common stock was exchanged for
one share of common stock of the Holding Company. On January 11, 2000, the
Holding Company sold, pursuant to a Securities Purchase Agreement, dated January
11, 2000, in a private placement 40,000 shares of Series A Convertible Preferred
Stock (the "Series A Preferred Stock") to Morgan Stanley & Co. Incorporated
("MSDW") and 60,000 Shares of Series B Convertible Preferred Stock (the "Series
B Preferred Stock") to Provender Opportunities Fund L.P. ("Provender"). On June
1, 2004, Provender sold all 60,000 of its Series B Preferred Stock to Keefe
Bruyette & Woods, Inc ("KBW"). On October 15, 2004, both MSDW and KBW elected to
convert their Preferred Shares into shares of the Holding Company's common
stock, thus an additional 208,333 shares of common stock were issued to these
parties.
The Holding Company conducts business as a unitary savings and loan
holding company, and the principal business of the Holding Company consists of
the operation of its wholly owned subsidiary, the Bank. The Holding Company's
executive offices are located at the home office of the Bank at 75 West 125th
Street, New York, New York 10027. The Holding Company's telephone number is
(718) 230-2900.
CARVER FEDERAL SAVINGS BANK
Carver Federal was chartered in 1948 and began operations in 1949 as
Carver Federal Savings and Loan Association, a federally chartered mutual
savings and loan association, at which time it obtained federal deposit
insurance and became a member of the Federal Home Loan Bank of New York (the
"FHLB-NY"). Carver Federal converted to a federal savings bank in 1986 and
changed its name at that time to Carver Federal Savings Bank.
Carver Federal was founded as an African-American operated institution
to provide residents of under-served communities with the ability to invest
their savings and obtain credit. Carver Federal's principal business consists of
attracting deposit accounts through its eight branch offices and investing those
funds in mortgage loans and other investments permitted to federal savings
banks. Based on asset size as of March 31, 2005, Carver Federal is the largest
African-American operated financial institution in the United States.
On March 8, 1995, Carver Federal formed CFSB Realty Corp. as a wholly
owned subsidiary to hold real estate acquired through foreclosure pending
eventual disposition. At March 31, 2005, this subsidiary had $219,000 in total
capital and a net operating loss of approximately $1,000. At March 31, 2005
there was no foreclosed real estate, however as a result of a property tax
redemption, the Bank took fee ownership of a vacant tract of land in Bayshore,
NY. See Note 1 of Notes to Consolidated Financial Statements. Carver Federal
also owns CFSB Credit Corp., an inactive subsidiary originally formed to
undertake the Bank's credit card issuances. During the fourth quarter of the
fiscal year ended March 31, 2003 ("fiscal 2003"), Carver Federal formed Carver
Asset Corporation, a wholly owned subsidiary which qualifies as a real estate
investment trust ("REIT") pursuant to the Internal Revenue Code of 1986, as
amended. This subsidiary may, among other things, be utilized by Carver Federal
to raise capital in the future. As of March 31, 2005 Carver Asset Corporation
owned mortgage loans valued at approximately $131 million.
Carver Federal's current operating strategy consists primarily of: (1)
the origination and purchase of one- to four-family residential, commercial,
construction and multifamily real estate loans in its primary market area; (2)
investing funds not utilized for loan originations or purchases in the purchase
of United States government agency securities and mortgage-backed securities;
(3) expanding its branch network by opening de novo branches in fiscal 2005 and
stand-alone ATM centers in high-traffic locations ; (4) generating fee income by
attracting and retaining core deposit accounts, expansion of its ATM network and
providing of wealth management products; and (5) continuing to monitor and
control its expenses by efficiently utilizing personnel, branch facilities and
alternative delivery channels (telephone banking, online banking, and ATMs) to
service its customers. The business is not operated in such a way that would
require segment reporting.
Carver Federal's primary market area for deposits consists of the areas
served by its eight branches. Carver Federal considers its primary lending
market to include Bronx, Kings, New York, Queens and Richmond counties, together
comprising New York City, and lower Westchester County, New York. See "Item
2-Properties."
Although Carver Federal's branches are located in areas that were
historically underserved by other financial institutions, Carver Federal is
facing increasing competition for deposits and residential mortgage lending in
its immediate market areas. Management believes that this competition has become
more intense as a result of an increased examination emphasis by federal banking
regulators on financial institutions' fulfillment of their responsibilities
under the Community Reinvestment Act ("CRA") and the improving economic
conditions in its market area. The Bank's competition for loans comes
principally from mortgage banking companies, commercial banks, savings banks and
savings and loan associations. The Bank's most direct competition for deposits
comes from commercial banks, savings banks, savings and loan associations and
credit unions. Competition for deposits also comes from money market mutual
funds and other corporate and government securities funds as well as from other
financial intermediaries such as brokerage firms and insurance companies. Many
of Carver Federal's competitors have substantially greater resources than Carver
Federal and offer a wider array of financial services and products than Carver
Federal. At times, these larger financial institutions may offer below market
interest rates on mortgage loans and above market interest rates for deposits.
These pricing concessions combined with competitors' larger presence in the New
York market add to the challenges Carver Federal faces in expanding its current
market share and growing its near term profitability. The Bank believes that it
can compete with these institutions by offering a competitive range of products
and services as well as through personalized service and community involvement.
Carver will continue to evaluate acquisition opportunities as part of
its strategic objective for long term growth and may acquire directly or
indirectly through Carver Federal.
As of March 31, 2005, Carver Federal had 135 full-time equivalent
employees, of whom 47 are officers and 88 are non-officers, none of whom was
represented by a collective bargaining agreement. The Bank considers its
employee relations to be satisfactory.
AVAILABLE INFORMATION
The Company makes available on or through its internet website,
http://www.carverbank.com, its Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Such
reports are free of charge and are available as soon as reasonably practicable
after the Company electronically files such material with, or furnishes it to,
the Securities and Exchange Commission ("SEC"). The public may read and copy any
materials the Company files with the SEC at the SEC's Public Reference Room at
450 Fifth Street, NW, Washington, DC, 20549. Information may be obtained on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC, including the Company, at http://www.sec.gov.
In addition, on or before September 13, 2005, the date of our annual
meeting of stockholders, we will post on our website certain other basic
corporate documents, including our Corporate Governance Principles, Code of
Ethics, Code of Ethics for Senior Financial Officers and the charters of our
Finance and Audit Committee, Compensation Committee and Nominating/Corporate
Governance Committee. Printed copies of these documents are also available free
of charge to any stockholder who requests them. Stockholders seeking additional
information should contact the Corporate Secretary's office by mail at 75 West
125th Street, New York, NY 10027 or by e-mail at
[email protected].
LENDING ACTIVITIES
GENERAL. Carver Federal's principal lending activity is the origination
or purchase of first mortgage loans for the purpose of purchasing or refinancing
one- to four-family residential, multifamily, and commercial properties. Carver
Federal also originates or participates in loans for the construction or
renovation of commercial properties and residential housing developments. In
addition, Carver Federal provides permanent and end loan financing upon
completion of construction and, to a lesser extent, originates secured consumer
and business loans. First-mortgage loan purchases during the fiscal year ended
March 31, 2005 ("fiscal 2005"), accounted for 57.4% of net loan additions. Loan
purchases are used to supplement originations.
LOAN PORTFOLIO COMPOSITION. Gross loans receivable increased by $69.8
million, or 19.7%, to $424.7 million at March 31, 2005 compared to $354.9
million at March 31, 2004. Carver Federal's net loan portfolio as a percentage
of total assets increased to 67.4% at March 31, 2005 compared to 65.3% at March
31, 2004. One- to four-family mortgage loans totaled $155.8 million, or 36.7% of
Carver Federal's total gross loan portfolio, multifamily loans totaled $101.9
million, or 24.0% of total gross loans, non-residential real estate loans, which
includes commercial and church loans, totaled $116.8 million, or 27.5% of total
gross loans, and construction loans, net of loans in process, totaled $48.5
million, or 11.4% of total gross loans. Consumer (credit card loans, personal
loans and home improvement loans) and business loans totaled $1.7 million, or
0.4% of total gross loans.
Carver Federal pays a premium when the effective yield on the loans
being purchased is greater than the current market rate for comparable loans.
These premiums are amortized as the loan is repaid. It is possible that, in a
declining interest rate environment, the rate or speed at which loans repay may
increase which may have the effect of accelerating the amortization of the
premium and therefore reducing the effective yield of the loan. Total premium
Carver paid on purchased loans increased by $479,000 or 37.9%, to $1.7 million
at March 31, 2005 compared to $1.3 million at March 31, 2004. The increase was
attributable to additional premiums recorded on new loans purchased.
Allowance for loan losses was substantially unchanged at $4.1 million
at March 31, 2005 compared to March 31, 2004. During fiscal 2005 $28,000 in net
charge-offs were recorded and no additional provisions for loan losses were
established. See "-Asset Quality-Asset Classification and Allowance for Losses."
The following table sets forth selected data relating to the
composition of Carver Federal's loan portfolio by type of loan at the dates
indicated.
AT MARCH 31,
-----------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
-----------------------------------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS:
One- to four-family $ 155,797 36.69% $ 98,645 27.80% $ 71,735 24.20% $ 122,814 41.84% $ 157,767 54.94%
Multifamily 101,899 23.99% 120,252 33.88% 131,749 44.45% 118,589 40.39% 83,620 29.13%
Non-residential 116,769 27.49% 102,641 28.92% 79,244 26.74% 40,101 13.66% 36,113 12.58%
Construction 48,579 11.43% 27,376 7.71% 11,539 3.89% 9,742 3.32% 5,821 2.03%
Consumer and business (1) 1,697 0.40% 6,010 1.69% 2,125 0.72% 2,328 0.79% 3,781 1.32%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total gross loans 424,741 100.00% 354,924 100.00% 296,392 100.00% 293,574 100.00% 287,102 100.00%
====== ====== ====== ====== ======
ADD:
Premium on loans 1,743 1,264 867 906 705
LESS:
Deferred fees and loan (400) (163) (363) (642) (819)
discounts
Allowance for loan Losses (4,097) (4,125) (4,158) (4,128) (3,551)
---------- --------- --------- --------- ---------
Net loan portfolio $ 421,987 $ 351,900 $ 292,738 $ 289,710 $ 283,437
========== ========= ========= ========= =========
(1) Includes personal, credit card, home equity, home improvement and
business loans.
ONE- TO FOUR-FAMILY RESIDENTIAL LENDING. Traditionally, Carver
Federal's lending activity has been the origination and purchase of loans
secured by first mortgages on existing one- to four-family residences. Carver
Federal originates and purchases one- to four-family residential mortgage loans
in amounts that usually range between $35,000 and $750,000. Approximately 90% of
Carver Federal's one- to four-family residential mortgage loans at March 31,
2005 had adjustable rates and approximately 10% had fixed rates.
Carver Federal's one- to four-family residential mortgage loans are
generally for terms of 30 years, amortized on a monthly basis, with principal
and interest due each month. Residential mortgage loans often remain outstanding
for significantly shorter periods than their contractual terms. These loans
customarily contain "due-on-sale" clauses that permit the Bank to accelerate
repayment of a loan upon transfer of ownership of the mortgaged property. Also,
borrowers may refinance or prepay one- to four-family residential loans at their
option without penalty.
The Bank's lending policies generally limit the maximum loan-to-value
("LTV") ratio on one- to four-family residential mortgage loans secured by
owner-occupied properties to 95% of the lesser of the appraised value or
purchase price, with private mortgage insurance required on loans with LTV
ratios in excess of 80%. Under certain special loan programs, Carver Federal
originates and sells loans secured by single-family homes purchased by first
time home buyers where the LTV ratio may be up to 97%.
Carver Federal's fixed-rate, one- to four-family residential mortgage
loans are underwritten in accordance with applicable guidelines and requirements
for sale to the Federal National Mortgage Association ("FNMA") or the State of
New York Mortgage Agency ("SONYMA") in the secondary market. From time to time
the Bank has sold such loans to FNMA and to SONYMA. The Bank also originates, to
a limited extent, loans underwritten according to Federal Home Loan Mortgage
Corporation ("FHLMC") standards. Loans are sold with limited recourse on a
servicing retained basis to FNMA and on a servicing released basis to SONYMA.
Carver Federal uses several servicing firms to sub-service mortgage loans,
whether held in portfolio or sold with the servicing retained. At March 31,
2005, the Bank, through its sub-servicers, serviced $17.9 million in loans for
FNMA.
Carver Federal offers one-year, three-year, five/one-year and
five/three-year adjustable-rate one- to four-family residential mortgage loans.
These loans are retained in Carver Federal's portfolio and are not sold on the
secondary market. They are indexed to the weekly average rate on one-year,
three-year and five-year U.S. Treasury securities, respectively, adjusted to a
constant maturity (usually one year), plus a margin. The rates at which interest
accrues on these loans are adjustable every one, three or five years, generally
with limitations on adjustments of two percentage points per adjustment period
and six percentage points over the life of a one-year adjustable-rate mortgage
and four percentage points over the life of three-year and five-year
adjustable-rate mortgages.
The retention of adjustable-rate loans in Carver Federal's portfolio
helps reduce Carver Federal's exposure to increases in prevailing market
interest rates. However, there are unquantifiable credit risks resulting from
potential increases in costs to borrowers in the event of upward repricing of
adjustable-rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable-rate loans may increase due to
increases in interest costs to borrowers. Although adjustable-rate loans allow
the Bank to increase the sensitivity of its interest-earning assets to changes
in interest rates, the extent of this interest rate sensitivity is limited by
periodic and lifetime interest rate adjustment limitations. Accordingly, there
can be no assurance that yields on the Bank's adjustable-rate loans will fully
adjust to compensate for increases in the Bank's cost of funds. Adjustable-rate
loans increase the Bank's exposure to decreases in prevailing market interest
rates, although decreases in the Bank's cost of funds would tend to offset this
effect.
MULTIFAMILY REAL ESTATE LENDING. Carver Federal continues to originate
and purchase multifamily loans during fiscal 2005. Rates offered on this product
are considered to be competitive with flexible terms that make this product
attractive to borrowers. Multifamily property lending entails additional risks
compared to one- to four-family residential lending. For example, such loans are
dependent on the successful operation of such buildings and can be significantly
impacted by supply and demand conditions in the market for multifamily
residential units. Over the past several years, Carver Federal has expanded its
presence in the multifamily lending market in the New York City metropolitan
area. At March 31, 2005, multifamily loans totaled $101.9 million, or 24.0% of
Carver Federal's gross loan portfolio. The Bank intends to continue its emphasis
on multifamily mortgage lending, which has enabled the Bank to benefit from
higher yields compared to lower yielding one- to four- family loans, while
continuing to serve the community.
Carver Federal's multifamily product guidelines generally require that
the maximum LTV not exceed 80% based on the appraised value of the mortgaged
property. The Bank generally requires a debt service coverage ratio ("DSCR") of
at least 1.25 on multifamily loans, which requires the properties to generate
cash flow after expenses and allowances in excess of the principal and interest
payment. Carver Federal originates and purchases multifamily mortgage loans,
which are predominantly adjustable rate loans that generally amortize on the
basis of a 15-, 20-, 25- or 30-year period and require a balloon payment after
the first five years, or the borrower may have an option to extend the loan for
two additional five-year periods. The Bank, on a case-by-case basis, originates
ten-year fixed rate loans.
To help ensure continued collateral protection and asset quality for
the term of multifamily real estate loans, Carver Federal employs a loan
risk-rating system. Under the risk-rating system, all commercial real estate
loans are risk-rated internally, however, loans with balances over $250,000 are
also risk rated by an independent consulting firm. Separate independent reviews
of the multifamily real estate loan portfolio are performed annually, resulting
in written summary reports.
NON-RESIDENTIAL REAL ESTATE LENDING. Carver Federal's non-residential
real estate lending activity consists predominantly of originating loans for the
purpose of purchasing or refinancing office, mixed-use (properties used for both
commercial and residential purposes but predominantly commercial), retail and
church buildings in its market area. Non-residential real estate lending entails
additional risks compared with one- to four-family residential and multifamily
lending. For example, such loans typically involve large loan balances to single
borrowers or groups of related borrowers, and the payment experience on such
loans typically is dependent on the successful operation of the commercial
property. Carver Federal's maximum LTV on non-residential real estate mortgage
loans is generally 80% based on the appraised value of the mortgaged property.
The Bank generally requires a DSCR of at least 1.25 on non-residential real
estate loans. The Bank requires the assignment of rents of all tenants' leases
in the mortgaged property which serves as additional security for the mortgage
loan. At March 31, 2005, non-residential real estate mortgage loans totaled
$116.8 million, or 27.5% of the gross loan portfolio.
All non-residential real estate loans are risk rated internally. An
independent third party, at least annually, also risk-rates non-residential
loans over $250,000 which results in written summary reports.
Historically, Carver Federal has been a New York City metropolitan area
leader in the origination of loans to churches. At March 31, 2005, loans to
churches totaled $14.1 million, or 3.3% of the Bank's gross loan portfolio.
These loans generally have five-, seven- or ten-year terms with 15-, 20- or
25-year amortization periods and a balloon payment due at the end of the term
and generally have no greater than a 70% LTV ratio. The Bank provides
construction financing for churches and generally provides permanent financing
upon completion of construction. There are currently 26 church loans in the
Bank's loan portfolio.
Loans secured by real estate owned by faith based organizations
generally are larger and involve greater risks than one- to four-family
residential mortgage loans. Because payments on loans secured by such properties
are often dependent on voluntary contributions by members of the church's
congregation, repayment of such loans may be subject to a greater extent to
adverse conditions in the economy. The Bank seeks to minimize these risks in a
variety of ways, including reviewing the organization's financial condition,
limiting the size of such loans and establishing the quality of the collateral
securing such loans. The Bank determines the appropriate amount and type of
security for such loans based in part upon the governance structure of the
particular organization, the length of time the church has been established in
the community and a cash flow analysis of the church to determine its ability to
service the proposed loan. Carver Federal will obtain a first mortgage on the
underlying real property and often requires personal guarantees of key members
of the congregation and/or key person life insurance on the pastor of the
congregation. The Bank may also require the church to obtain key person life
insurance on specific members of the church's leadership. Asset quality in the
church loan category has been exceptional throughout Carver Federal's history.
Management believes that Carver Federal remains a leading lender to churches in
its market area.
CONSTRUCTION LENDING. The Bank originates and purchases construction
loans for new construction and renovation of churches, multifamily buildings,
residential developments, community service facilities and affordable housing
programs. Carver Federal also offers construction loans to qualified individuals
and developers for new construction and renovation of one- to four-family
residences in the Bank's market area. The Bank's construction loans generally
have adjustable interest rates and are underwritten in accordance with the same
standards as the Bank's mortgage loans on existing properties. The loans provide
for disbursement in stages as construction is completed. Purchased construction
loans may be at various stages of funding including those that are fully funded
and are awaiting refinancing to a permanent loan. Construction terms are usually
from 12 to 24 months. The construction loan interest is capitalized as part of
the overall project cost and is funded monthly from the loan proceeds. Borrowers
must satisfy all credit requirements that apply to the Bank's permanent mortgage
loan financing for the mortgaged property. Carver Federal has established
additional criteria for construction loans to include an engineer's plan and
cost review on all construction budgets with appropriate interest reserves for
loans in excess of $250,000.
Construction financing generally is considered to involve a higher
degree of risk of loss than long-term financing on improved and occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the mortgaged property's value at completion
of construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
project delays and cost overruns. If the estimate of construction costs proves
to be inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with a project having a value that is insufficient to
assure full repayment of such loan. The ability of a developer to sell developed
lots or completed dwelling units will depend on, among other things, demand,
pricing, availability of comparable properties and economic conditions. The Bank
has sought to minimize this risk by limiting construction lending to qualified
borrowers in the Bank's market areas, limiting the aggregate amount of
outstanding construction loans and imposing a stricter LTV ratio requirement
than that required for one- to four-family mortgage loans.
At March 31, 2005, the Bank had $48.6 million (net of $37.4 million of
committed but undisbursed funds) in construction loans outstanding, comprising
11.4% of the Bank's total gross loan portfolio. Purchased construction loans
represent 47.1% of total construction loans in portfolio.
CONSUMER AND BUSINESS LOANS. At March 31, 2005, the Bank had
approximately $1.7 million in consumer and business loans, or 0.4% of the Bank's
gross loan portfolio. At March 31, 2005, $1.5 million, or 86.8% of the Bank's
consumer and business loans, was unsecured and $224,000, or 13.2%, was secured
by savings deposits. At the end of fiscal 2005 the Bank froze all undrawn
available credit lines on its credit card product. The intent is to terminate
this product and hereto collect repayments on outstanding balances and related
finance charges. The Bank discontinued the origination of unsecured commercial
business loans during the fourth quarter of the fiscal year ended March 31,
1999.
Consumer loans generally involve more risk than first mortgage loans.
Collection of a delinquent loan is dependent on the borrower's continuing
financial stability, and thus is more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Further, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered. These loans may
also give rise to claims and defenses by a borrower against Carver Federal, and
a borrower may be able to assert claims and defenses against Carver Federal
which it has against the seller of the underlying collateral. In underwriting
secured consumer loans other than secured credit cards, Carver Federal considers
the borrower's credit history, an analysis of the borrower's income, expenses
and ability to repay the loan and the value of the collateral. The underwriting
for secured credit cards only takes into consideration the value of the
underlying collateral. See "-Asset Quality-Non-performing Assets."
LOAN PROCESSING. Carver Federal's loan originations are derived from a
number of sources, including referrals by realtors, builders, depositors,
borrowers and mortgage brokers, as well as walk-in customers. Loans are
originated by the Bank's personnel who receive a base salary, commissions and
other incentive compensation. Loan application forms are available at each of
the Bank's offices. All real estate loan applications are forwarded to the
Bank's Lending Department. The Bank has established underwriting standards for
all loan products.
The underwriting and loan processing for residential loans is initiated
internally but undergoes subsequent review by an outsourced third party
provider. A commercial real estate loan application is completed for all
multifamily and non-residential properties which the Bank finances. Prior to
loan approval, the property is inspected by a loan officer. As part of the loan
approval process, consideration is given to an independent appraisal, location,
accessibility, stability of the neighborhood, environmental assessment, personal
credit history of the applicant(s) and the financial capacity of the
applicant(s).
Upon receipt of a completed loan application from a prospective
borrower, a credit report and other verifications are ordered to confirm
specific information relating to the loan applicant's income and credit
standing. It is the Bank's policy to obtain an appraisal of the real estate
intended to secure a proposed mortgage loan from an independent fee appraiser
approved by the Bank.
It is Carver Federal's policy to record a lien on the real estate
securing the loan and to obtain a title insurance policy that insures that the
property is free of prior encumbrances. Borrowers must also obtain hazard
insurance policies prior to closing and, when the property is in a flood plain
as designated by the Department of Housing and Urban Development, paid flood
insurance policies must be obtained. Most borrowers are also required to advance
funds on a monthly basis, together with each payment of principal and interest,
to a mortgage escrow account from which the Bank makes disbursements for items
such as real estate taxes and hazard insurance.
LOAN APPROVAL. Except for loans in excess of $5.0 million, mortgage
loan approval authority has been delegated by the Bank's Board of Directors
("Board") to the Board's Asset Liability and Interest Rate Risk Committee. The
Asset Liability and Interest Rate Risk Committee has delegated to the Bank's
Management Loan Committee, which consists of certain members of executive
management, loan approval authority for loans up to and including $2.0 million.
All one- to four-family mortgage loans that conform to FNMA standards and limits
may be approved by the Residential Mortgage Loan Underwriter. Any loan that
represents an exception to the Bank's lending policies must be ratified by the
next higher approval authority. Loans above $5.0 million must be approved by the
full Board. Purchased loans are subject to the same approval process as
originated loans.
LOANS TO ONE BORROWER. Under the loans-to-one-borrower limits of the
Office of Thrift Supervision ("OTS"), with certain limited exceptions, loans and
extensions of credit to a single or related group of borrowers outstanding at
one time generally may not exceed 15% of the unimpaired capital and surplus of a
savings bank. See "-Regulation and Supervision-Federal Banking Regulation-Loans
to One Borrower Limitations." At March 31, 2005, the maximum loan to one
borrower under this test would be $9.3 million and the Bank had no relationships
that exceeded this limit.
LOAN SALES. Originations of one- to four-family real estate loans are
generally made on properties located within the New York City metropolitan area,
although Carver Federal does occasionally fund loans secured by property in
other areas. All such loans, however, satisfy the Bank's underwriting criteria
regardless of location. The Bank continues to offer one- to four-family
fixed-rate mortgage loans in response to consumer demand but requires that such
loans satisfy guidelines of either FNMA or SONYMA to provide opportunity for
subsequent sale in the secondary market as desired to manage interest rate risk
exposure.
LOAN PURCHASES AND ORIGINATIONS. During fiscal 2005, Carver Federal
purchased a total of $104.7 million of mortgage loans, consisting of performing
adjustable-rate one- to four-family, construction and non-residential mortgage
loans to supplement its origination efforts. This represented 57.4% of Carver
Federal's net addition to its loan portfolio during fiscal 2005. The Bank
purchases loans in order to increase interest income and to manage its liquidity
position. The Bank continues to shift its loan production emphasis to take
advantage of the higher yields and better interest rate risk characteristics
available on multifamily and non-residential real estate mortgage loans,
including those in construction, as well as to increase its participation in
multifamily and non-residential real estate mortgage loans with other New York
metropolitan area lenders. Loans purchased in fiscal 2005 increased $11.0
million, or 11.8%, from loan purchases of $93.7 million during the fiscal year
ended March 31, 2004 ("fiscal 2004").
Loan originations amounted to $85.8 million in fiscal 2005 compared to
$87.1 million in fiscal 2004 and $59.6 million in fiscal 2003. The decrease in
loan originations in fiscal 2005 can be attributed to the decline in mortgage
refinance activity resulting from a rising interest rate environment, which
reduced loan demand.
The following table sets forth certain information with respect to
Carver Federal's loan originations, purchases and sales during the periods
indicated.
YEAR ENDED MARCH 31,
--------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Loans Originated:
One- to four-family $ 15,437 8.46% $ 14,284 8.33% $ 5,985 6.02%
Multifamily 15,969 8.75 5,771 3.37 19,979 20.10
Non-residential 30,823 16.89 50,373 29.38 24,524 24.67
Construction 23,351 12.79 12,050 7.02 9,006 9.06
Consumer and business (1) 221 0.13 4,662 2.72 101 0.10
--------- --------- --------- --------- --------- ---------
Total loans originated 85,801 47.02 87,140 50.82 59,595 59.95
Loans purchased (2) 104,734 57.39 93,694 54.64 42,260 42.51
Loans sold (3) (8,043) (4.41) (9,358) (5.46) (2,453) (2.46)
--------- --------- --------- --------- --------- ---------
Net additions to loan portfolio $ 182,492 100.00% $ 171,476 100.00% $ 99,402 100.00%
========= ========= ========= ========= ========= =========
(1) Comprised of credit card, personal, home improvement and
secured business loans.
(2) Comprised primarily of one- to four-family mortgage loans,
multifamily mortgage loans and construction loans.
(3) Comprised primarily of fixed rate one- to four-family loans.
Loans purchased by the Bank entail certain risks not necessarily
associated with loans the Bank originates. The Bank's purchased loans are
generally acquired without recourse and in accordance with the Bank's
underwriting criteria for originations. In addition, purchased loans have a
variety of terms, including maturities, interest rate caps and indices for
adjustment of interest rates, that may differ from those offered at the time by
the Bank in connection with the loans the Bank originates. The Bank initially
seeks to purchase loans in its market area, however, the Bank will purchase
loans secured by property secured outside its market area to meet its financial
objectives. During fiscal 2005, the properties securing purchased loans were
concentrated in New York, New Jersey, Connecticut and California. The market
areas in which the properties that secure the purchased loans are located may
differ from Carver Federal's market area and may be subject to economic and real
estate market conditions that may significantly differ from those experienced in
Carver Federal's market area. There can be no assurance that economic conditions
in these out-of-state areas will not deteriorate in the future, resulting in
increased loan delinquencies and loan losses among the loans secured by property
in these areas.
In an effort to reduce these risks, with its existing personnel and
through the use of a quality control/loan review firm, the Bank has sought to
ensure that purchased loans satisfy the Bank's underwriting standards and do not
otherwise have a higher risk of collection or loss than loans originated by the
Bank. A Lending Department officer monitors the inspection and confirms the
review of each purchased loan. Carver Federal also requires appropriate
documentation and further seeks to reduce its risk by requiring, in each
buy/sell agreement, a series of warranties and representations as to the
underwriting standards and the enforceability of the related legal documents.
These warranties and representations remain in effect for the life of the loan.
Any misrepresentation must be cured within 90 days of discovery or trigger
certain repurchase provisions in the buy/sell agreement.
INTEREST RATES AND LOAN FEES. Interest rates charged by Carver Federal
on mortgage loans are primarily determined by competitive loan rates offered in
its market area and minimum yield requirements for loans purchased by FNMA and
SONYMA. Mortgage loan rates reflect factors such as prevailing market interest
rate levels, the supply of money available to the banking industry and the
demand for such loans. These factors are in turn affected by general economic
conditions, the monetary policies of the federal government, including the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board"), the
general supply of money in the economy, tax policies and governmental budget
matters.
Carver Federal charges fees in connection with loan commitments and
originations, rate lock-ins, loan modifications, late payments, changes of
property ownership and for miscellaneous services related to its loans. Loan
origination fees are calculated as a percentage of the loan principal. The Bank
typically receives fees of between zero and one point (one point being
equivalent to 1% of the principal amount of the loan) in connection with the
origination of fixed-rate and adjustable-rate mortgage loans. The loan
origination fee, net of certain direct loan origination expenses, is deferred
and accreted into income over the estimated life of the loan using the interest
method. If a loan is prepaid, refinanced or sold, all remaining deferred fees
with respect to such loan are taken into income at such time.
In addition to the foregoing fees, Carver Federal receives fees for
servicing loans for others, which in turn generally are sub-serviced for Carver
Federal by a third party servicer. Servicing activities include the collection
and processing of mortgage payments, accounting for loan repayment funds and
paying real estate taxes, hazard insurance and other loan-related expenses out
of escrowed funds. Income from these activities varies from period to period
with the volume and type of loans originated, sold and purchased, which in turn
is dependent on prevailing market interest rates and their effect on the demand
for loans in the Bank's market area.
LOAN MATURITY SCHEDULE. The following table sets forth information at
March 31, 2005 regarding the amount of loans maturing in Carver Federal's
portfolio, including scheduled repayments of principal, based on contractual
terms to maturity. Demand loans, loans having no schedule of repayments and no
stated maturity, and overdrafts are reported as due in one year or less. The
table below does not include any estimate of prepayments, which significantly
shorten the average life of all mortgage loans and may cause Carver Federal's
actual repayment experience to differ significantly from that shown below.
DUE DURING THE YEAR ENDING
MARCH 31, DUE THREE DUE FIVE DUE TEN
--------- TO FIVE TO TO DUE AFTER
2006 2007 2008 YEARS TEN YEARS 20 YEARS 20 YEARS TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Real Estate Loans:
One- to four-family $ 4,089 $ 2,291 $ 4,110 $ 26,448 $ 1,011 $ 4,995 $112,854 $155,798
Multifamily 2,473 6,879 8,636 29,688 14,506 10,517 29,200 101,899
Non-residential 10,756 6,961 6,868 62,020 18,846 6,942 4,376 116,769
Construction 42,268 6,311 -- -- -- -- -- 48,579
Consumer and business 1,281 36 49 148 10 158 14 1,696
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 60,867 $ 22,478 $ 19,663 $118,304 $ 34,373 $ 22,612 $146,444 $424,741
======== ======== ======== ======== ======== ======== ======== ========
The following table sets forth as of March 31, 2005 amounts in each
loan category that are contractually due after March 31, 2006 and whether such
loans have fixed or adjustable interest rates. Scheduled contractual principal
repayments of loans do not necessarily reflect the actual lives of such assets.
The average life of long-term loans is substantially less than their contractual
terms due to prepayments. In addition, due-on-sale clauses in mortgage loans
generally give Carver Federal the right to declare a conventional loan due and
payable in the event, among other things, that a borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and tends to decrease
when current mortgage loan market rates are substantially lower than rates on
existing mortgage loans.
DUE AFTER MARCH 31, 2006
-------------------------------------------
FIXED ADJUSTABLE TOTAL
------------- ------------- -------------
( IN THOUSANDS )
Real Estate Loans:
One- to four-family $ 14,990 $ 136,719 $ 151,709
Multifamily 55,002 44,424 99,426
Non-residential 31,616 74,397 106,013
Construction -- 6,311 6,311
Consumer and business loans 415 -- 415
------------- ------------- -------------
Total $ 102,023 $ 261,851 $ 363,874
------------- ------------- -------------
ASSET QUALITY
GENERAL. One of the Bank's key operating objectives continues to be to
maintain a high level of asset quality. Through a variety of strategies,
including, but not limited to, monitoring loan delinquencies and borrower
workout arrangements, the Bank has been proactive in addressing problem and
non-performing assets which, in turn, has helped to build the strength of the
Bank's financial condition. Such strategies, as well as the Bank's concentration
on one- to four-family and commercial mortgage lending (which includes
multifamily and non-residential real estate loans), the maintenance of sound
credit standards for new loan originations and a strong real estate market, have
resulted in the Bank maintaining a low level of non-performing assets.
The underlying credit quality of the Bank's loan portfolio is dependent
primarily on each borrower's ability to continue to make required loan payments
and, in the event a borrower is unable to continue to do so, the value of the
collateral should be adequate to secure the loan. A borrower's ability to pay
typically is dependent primarily on employment and other sources of income,
which, in turn, is impacted by general economic conditions, although other
factors, such as unanticipated expenditures or changes in the financial markets,
may also impact the borrower's ability to pay. Collateral values, particularly
real estate values, are also impacted by a variety of factors, including general
economic conditions, demographics, maintenance and collection or foreclosure
delays.
NON-PERFORMING ASSETS. When a borrower fails to make a payment on a
mortgage loan, immediate steps are taken by Carver Federal and it's
sub-servicers to have the delinquency cured and the loan restored to current
status. With respect to mortgage loans, once the payment grace period has
expired (in most instances 15 days after the due date), a late notice is mailed
to the borrower within two business days and a late charge is imposed if
applicable. If payment is not promptly received, the borrower is contacted by
telephone and efforts are made to formulate an affirmative plan to cure the
delinquency. Additional calls are made by the 20th and 25th day of the
delinquency. If a mortgage loan becomes 30 days delinquent, a letter is mailed
to the borrower requesting payment by a specified date. If a mortgage loan
becomes 60 days delinquent, Carver Federal seeks to make personal contact with
the borrower and also has the property inspected. If a mortgage becomes 90 days
delinquent, a letter is sent to the borrower demanding payment by a certain date
and indicating that a foreclosure suit will be filed if the deadline is not met.
If payment is still not made, the Bank may pursue foreclosure or other
appropriate action.
When a borrower fails to make a payment on a consumer loan, steps are
taken by Carver Federal's loan servicing department to have the delinquency
cured and the loan restored to current status. Once the payment grace period has
expired (15 days after the due date), a late notice is mailed to the borrower
immediately and a late charge is imposed if applicable. If payment is not
promptly received, the borrower is contacted by telephone, and efforts are made
to formulate an affirmative plan to cure the delinquency. If a consumer loan
becomes 30 days delinquent, a letter is mailed to the borrower requesting
payment by a specified date. If the loan becomes 60 days delinquent, the account
is given to an independent collection agency to follow up with the collection of
the account. If the loan becomes 90 days delinquent, a final warning letter is
sent to the borrower and any co-borrower. If the loan remains delinquent, it is
reviewed for charge-off. The Bank's collection efforts generally continue after
the loan is charged off.
The following table sets forth information with respect to Carver
Federal's non-performing assets at the dates indicated.
AT MARCH 31,
------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Loans accounted for on a non-accrual basis (1):
Real estate:
One- to four-family $ 149 $ 558 $1,113 $ 756 $ 947
Multifamily 167 1,532 -- 253 978
Non-residential 665 -- 639 1,754 565
Construction -- 23 23 23 23
Consumer and business 17 10 27 37 6
------ ------ ------ ------ ------
Total non-accrual loans 998 2,123 1,802 2,823 2,519
------ ------ ------ ------ ------
Accruing loans contractually past due 90 days or more -- -- -- -- --
------ ------ ------ ------ ------
Total of non-accrual and accruing 90-day past due loans $ 998 $2,123 $1,802 $2,823 $2,519
------ ------ ------ ------ ------
Other non-performing assets (2):
Real estate:
One- to four-family -- -- -- -- --
Multifamily -- -- -- -- 27
Non-residential -- -- -- -- 449
Consumer and business -- -- -- -- --
------ ------ ------ ------ ------
Total other non-performing assets -- -- -- -- 476
------ ------ ------ ------ ------
Total non-performing assets (3) $ 998 $2,123 $1,802 $2,823 $2,995
====== ====== ====== ====== ======
Non-performing loans to total loans 0.23% 0.60% 0.61% 0.96% 1.04%
Non-performing assets to total assets 0.16% 0.39% 0.36% 0.63% 0.71%
(1) Non-accrual status denotes any loan where the delinquency exceeds 90 days
past due and in the opinion of management the collection of additional
interest is doubtful. Payments received on a non-accrual loan are either
applied to the outstanding principal balance or recorded as interest
income, depending on assessment of the ability to collect on the loan.
During the year ended March 31, 2005, gross interest income of $83,000
would have been recorded on non-accrual loans had they been current
throughout the fiscal year
(2) Other non-performing assets represent property acquired by the Bank in
settlement of loans (i.e., through foreclosure or repossession or as an
in-substance foreclosure). These assets are recorded at the lower of their
fair value or the unpaid principal balance plus unpaid accrued interest of
the related loans.
(3) Total non-performing assets consist of non-accrual loans, accruing loans
90 days or more past due and property acquired in settlement of loans.
At March 31, 2005, total non-performing assets decreased by $1.1
million, or 53.0%, to $998,000 compared to $2.1 million at March 31, 2004. All
non-performing assets at March 31, 2005 and 2004 relate to loans accounted for
on a non-accrual basis. The decrease primarily reflects a decline in
non-accruing multifamily and one- to four-family real estate loans partially
offset by an increase in non-accruing non-residential real estate loans.
There were no accruing loans contractually past due 90 days or more at
March 31, 2005 and March 31, 2004, reflecting the continued practice adopted by
the Bank during the fiscal year ended March 31, 2000 to either write off or
place on non-accrual status all loans contractually past due 90 days or more.
ASSET CLASSIFICATION AND ALLOWANCES FOR LOSSES. Federal regulations and
the Bank's policies require the classification of assets on the basis of quality
on a quarterly basis. An asset is classified as "substandard" if it is
determined to be inadequately protected by the current net worth and paying
capacity of the obligor or the current value of the collateral pledged, if any.
An asset is classified as "doubtful" if full collection is highly questionable
or improbable. An asset is classified as "loss" if it is considered
un-collectible, even if a partial recovery could be expected in the future. The
regulations also provide for a "special mention" designation, described as
assets that do not currently expose a savings institution to a sufficient degree
of risk to warrant classification but do possess credit deficiencies or
potential weaknesses deserving management's close attention. Assets classified
as substandard or doubtful require a savings institution to establish general
allowances for loan losses. If an asset or portion thereof is classified as a
loss, a savings institution must either establish specific allowances for loan
losses in the amount of the portion of the asset classified loss or charge off
such amount. Federal examiners may disagree with a savings institution's
classifications. If a savings institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the OTS Regional
Director.
At March 31, 2005, Carver Federal had $1.0 million of loans classified
as substandard which represented 0.2% of the Bank's total assets. There were no
loans classified as doubtful or loss at March 31, 2005.
The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan losses and
lease losses. The policy statement provides guidance for financial institutions
on both the responsibilities of management for the assessment and establishment
of adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems, that management analyze
all significant factors that affect the ability to collect the portfolio in a
reasonable manner and that management establish acceptable allowance evaluation
processes that meet the objectives set forth in the policy statement. Although
management believes that adequate specific and general loan loss allowances have
been established, actual losses are dependent upon future events and, as such,
further additions to the level of specific and general loan loss allowances may
become necessary. Federal examiners may disagree with the savings institution as
to the appropriate level of the institution's allowance for loan losses. While
management believes Carver Federal has established its existing loss allowances
in accordance with generally accepted accounting principles, there can be no
assurance that regulators, in reviewing Carver Federal's assets, will not
require Carver Federal to increase its loss allowance, thereby negatively
affecting Carver Federal's reported financial condition and results of
operations.
Carver Federal's methodology for establishing the allowance for loan
losses takes into consideration probable losses that have been identified in
connection with specific loans as well as losses that have not been identified
but can be expected to occur. Further, management reviews the ratio of
allowances to total loans (including projected growth) and recommends
adjustments to the level of allowances accordingly. The Internal Asset Review
Committee conducts quarterly reviews of the Bank's loans and evaluates the need
to establish general and specific allowances on the basis of this review. In
addition, management actively monitors Carver Federal's asset quality and
charges off loans and properties acquired in settlement of loans against the
allowances for losses on loans and such properties when appropriate and provides
specific loss reserves when necessary. Although management believes it uses the
best information available to make determinations with respect to the allowances
for losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making the
initial determinations.
The Internal Asset Review Committee reviews Carver Federal's assets on
a quarterly basis to determine whether any assets require classification or
re-classification. The Bank has a centralized loan servicing structure that
relies upon outside servicers, each of which generates a monthly report of
delinquent loans. The Board has designated the Internal Asset Review Committee
to perform quarterly reviews of the Bank's asset quality, and their report is
submitted to the Board for review. The Asset Liability and Interest Rate Risk
Committee of the Board establishes policy relating to internal classification of
loans and also provides input to the Internal Asset Review Committee in its
review of classified assets. In originating loans, Carver Federal recognizes
that credit losses will occur and that the risk of loss will vary with, among
other things, the type of loan being made, the creditworthiness of the borrower
over the term of the loan, general economic conditions and, in the case of a
secured loan, the quality of the security for the loan. It is management's
policy to maintain a general allowance for loan losses based on, among other
things, regular reviews of delinquencies and loan portfolio quality, character
and size, the Bank's and the industry's historical and projected loss experience
and current and forecasted economic conditions. In addition, considerable
uncertainty exists as to the future improvement or deterioration of the real
estate markets in various states, or of their ultimate impact on Carver Federal
as a result of its purchased loans in such states. See "--Lending
Activities--Loan Purchases and Originations." Carver Federal increases its
allowance for loan losses by charging provisions for possible losses against the
Bank's income. General allowances are established by the Board on at least a
quarterly basis based on an assessment of risk in the Bank's loans, taking into
consideration the composition and quality of the portfolio, delinquency trends,
current charge-off and loss experience, the state of the real estate market and
economic conditions generally. Specific allowances are provided for individual
loans, or portions of loans, when ultimate collection is considered improbable
by management based on the current payment status of the loan and the fair value
or net realizable value of the security for the loan.
At the date of foreclosure or other repossession or at the date the
Bank determines a property is an impaired property, the Bank transfers the
property to real estate acquired in settlement of loans at the lower of cost or
fair value, less estimated selling costs. Fair value is defined as the amount in
cash or cash-equivalent value of other consideration that a real estate parcel
would yield in a current sale between a willing buyer and a willing seller. Any
amount of cost in excess of fair value is charged-off against the allowance for
loan losses. Carver Federal records an allowance for estimated selling costs of
the property immediately after foreclosure. Subsequent to acquisition,
management periodically evaluates the property and an allowance is established
if the estimated fair value of the property, less estimated costs to sell,
declines. If, upon ultimate disposition of the property, net sales proceeds
exceed the net carrying value of the property, a gain on sale of real estate is
recorded. At March 31, 2005, the Bank had no foreclosed real estate, however as
a result of a property tax redemption, the Bank took fee ownership of a vacant
tract of land in Bayshore, NY. See Note 1 of Notes to Consolidated Financial
Statements.
The following table sets forth an analysis of Carver Federal's
allowance for loan losses for the periods indicated.
YEAR ENDED MARCH 31,
-----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 4,125 $ 4,158 $ 4,128 $ 3,551 $ 2,935
Loans charged-off:
Real Estate:
One- to four-family 8 6 2 -- 252
Non-residential -- 55 -- -- 194
Consumer and business 65 264 226 500 931
-------- -------- -------- -------- --------
Total Charge-offs 73 325 228 500 1,377
-------- -------- -------- -------- --------
Recoveries:
One- to four-family -- 107 -- 3 --
Multifamily -- -- -- -- --
Non-residential -- 10 -- -- --
Consumer and business 45 175 258 174 200
-------- -------- -------- -------- --------
Total Recoveries 45 292 258 177 200
-------- -------- -------- -------- --------
Net loans charged-off (recovered) 28 33 (30) 323 1,177
-------- -------- -------- -------- --------
Provision for losses -- -- -- 900 1,793
-------- -------- -------- -------- --------
Balance at end of period $ 4,097 $ 4,125 $ 4,158 $ 4,128 $ 3,551
======== ======== ======== ======== ========
Ratio of net charge-offs to loans outstanding 0.01% 0.01% -0.01% 0.11% 0.42%
Ratio of allowance to total loans 0.96% 1.16% 1.40% 1.41% 1.24%
Ratio of allowance to non-performing assets (1) 411.52% 194.30% 230.74% 146.23% 118.56%
(1) Non-performing assets consist of non-accrual loans, accruing loans 90 days
or more past due and property acquired in settlement of loans.
The following table allocates the allowance for loan losses by asset
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
AT MARCH 31,
------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------------------------------------------------------------------------------------------------
% OF LOANS % OF LOANS % OF LOANS % OF LOANS % OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
GROSS GROSS GROSS GROSS GROSS
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Loans:
Real Estate
One- to four-family $ 528 36.68% $ 355 27.80% $ 298 24.20% $ 429 41.84% $ 1,198 54.94%
Multifamily 898 23.99% 1,240 33.88% 656 44.45% 1,468 40.39% 748 29.13%
Non-residential 1,129 27.49% 853 28.92% 1,967 26.74% 729 13.66% 353 12.58%
Construction 212 11.44% 158 7.71% 170 3.89% 76 3.32% 290 2.03%
Consumer and business 554 0.40% 487 1.69% 344 0.72% 377 0.79% 962 1.32%
Unallocated 776 N/A 1,032 N/A 723 N/A 1,049 N/A -- N/A
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Allowance for
loan losses $ 4,097 100.00% $ 4,125 100.00% $ 4,158 100.00% $ 4,128 100.00% $ 3,551 100.00%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
INVESTMENT ACTIVITIES
GENERAL. The Bank utilizes mortgage-backed and other investment
securities in its asset/liability management strategy. In making investment
decisions, the Bank considers, among other things, its yield and interest rate
objectives, its interest rate and credit risk position and its liquidity and
cash flow.
The Bank must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. The Bank's liquidity policy requires that
cash flow projections are regularly reviewed and updated to assure that adequate
liquidity is maintained.
Generally, the investment policy of the Bank is to invest funds among
categories of investments and maturities based upon the Bank's asset/liability
management policies, investment quality, loan and deposit volume and collateral
requirements, liquidity needs and performance objectives. SFAS No. 115,
"ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES", requires
that securities be classified into three categories: trading, held-to-maturity,
and available-for-sale. Securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and are reported at fair value with unrealized gains and losses included in
earnings. Debt securities for which the Bank has the positive intent and ability
to hold to maturity are classified as held-to-maturity and reported at amortized
cost. All other securities not classified as trading or held-to-maturity are
classified as available-for-sale and reported at fair value with unrealized
gains and losses included, on an after-tax basis, in a separate component of
stockholders' equity. At March 31, 2005, the Bank had no securities classified
as trading. At March 31, 2005, $118.0 million, or 79.0% of the Bank's
mortgage-backed and other investment securities, was classified as
available-for-sale. The remaining $31.3 million, or 21.0%, was classified as
held-to-maturity.
MORTGAGE-BACKED SECURITIES. The Bank has invested in mortgage-backed
securities in order to achieve its asset/liability management goals. Although
mortgage-backed securities generally yield from 60 to 100 basis points less than
whole loans, they present substantially lower credit risk, are more liquid than
individual mortgage loans and may be used to collateralize obligations of the
Bank. Because Carver Federal receives regular payments of principal and interest
from its mortgage-backed securities, these investments provide more consistent
cash flows than investments in other debt securities, which generally only pay
principal at maturity. Mortgage-backed securities also help the Bank meet
certain definitional tests for favorable treatment under federal banking and tax
laws. See "--Regulation and Supervision--Federal Banking Regulation--QTL Test"
and "Federal and State Taxation."
At March 31, 2005, mortgage-backed securities constituted 20.2% of
total assets, as compared to 22.0% of total assets at March 31, 2004. Carver
Federal maintains a significant portfolio of mortgage-backed securities in the
form of Government National Mortgage Association ("GNMA") pass-through
certificates, FNMA and FHLMC participation certificates and at times
collateralized mortgage obligations ("CMOs"). GNMA pass-through certificates are
guaranteed as to the payment of principal and interest by the full faith and
credit of the United States Government while FNMA and FHLMC certificates are
each guaranteed by their respective agencies as to principal and interest.
Mortgage-backed securities generally entitle Carver Federal to receive a pro
rata portion of the cash flows from an identified pool of mortgages. CMOs are
securities issued by special purpose entities generally collateralized by pools
of mortgage-backed securities. The cash flows from such pools are segmented and
paid in accordance with a predetermined priority to various classes of
securities issued by the entity. Carver Federal has also invested in pools of
loans guaranteed as to principal and interest by the Small Business
Administration ("SBA").
The Bank seeks to manage interest rate risk by investing in
adjustable-rate mortgage-backed securities, which at March 31, 2005 constituted
$121.3 million, or 95.7% of the mortgage-backed securities portfolio.
Mortgage-backed securities, however, expose Carver Federal to certain unique
risks. In a declining rate environment, accelerated prepayments of loans
underlying these securities expose Carver Federal to the risk that it will be
unable to obtain comparable yields upon reinvestment of the proceeds. In the
event the mortgage-backed security has been funded with an interest-bearing
liability with maturity comparable to the original estimated life of the
mortgage-backed security, the Bank's interest rate spread could be adversely
affected. Conversely, in a rising interest rate environment, the Bank may
experience a lower than estimated rate of repayment on the underlying mortgages,
effectively extending the estimated life of the mortgage-backed security and
exposing the Bank to the risk that it may be required to fund the asset with a
liability bearing a higher rate of interest.
The following table sets forth the carrying value of Carver Federal's
mortgage-backed securities at the dates indicated. In fiscal 2003 the Bank
transferred $22.8 million of mortgage-backed securities from available-for-sale
to held-to-maturity.
AT MARCH 31,
------------------------------------
2005 2004 2003
-------- -------- --------
(IN THOUSANDS)
Available-for-Sale:
GNMA $ 83,425 $ 55,512 $ 47,120
Fannie Mae 8,149 12,626 23,470
FHLMC 3,908 6,712 19,693
-------- -------- --------
Total available-for-sale 95,482 74,850 90,283
-------- -------- --------
HELD-TO-MATURITY:
GNMA $ 1,070 $ 1,465 $ 2,473
Fannie Mae 10,780 20,386 6,203
FHLMC 19,115 21,305 27,482
SBA 337 318 372
-------- -------- --------
Total held-to-maturity 31,302 43,474 36,530
-------- -------- --------
Total mortgage-backed securities $126,784 $118,324 $126,813
======== ======== ========
The following table sets forth the scheduled final maturities,
amortized costs and fair values for Carver Federal's mortgage-backed securities
at March 31, 2005. Expected maturities will differ from contractual maturities
due to scheduled repayments and because borrowers may have the right to call or
prepay obligations with or without prepayment penalties. The following table
does not take into consideration the effects of scheduled repayments or the
effects of possible prepayments.
AMORTIZED FAIR
COST VALUE
------------ ------------
(IN THOUSANDS)
AVAILABLE-FOR-SALE :
Less than one year $ 1 $ 1
One through five years 576 595
Five through ten years 1,839 1,827
After ten years 93,614 93,059
------------ ------------
$ 96,030 $ 95,482
============ ============
HELD-TO-MATURITY:
Less than one year -- --
One through five years 99 102
Five through ten years -- --
After ten years 31,203 31,208
------------ ------------
$ 31,302 $ 31,310
============ ============
OTHER INVESTMENT SECURITIES. In addition to mortgage-backed securities,
the Bank also invests in high-quality assets (primarily government and agency
obligations) with short and intermediate terms (typically seven years or less)
to maturity. Carver Federal is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB, certificates
of deposit in federally insured institutions, certain bankers' acceptances and
federal funds. The Bank may also invest, subject to certain limitations, in
commercial paper having one of the two highest investment ratings of a
nationally recognized credit rating agency, and certain other types of corporate
debt securities and mutual funds. In anticipation of the acquisition of
Independence Federal Savings Bank ("IFSB"), in fiscal 2004 Carver purchased
150,000 shares of IFSB common stock, a total investment of $3.1 million. As a
result of subsequent declines in the market value of these shares, Carver took a
resulting impairment charge deemed other than temporary of $1.5 million on this
investment. Subsequent to end of the fiscal year, on May 11, 2005, the Company
sold its entire equity investment in IFSB for an aggregate price of $1.6
million.
The following table sets forth the carrying value of Carver Federal's
other securities available-for-sale and held-to-maturity at the date indicated.
AT MARCH 31,
-----------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS)
U.S. Government and Equity securities:
Available-for-sale $22,551 $21,553 $38,772
Held-to-maturity -- -- --
------- ------- -------
Total other securities $22,551 $21,553 $38,772
======= ======= =======
The following table sets forth the scheduled maturities, amortized
costs and fair values for Carver Federal's other investments at March 31, 2005.
AMORTIZED FAIR
COST VALUE
------------ ------------
(IN THOUSANDS)
Available-for-sale:
One year or less $ 10,368 $ 10,353
One through five years 12,351 12,198
------------ ------------
$ 22,719 $ 22,551
============ ============
OTHER EARNING ASSETS. Federal regulations require the Bank to maintain
an investment in FHLB stock and a sufficient amount of liquid assets which may
be invested in cash and specified securities. For additional information, see
"--Regulation and Supervision--Federal Banking Regulation--Liquidity."
The following table sets forth the carrying value of Carver Federal's
investment in FHLB stock and liquid assets at the dates indicated.
AT MARCH 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(IN THOUSANDS)
FHLB stock $ 5,125 $ 4,576 $ 5,440
Federal funds sold 6,800 8,200 5,500
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the primary source of Carver Federal's funds for
lending and other investment purposes. In addition to deposits, Carver Federal
derives funds from loan principal repayments, loan and investment interest
payments, maturing investments and fee income. Loan and mortgage-backed
securities repayments and interest payments are a relatively stable source of
funds, while deposit inflows and outflows are significantly influenced by
prevailing market interest rates, pricing of deposits, competition and general
economic conditions. Borrowed money may be used to supplement the Bank's
available funds, and from time to time the Bank has borrowed funds from the FHLB
and through repurchase agreements.
DEPOSITS. Carver Federal attracts deposits principally from within its
market area by offering a variety of deposit instruments, including passbook and
statement accounts and certificates of deposit, which range in term from 91 days
to seven years. Deposit terms vary, principally on the basis of the minimum
balance required, the length of time the funds must remain on deposit and the
interest rate. Carver Federal also offers Individual Retirement Accounts. Carver
Federal's policies are designed primarily to attract deposits from local
residents through the Bank's branch network. Carver Federal also holds deposits
from various governmental agencies or authorities and corporations. At March 31,
2005 the Bank did not hold any brokered deposits.
Deposit interest rates, maturities, service fees and withdrawal
penalties on deposits are established based on the Bank's funds acquisition and
liquidity requirements, the rates paid by the Bank's competitors, current market
rates, the Bank's growth goals and applicable regulatory restrictions and
requirements.
The following table sets forth the change in dollar amount of deposits
in the various types of accounts offered by Carver Federal between the dates
indicated. Over the course of fiscal 2005 the Bank opened two additional
branches as well as two stand-alone ATMs. The first new branch and ATM were
opened in July 2004 at Atlantic Terminal in Fort Greene, Brooklyn, the second
new ATM and branch were opened in Harlem in December 2004 and January 2005,
respectively. During fiscal 2004 the Bank opened two stand-alone ATM centers in
Harlem and a new branch in Jamaica, Queens. The Bank's branches on 116th Street
in Harlem and in Jamaica operate in New York State designated Banking
Development Districts ("BDD"), which allow Carver Federal to participate in
BDD-related activities, including acquiring New York City and New York State
deposits. As of March 31, 2005, Carver Federal held $100.0 million in BDD
deposits.
YEAR ENDED MARCH 31,
---------------------------------
2005 2004 2003
---------------------------------
(DOLLARS IN THOUSANDS)
Deposits at beginning of period $373,665 $347,164 $324,954
Net increase before interest credited 74,334 21,852 16,450
Interest credited 5,455 4,649 5,760
-------- -------- --------
Deposits at end of period $453,454 $373,665 $347,164
======== ======== ========
Net increase during the year:
Amount $ 79,789 $ 26,501 $ 22,210
======== ======== ========
Percent 21.4% 7.6% 6.8%
======== ======== ========
The following table sets forth the distribution of the Bank's deposit
accounts and the related weighted average interest rates paid at the dates
indicated.
AT MARCH 31,
--------------------------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------------------
PERCENT OF WEIGHTED PERCENT OF WEIGHTED PERCENT OF WEIGHTED
TOTAL AVERAGE TOTAL AVERAGE TOTAL AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
--------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Non-interest-bearing
demand $ 25,570 5.6% -% $ 20,966 5.6% -% $ 16,539 4.8% -%
NOW demand 24,095 5.3 0.30 22,671 6.0 0.30 18,190 5.2 0.53
Savings and clubs 137,810 30.4 0.62 131,120 35.1 0.60 128,935 37.1 1.06
Money Market savings 36,294 8.0 1.34 30,842 8.3 0.74 20,735 6.0 0.92
Certificates of deposit 229,685 50.7 2.30 168,066 45.0 1.97 162,765 46.9 2.20
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total $453,454 100.0% 1.48% $373,665 100.0% 1.18% $347,164 100.0% 1.51%
======== ======== ======== ======== ======== ======== ======== ======== ========
The following table sets forth the amount and maturities of
certificates of deposit in specified weighted average interest rate categories
at March 31, 2005.
PERIOD TO MATURITY MARCH 31,
---------------------------------------------------------------- --------------------
LESS THAN AFTER TOTAL PERCENT
Rate ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS 2005 OF TOTAL 2004 2003
- ----------- ---------------------------------------------------------------- --------- ---------
(DOLLARS IN THOUSANDS)
0% - 0.99% $ 569 $ 20 $ 3 $ 96 $ 688 0.30% $ 29,848 $ --
1% - 1.99% 119,731 2,311 410 7 122,459 53.32 69,434 87,811
2% - 3.99% 63,035 10,329 5,145 13,672 92,181 40.13 53,294 40,926
4% and over 3,250 752 2,954 7,401 14,357 6.25 15,490 34,028
--------- --------- --------- --------- --------- --------- --------- ---------
Total $ 186,585 $ 13,412 $ 8,512 $ 21,176 $ 229,685 100.00% $ 168,066 $ 162,765
========= ========= ========= ========= ========= ========= ========= =========
Carver Federal's certificates of deposit of $100,000 or more were
$161.7 million as of March 31, 2005 compared to $104.3 million at March 31, 2004
and $100.1 million at March 31, 2003. These certificates of deposit over
$100,000 include BDD deposits of $100 million and $50 million at March 31, 2005
and 2004, respectively.
BORROWED MONEY. Deposits are the primary source of funds for Carver
Federal's lending, investment and general operating activities. Carver Federal
is authorized, however, to use advances and securities sold under agreements to
repurchase ("Repos") from the FHLB and approved primary dealers to supplement
its supply of funds and to meet deposit withdrawal requirements. The FHLB
functions as a central bank providing credit for savings institutions and
certain other member financial institutions. As a member of the FHLB system,
Carver Federal is required to own stock in the FHLB and is authorized to apply
for advances. Advances are made pursuant to several different programs, each of
which has its own interest rate and range of maturities. Advances from the FHLB
are secured by Carver Federal's stock in the FHLB and a pledge of Carver
Federal's mortgage loan and mortgage-backed securities portfolios. One of the
elements of Carver Federal's investment strategy is to leverage the balance
sheet by increasing liabilities with FHLB advances and Repos and investing
borrowed funds primarily in adjustable-rate mortgage loan and mortgage-backed
securities products.
On September 17, 2003, Carver Federal 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 were $13.0
million and, together with the proceeds from the sale of the trust's common
securities, were used to purchase approximately $13.4 million aggregate
principal amount of the Holding Company's floating rate junior subordinated debt
securities due 2033. The trust preferred debt securities are redeemable
quarterly at the option of the Company beginning on or after July 7, 2007 and
have a mandatory redemption date of September 17, 2033. Cash distributions on
the trust preferred debt securities are cumulative and payable at a floating
rate per annum (reset quarterly) equal to 3.05% over 3-month LIBOR, with a rate
at March 31, 2005 of 6.08%. The subordinated debt securities amounted to $12.8
million at March 31, 2005 and are included in other borrowed money on the
consolidated statement of financial condition. The Bank takes into consideration
the term of borrowed money with the repricing cycle of the mortgage loans on the
balance sheet. At March 31, 2005, Carver Federal had outstanding $115.3 million
in total borrowed money, consisting of the subordinated debt securities and FHLB
borrowings.
The following table sets forth certain information regarding Carver
Federal's borrowed money at the dates and for the periods indicated:
AT OR FOR THE YEAR
ENDED MARCH 31,
-------------------
2005 2004
-------- --------
(DOLLARS IN THOUSANDS)
Amounts outstanding at the end of period:
FHLB-NY advances $102,500 $ 91,516
Guaranteed preferred beneficial interest in junior subordinated debentures 12,799 12,741
Loan for employee stock ownership plan -- 25
Rate paid at period end:
FHLB-NY advances 3.78% 3.92%
Guaranteed preferred beneficial interest in junior subordinated debentures 6.08% 4.16%
Loan for employee stock ownership plan -- 4.00%
Maximum amount of borrowing outstanding at any month end:
FHLB-NY advances $112,506 $112,030
Guaranteed preferred beneficial interest in junior subordinated debentures 12,799 12,742
Loan for employee stock ownership plan 25 207
Approximate average amounts outstanding for period:
FHLB-NY advances $ 97,013 $ 99,359
Guaranteed preferred beneficial interest in junior subordinated debentures 12,768 6,854
Loan for employee stock ownership plan 6 137
Approximate weighted average rate paid during period (1):
FHLB-NY advances 3.71% 3.74%
Guaranteed preferred beneficial interest in junior subordinated debentures 5.49% 4.78%
Loan for employee stock ownership plan 3.86% 4.07%
(1) The approximate weighted average rate paid during the period was computed
by dividing the average amounts outstanding into the related interest
expense for the period.
REGULATION AND SUPERVISION
GENERAL
The Bank is subject to extensive regulation, examination and
supervision by its primary regulator, the OTS. The Bank's deposit accounts are
insured up to applicable limits by the Federal Deposit Insurance Corporation
("FDIC") under the Savings Association Insurance Fund ("SAIF"), and it is a
member of the FHLB. The Bank must file reports with the OTS concerning its
activities and financial condition, and it must obtain regulatory approvals
prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions. The Holding Company, as a
unitary savings and loan holding company, is subject to regulation, examination
and supervision by the OTS and is required to file certain reports with, and
otherwise comply with, the rules and regulations of the OTS and of the
Securities and Exchange Commission (the "SEC") under the federal securities
laws. The OTS and the FDIC periodically perform safety and soundness
examinations of the Bank and the Holding Company and test our compliance with
various regulatory requirements. The OTS has primary enforcement responsibility
over federally chartered savings banks and has substantial discretion to impose
enforcement action on an institution that fails to comply with applicable
regulatory requirements, particularly with respect to its capital requirements.
In addition, the FDIC has the authority to recommend to the Director of the OTS
that enforcement action be taken with respect to a particular federally
chartered savings bank and, if action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances.
This regulation and supervision establishes a comprehensive framework
to regulate and control the activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. This
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such laws and regulations whether by the OTS, the FDIC or through
legislation could have a material adverse impact on the Bank and the Holding
Company and their operations and stockholders.
The description of statutory provisions and regulations applicable to
federally chartered savings banks and their holding companies and of tax matters
set forth in this document does not purport to be a complete description of all
such statutes and regulations and their effects on the Bank and the Holding
Company.
FEDERAL BANKING REGULATION
ACTIVITY POWERS. The Bank derives its lending and investment powers
from the Home Owners' Loan Act, as amended ("HOLA"), and the regulations of the
OTS. Under these laws and regulations, the Bank may invest in mortgage loans
secured by residential and commercial real estate, commercial and consumer
loans, certain types of debt securities and certain other assets. The Bank may
also establish service corporations that may engage in activities not otherwise
permissible for the Bank, including certain real estate equity investments and
securities and insurance brokerage. The Bank's authority to invest in certain
types of loans or other investments is limited by federal law.
LOANS TO ONE BORROWER LIMITATIONS. The Bank is generally subject to the
same limits on loans to one borrower as a national bank. With specified
exceptions, the Bank's total loans or extension of credit to a single borrower
or group of related borrowers may not exceed 15% of the Bank's unimpaired
capital and unimpaired surplus, which does not include accumulated other
comprehensive income. The Bank may lend additional amounts up to 10% of its
unimpaired capital and unimpaired surplus if the loans or extensions of credit
are fully secured by readily marketable collateral. The Bank currently complies
with applicable loans to one borrower limitations. At March 31, 2005, the Bank's
limit on loans to one borrower based on its unimpaired capital and surplus was
$9.3 million.
QTL TEST. Under HOLA, the Bank must comply with a qualified thrift
lender ("QTL") test. Under this test, the Bank is required to maintain at least
65% of its "portfolio assets" in certain "qualified thrift investments" on a
monthly basis in at least nine months of the most recent twelve-month period.
"Portfolio assets" means, in general, an association's total assets less the sum
of (a) specified liquid assets up to 20% of total assets, (b) goodwill and other
intangible assets and (c) the value of property used to conduct the Bank's
business. "Qualified thrift investments" include various types of loans made for
residential and housing purposes, investments related to such purposes,
including certain mortgage-backed and related securities and consumer loans. If
the Bank fails the QTL test, it must either operate under certain restrictions
on its activities or convert from a thrift charter to a bank charter. In
addition, if the Bank does not requalify under the QTL test within three years
after failing the test, the institution would be prohibited from engaging in any
activity not permissible for a national bank and would have to repay any
outstanding advances from the FHLB as promptly as possible. At March 31, 2005,
the Bank maintained approximately 73.1% of its portfolio assets in qualified
thrift investments. The Bank had also met the QTL test in each of the prior 12
months and was, therefore, a qualified thrift lender.
CAPITAL REQUIREMENTS. OTS regulations require the Bank to meet three
minimum capital ratios:
(1) a tangible capital ratio requirement of 1.5% of total assets,
as adjusted under OTS regulations;
(2) a leverage ratio requirement of 4% of core capital to such
adjusted total assets; and
(3) a risk-based capital ratio requirement of 8% of core and
supplementary capital to total risk-weighted assets.
In determining compliance with the risk-based capital requirement, the
Bank must compute its risk-weighted assets by multiplying its assets and certain
off-balance sheet items by risk-weights, which range from 0% for cash and
obligations issued by the U.S. government or its agencies to 100% for consumer
and commercial loans, as assigned by the OTS capital regulations based on the
risks that the OTS believes are inherent in the type of asset.
Generally, tangible capital is defined as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain mortgage
servicing rights) and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank.
Core capital is defined similarly to tangible capital, but also
includes certain qualifying supervisory goodwill less certain disallowed assets.
Supplementary capital includes cumulative and other perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and the allowance for loan and lease losses. In addition, up to 45% of
unrealized gains on available-for-sale equity securities with a readily
determinable fair value may be included in supplementary capital. The allowance
for loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets, and the amount of supplementary
capital that may be included as total capital cannot exceed the amount of core
capital.
In assessing an institution's capital adequacy, the OTS takes into
consideration not only these numeric factors but qualitative factors as well,
and has the authority to establish higher capital requirements for individual
institutions where necessary. The Bank, as a matter of prudent management,
targets as its goal the maintenance of capital ratios which exceed these minimum
requirements and are consistent with the Bank's risk profile. At March 31, 2005,
the Bank exceeded each of its capital requirements with a tangible capital ratio
of 9.2%, leverage capital ratio of 9.2% and total risk-based capital ratio of
15.6%.
The Federal Deposit Insurance Corporation Improvement Act, as amended
("FDICIA"), requires that the OTS and other federal banking agencies revise
their risk-based capital standards, with appropriate transition rules, to ensure
that they take into account interest rate risk, concentrations of risk and the
risks of non-traditional activities. The OTS adopted regulations, effective
January 1, 1994, that set forth the methodology for calculating an interest rate
risk ("IRR") component to be incorporated into the OTS risk-based capital
regulations. On May 10, 2002, the OTS adopted an amendment to its capital
regulations which eliminated the IRR component of the risk-based capital
requirement. Pursuant to the amendment, the OTS will continue to monitor the IRR
of individual institutions through the OTS requirements for IRR management, the
ability of the OTS to impose individual minimum capital requirements on
institutions that exhibit a high degree of IRR, and the requirements of Thrift
Bulletin 13a, which provides guidance on the management of IRR and the
responsibility of boards of directors in that area. In addition, the OTS
monitors the IRR of individual institutions through a variety of means,
including an analysis of the change in portfolio value, or NPV. NPV is defined
as the net present value of the expected future cash flows of an entity's assets
and liabilities and therefore, hypothetically represents the value of an
institution's net worth. The OTS has also used this NPV analysis as part of its
evaluation of certain applications or notices submitted by thrift institutions.
In addition, OTS Bulletin 13a provides guidance on the management of IRR and the
responsibility of boards of directors in that area. The OTS, through its general
oversight of the safety and soundness of savings associations, retains the right
to impose minimum capital requirements on individual institution to the extent
the institution is not in compliance with certain written guidelines established
by the OTS regarding NPV analysis. The OTS has not imposed any such requirements
on the Bank.
PROMPT CORRECTIVE ACTION REGULATIONS. Under the prompt corrective
action regulations, the OTS is authorized and, in some cases, required to take
supervisory actions against undercapitalized savings banks. For this purpose, a
savings bank would be placed in one of the following five categories based on
the bank's regulatory capital: well-capitalized; adequately capitalized;
undercapitalized; significantly undercapitalized; or critically
undercapitalized.
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as a bank's capital decreases
within the three undercapitalized categories. All banks are prohibited from
paying dividends or other capital distributions or paying management fees to any
controlling person if, following such distribution, the bank would be
undercapitalized. Generally, a capital restoration plan must be filed with the
OTS within 45 days of the date a bank receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, various mandatory supervisory actions become
immediately applicable to the institution, including restrictions on growth of
assets and other forms of expansion. Under the OTS regulations, generally, a
federally chartered savings bank is treated as well capitalized if its total
risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio
is 6% or greater, and its leverage ratio is 5% or greater, and it is not subject
to any order or directive by the OTS to meet a specific capital level. When
appropriate, the OTS can require corrective action by a savings association
holding company under the "prompt corrective action" provisions of federal law.
At March 31, 2005, the Bank was considered well-capitalized by the OTS.
LIMITATION ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions on the Bank's ability to make capital distributions, including cash
dividends, payments to repurchase or otherwise acquire its shares and other
distributions charged against capital. A savings institution that is the
subsidiary of a savings and loan holding company, such as the Bank, must file a
notice with the OTS at least 30 days before making a capital distribution.
However, the Bank must file an application for prior approval if the total
amount of its capital distributions (including each proposed distribution), for
the applicable calendar year would exceed the Bank's net income for that year
plus the Bank's retained net income for the previous two years.
The Bank may not pay dividends to the Holding Company if, after paying
those dividends, the Bank would fail to meet the required minimum levels under
risk-based capital guidelines and the minimum leverage and tangible capital
ratio requirements or the OTS notified the Bank that it was in need of more than
normal supervision.
The Bank is prohibited from making capital distributions if:
(1) the Bank would be undercapitalized following the distribution;
(2) the proposed capital distribution raises safety and soundness
concerns; or
(3) the capital distribution would violate a prohibition contained
in any statute, regulation or agreement.
LIQUIDITY. The Bank maintains liquidity levels to meet operational
needs. In the normal course of business, the levels of liquid assets during any
given period are dependent on operating, investing and financing activities.
Cash and due from banks, federal funds sold and repurchase agreements with
maturities of three months or less are the Bank's most liquid assets. The Bank
maintains a liquidity policy to maintain sufficient liquidity to ensure its safe
and sound operations.
BRANCHING. Subject to certain limitations, federal law permits the Bank
to establish branches in any state of the United States. The authority for the
Bank to establish an interstate branch network would facilitate a geographic
diversification of the Bank's activities. This authority under federal law and
OTS regulations preempts any state law purporting to regulate branching by
federal savings associations.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act, as
amended ("CRA"), as implemented by OTS regulations, the Bank has a continuing
and affirmative obligation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for the Bank nor does it
limit the Bank's discretion to develop the types of products and services that
it believes are best suited to its particular community. The CRA does however
require the OTS, in connection with its examination of the Bank, to assess the
Bank's record of meeting the credit needs of its community and to take such
record into account in its evaluation of certain applications by the Bank.
In particular, the system focuses on three tests:
(1) a lending test, to evaluate the institution's record of making
loans in its assessment areas;
(2) an investment test, to evaluate the institution's record of
investing in community development projects, affordable
housing and programs benefiting low or moderate income
individuals and businesses; and
(3) a service test, to evaluate the institution's delivery of
banking services through its branches, ATMs and other offices.
The CRA also requires all institutions to make public disclosure of
their CRA ratings. The Bank received an "Outstanding" CRA rating in its most
recent examination conducted in 2004.
Regulations require that we publicly disclose certain agreements that
are in fulfillment of CRA. The Holding Company has no such agreements in place
at this time.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with its "affiliates" and insiders is limited by OTS regulations
and by Sections 23A, 23B, 22 (g) and 22 (h) of the Federal Reserve Act ("FRA").
In general, these transactions must be on terms which are as favorable to the
Bank as comparable transactions with non-affiliates. Additionally, certain types
of these transactions are restricted to an aggregate percentage of the Bank's
capital. Collateral in specified amounts must usually be provided by affiliates
in order to receive loans from the Bank. In addition, OTS regulations prohibit a
savings bank from lending to any of its affiliates that is engaged in activities
that are not permissible for bank holding companies and from purchasing the
securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to its directors, executive
officers, and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the FRA and Regulation O of the Federal Reserve Board ("FRB"). Among other
things, these provisions require that extensions of credit to insiders (a) be
made on terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features and (b) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the Bank's capital. In addition, extensions of credit in excess of
certain limits must be approved by the Bank's board of directors. At March 31,
2005, there were no loans to officers or directors.
The FRB has confirmed its previous interpretations of Sections 23A and
23B of the FRA with Regulation W. The OTS has also conformed its regulations to
agree with Regulation W. Regulation W made various changes to existing law
regarding Sections 23A and 23B, including expanding the definition of what
constitutes an "affiliate" subject to Sections 23A and 23B and exempting certain
subsidiaries of state-chartered banks from the restrictions of Sections 23A and
23B.
The OTS regulations provide for additional restrictions imposed on
savings associations under Section 11 of HOLA, including provisions prohibiting
a savings association from making a loan to an affiliate that is engaged in
non-bank holding company activities and provisions prohibiting a savings
association from purchasing or investing in securities issued by an affiliate
that is not a subsidiary. The OTS regulations also include certain specific
exemptions from these prohibitions. The FRB and the OTS expect each depository
institution that is subject to Sections 23A and 23B to implement policies and
procedures to ensure compliance with Regulation W and the OTS regulation. These
regulations have had no material adverse effect on our business.
Section 402 of the Sarbanes-Oxley Act prohibits the extension of
personal loans to directors and executive officers of issuers (as defined in the
Sarbanes-Oxley Act). The prohibition, however, does not apply to mortgages
advanced by an insured depository institution, such as the Bank, that is subject
to the insider lending restrictions of Section 22(h) of the FRA.
ASSESSMENT. The OTS charges assessments to recover the cost of
examining savings associations and their affiliates. These assessments are based
on three components: the size of the association, on which the basic assessment
is based; the association's supervisory condition, which results in an
additional assessment based on a percentage of the basic assessment for any
savings institution with a composite rating of 3, 4, or 5 in its most recent
safety and soundness examination; and the complexity of the association's
operations, which results in an additional assessment based on a percentage of
the basic assessment for any savings association that managed over $1 billion in
trust assets, serviced for others loans aggregating more than $1 billion, or had
certain off-balance sheet assets aggregating more than $1 billion. Effective
July 1, 2004, the OTS adopted a final rule replacing examination fees for
savings and loan holding companies with semi-annual assessments. The OTS is
phasing in the assessments at a rate of 25% of the first semi-annual assessment
on July 1, 2004, 50% of the second semi-annual assessment on January 1, 2005 and
100% of the third semi-annual assessment on July 1, 2005. For fiscal 2005,
Carver paid $119,000 in OTS assessments.
ENFORCEMENT. The OTS has primary enforcement responsibility over the
Bank. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease and desist orders and to remove
directors and officers. In general, these enforcement actions may be initiated
in response to violations of laws and regulations and unsafe or unsound
practices.
STANDARDS FOR SAFETY AND SOUNDNESS. The OTS has adopted guidelines
prescribing safety and soundness standards. The guidelines establish general
standards relating to internal controls and information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, asset quality, earnings, and compensation, fees and benefits. In
general, the guidelines require, among other things, appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines. In addition, OTS regulations authorize, but do not require, the OTS
to order an institution that has been given notice that it is not satisfying
these safety and soundness standards to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable compliance plan
or fails in any material respect to implement an accepted compliance plan, the
OTS must issue an order directing action to correct the deficiency and may issue
an order directing other actions of the types to which an undercapitalized
association is subject under the "prompt corrective action" provisions of
federal law. If an institution fails to comply with such an order, the OTS may
seek to enforce such order in judicial proceedings and to impose civil money
penalties.
INSURANCE OF DEPOSIT ACCOUNTS. The Bank is a member of the SAIF and
pays its deposit insurance assessments to the SAIF. The FDIC also maintains
another insurance fund, BIF, which primarily insures the deposits of banks and
state chartered savings banks. Under federal law, the FDIC established a
risk-based assessment system for determining the deposit insurance assessments
to be paid by insured depository institutions. Under the assessment system, the
FDIC assigns an institution to one of three capital categories based on the
institution's financial information as of the quarter ending three months before
the beginning of the assessment period: (1) well-capitalized, (2) adequately
capitalized and (3) undercapitalized. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. Under
the regulation, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates currently range from 0.0% of
deposits for an institution in the highest category (i.e., well-capitalized and
financially sound, with no more than a few minor weaknesses) to 0.27% of
deposits for an institution in the lowest category (i.e., undercapitalized and
substantial supervisory concern). The FDIC is authorized to raise the assessment
rates as necessary to maintain the required reserve ratio of the deposit
insurance fund to 1.25%.
In addition, all FDIC insured institutions are required to pay
assessments to the FDIC at an annual rate of approximately 1.44% per $100,000 of
insured deposits to fund interest payments on the bonds issued by the Financing
Corporation ("FICO"), an agency of the federal government established to
recapitalize the predecessor to the SAIF. These assessments will continue until
the FICO bonds mature in 2017. The Bank's total expense in fiscal 2005 for FDIC
assessment for FICO bonds interest payments was $58,000. Due to the Bank's
favorable assessment risk classification there was no deposit insurance
assessment on our deposits for fiscal 2005.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of New
York ("FHLB-NY"), which is one of the twelve regional FHLBs composing the FHLB
System. Each FHLB provides a central credit facility primarily for its member
institutions. The Bank, as an FHLB member, is required to acquire and hold
shares of capital stock in the FHLB-NY in an amount equal to the greater of (i)
1% of the aggregate principal amount of its unpaid residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each year,
and (ii) 5% (or such greater fraction as established by the FHLB) of its
outstanding advances from the FHLB. The Bank was in compliance with this
requirement with an investment in the capital stock of the FHLB at March 31,
2005 of $5.1 million. Any advances from a FHLB must be secured by specified
types of collateral, and all long term advances may be obtained only for the
purpose of providing funds for residential housing finance.
FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. If dividends were reduced, or
interest on future FHLB advances increased, the Bank's net interest income would
be adversely affected. Dividends from FHLB-NY to the Bank amounted to $130,000
for fiscal 2005, $126,000 for fiscal 2004 and $190,000 for fiscal 2003. The
FHLB-NY suspended dividend payments to stockholders in the fourth quarter of
2003, due to losses in its securities portfolio, but resumed payment in January
2004 at a rate of 1.58% paid in April 2004. The dividend payment received in
January 2005 was at a rate of 3.05%.
Under the Gramm-Leach-Bliley Act, as amended ("Gramm-Leach"), which
repeals historical restrictions and eliminates many federal and state law
barriers to affiliations among banks and securities firms, insurance companies
and other financial service providers, membership in the FHLB system is now
voluntary for all federally-chartered savings banks such as the Bank.
Gramm-Leach also replaces the existing redeemable stock structure of the FHLB
system with a capital structure that requires each FHLB to meet a leverage limit
and a risk-based permanent capital requirement. Two classes of stock are
authorized: Class A (redeemable on six months notice) and Class B (redeemable on
five years notice). Pursuant to regulations promulgated by the Federal Housing
Finance Board, as required by Gramm-Leach, the FHLB-NY has adopted a capital
plan that will change the foregoing minimum stock ownership requirements for
FHLB-NY stock. Under the new capital plan, each member of the FHLB-NY will have
to maintain a minimum investment in FHLB-NY capital stock in an amount equal to
the sum of (1) the greater of $1,000 or 0.20% of the member's mortgage-related
assets and (2) 4.50% of the dollar amount of any outstanding advances under such
member's Advances, Collateral Pledge and Security Agreement with the FHLB-NY.
The FHLB-NY, however, has postponed the implementation of the new capital plan,
and the new implementation date has not yet been determined.
FEDERAL RESERVE SYSTEM. Under the FRB's regulations, the Bank is
required to maintain non-interest-earning reserves against its transaction
accounts. FRB regulations generally require that (a) reserves of 3% must be
maintained against aggregate transaction accounts between $7.0 million and $47.6
million (subject to adjustment by the FRB), and (b) a reserve of 10% (subject to
adjustment by the FRB between 8% and 14%) must be maintained against that
portion of total transaction accounts in excess of $47.6 million. The first $7.0
million of otherwise reservable balances are exempted from the reserve
requirements. The Bank is in compliance with these reserve requirements. Because
required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank, or a pass-through
account as defined by the FRB, the effect of this reserve requirement is to
reduce the Bank's interest-earning assets to the extent that the requirement
exceeds vault cash.
PRIVACY PROTECTION. Carver Federal is subject to OTS regulations
implementing the privacy protection provisions of Gramm-Leach. These regulations
require the Bank to disclose its privacy policy, including identifying with whom
it shares "nonpublic personal information," to customers at the time of
establishing the customer relationship and annually thereafter. The regulations
also require the Bank to provide its customers with initial and annual notices
that accurately reflect its privacy policies and practices. In addition, to the
extent its sharing of such information is not exempted, the Bank is required to
provide its customers with the ability to "opt-out" of having the Bank share
their nonpublic personal information with unaffiliated third parties before they
can disclose such information, subject to certain exceptions.
The Bank is subject to regulatory guidelines establishing standards for
safeguarding customer information. These regulations implement certain
provisions of Gramm-Leach. The guidelines describe the agencies' expectations
for the creation, implementation and maintenance of an information security
program, which would include administrative, technical and physical safeguards
appropriate to the size and complexity of the institution and the nature and
scope of its activities. The standards set forth in the guidelines are intended
to insure the security and confidentiality of customer records and information,
protect against any anticipated threats or hazards to the security or integrity
of such records and protect against unauthorized access to or use of such
records or information that could result in substantial harm or inconvenience to
any customer. The Bank has a policy to comply with the foregoing guidelines.
HOLDING COMPANY REGULATION. The Holding Company is a savings and loan
holding company regulated by the OTS. As such, the Holding Company is registered
with and is subject to OTS examination and supervision, as well as certain
reporting requirements. In addition, the OTS has enforcement authority over the
Holding Company and its subsidiaries. Among other things, this authority permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the financial safety, soundness or stability of a subsidiary savings
institution. Unlike bank holding companies, federal savings and loan holding
companies are not subject to any regulatory capital requirements or to
supervision by the FRB.
Gramm-Leach restricts the powers of new unitary savings and loan
holding companies. Unitary savings and loan holding companies that are
"grandfathered," i.e., unitary savings and loan holding companies in existence
or with applications filed with the OTS on or before May 4, 1999, such as
Carver, retain their authority under the prior law. All other unitary savings
and loan holding companies are limited to financially related activities
permissible for bank holding companies, as defined under Gramm-Leach.
Gramm-Leach also prohibits non-financial companies from acquiring grandfathered
unitary savings and loan holding companies.
RESTRICTIONS APPLICABLE TO ALL SAVINGS AND LOAN HOLDING COMPANIES.
Federal law prohibits a savings and loan holding company, including the Holding
Company, directly or indirectly, from acquiring:
(1) control (as defined under HOLA) of another savings institution
(or a holding company parent) without prior OTS approval;
(2) through merger, consolidation, or purchase of assets, another
savings institution or a holding company thereof, or acquiring
all or substantially all of the assets of such institution (or
a holding company), without prior OTS approval; or
(3) control of any depository institution not insured by the FDIC
(except through a merger with and into the holding company's
savings institution subsidiary that is approved by the OTS).
A savings and loan holding company may not acquire as a separate
subsidiary an insured institution that has a principal office outside of the
state where the principal office of its subsidiary institution is located,
except:
(1) in the case of certain emergency acquisitions approved by the
FDIC;
(2) if such holding company controls a savings institution
subsidiary that operated a home or branch office in such
additional state as of March 5, 1987; or
(3) if the laws of the state in which the savings institution to
be acquired is located specifically authorize a savings
institution chartered by that state to be acquired by a
savings institution chartered by the state where the acquiring
savings institution or savings and loan holding company is
located or by a holding company that controls such a state
chartered association.
The HOLA prohibits a savings and loan holding company (directly or
indirectly, or through one or more subsidiaries) from acquiring another savings
association or holding company thereof without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of a depository institution that is not
federally insured. In evaluating applications by holding companies to acquire
savings associations, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
FEDERAL SECURITIES LAWS. The Holding Company is subject to the periodic
reporting, proxy solicitation, tender offer, insider trading restrictions and
other requirements under the Securities Exchange Act of 1934, as amended
("Exchange Act").
DELAWARE CORPORATION LAW. The Holding Company is incorporated under the
laws of the State of Delaware. Thus, it is subject to regulation by the State of
Delaware and the rights of its shareholders are governed by the General
Corporation Law of the State of Delaware.
NEW YORK STATE BANKING REGULATIONS. The New York State Banking
Department has adopted Section 6-L to the banking law and regulations which
impose restrictions and limitations on certain high cost home loans made by any
individual or entity, including a federally-chartered savings bank, that
originates more than one high cost home loan in New York State in a 12-month
period. Among other things, the regulations and statute prohibit certain
mortgage loan provisions and certain acts and practices by originators and
impose certain disclosure and reporting requirements. It is unclear whether
these provisions would be preempted by Section 5(a) of HOLA, as implemented by
the lending and investment regulations of the OTS. The OTS has not yet adopted
regulations regarding high-cost mortgage loans and is currently considering
whether it will do so. Although the Bank does not originate loans that meet the
definition of "high-cost mortgage loan" under the proposed regulations, in the
event the Bank determines to originate such loans in the future, the Bank may be
subject to such regulation, if adopted as proposed.
OTHER FEDERAL REGULATION. The Bank is subject to OTS regulations
implementing the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA
PATRIOT Act. The USA PATRIOT Act gives the federal government new powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III
of the USA PATRIOT Act takes measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.
Title III of the USA PATRIOT Act and the related OTS regulations impose
the following requirements with respect to financial institutions:
o Establishment of anti-money laundering programs.
o Establishment of a program specifying procedures for obtaining
identifying information from customers seeking to open new
accounts, including verifying the identity of customers within
a reasonable period of time.
o Establishment of enhanced due diligence policies, procedures
and controls designed to detect and report money laundering.
o Prohibition on correspondent accounts for foreign shell banks
and compliance with recordkeeping obligations with respect to
correspondent accounts of foreign banks.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Holding Company and the Bank currently file consolidated
federal income tax returns, report their income for tax return purposes on the
basis of a taxable-year ending March 31st, using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations with some exceptions, including in particular the Bank's tax
reserve for bad debts discussed below. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Holding Company.
BAD DEBT RESERVES. The Bank, as a "small bank" (one with assets having
an adjusted tax basis of $500 million or less) in fiscal 2003 and fiscal 2002,
was permitted to maintain a reserve for bad debts with respect to "qualifying
loans," which, in general, are loans secured by certain interests in real
property, and to make, within specified formula limits, annual additions to the
reserve which are deductible for purposes of computing the Bank's taxable
income. In both fiscal years 2005 and 2004 the Bank was not considered to be a
small bank as total assets exceeded $500 million.
DISTRIBUTIONS. To the extent that the Bank makes "non-dividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's "base year reserve," i.e., its reserve as of
March 31, 1988, to the extent thereof and then from its supplemental reserve for
losses on loans, and an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not
constitute non-dividend distributions and, therefore, will not be included in
the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the non-dividend distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate.
ELIMINATION OF DIVIDENDS; DIVIDENDS-RECEIVED DEDUCTION. The Holding
Company may exclude from its income 100% of dividends received from the Bank as
a member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which the Holding Company and the Bank will
not file a consolidated tax return, except that if the Holding Company or the
Bank owns more than 20% of the stock of a corporation distributing a dividend,
then 80% of any dividends received may be deducted.
STATE AND LOCAL TAXATION
STATE OF NEW YORK. The Bank and the Holding Company are subject to New
York State franchise tax on entire net income or one of several alternative
bases, whichever results in the highest tax. "Entire net income" means federal
taxable income with adjustments. The Bank and the Holding Company file combined
returns and are subject to taxation in the same manner as other corporations
with some exceptions, including the Bank's deductions for additions to its
reserve for bad debts. The New York State franchise tax rate for both fiscal
years 2005 and 2004 was 9.03%, (including the Metropolitan Commuter
Transportation District Surcharge) of net income. In general, the Holding
Company is not required to pay New York State tax on dividends and interest
received from the Bank or on gains realized on the sale of Bank stock. 60% of
dividend income, and gains and losses from subsidiary capital are excluded from
New York State entire net income. Distributions to Carver Federal received from
Carver Asset Corporation are eligible for the New York State dividends received
deduction.
New York State has enacted legislation that enabled the Bank to avoid
the recapture of the New York State tax bad debt reserves that otherwise would
have occurred as a result of the changes in federal law and to continue to
utilize either the federal method or a method based on a percentage of its
taxable income for computing additions to its bad debt reserve.
NEW YORK CITY. The Bank and the Holding Company are also subject to a
similarly calculated New York City banking corporation tax of 9% on income
allocated to New York City. In this connection, legislation was enacted
regarding the use and treatment of tax bad debt reserves that is substantially
similar to the New York State legislation described above.
DELAWARE TAXATION. As a Delaware holding company not earning income in
Delaware, the Holding Company is exempted from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
EXECUTIVE OFFICERS OF THE HOLDING COMPANY
The name, position, term of office as officer and period during which
he or she has served as an officer is provided below for each executive officer
of the Holding Company as of May 31, 2005. Each of the persons listed below is
an executive officer of the Holding Company and the Bank, holding the same
office in each.
DEBORAH C. WRIGHT, age 47, has served as President and Chief Executive
Officer and a Director of the Holding Company and Carver Federal since June 1,
1999. In February 2005, Ms. Wright was elected Chairman of the Board. Prior to
joining Carver, Ms. Wright was President & Chief Executive Officer of the Upper
Manhattan Empowerment Zone Development Corporation, a position she held since
May 1996.
JAMES H. BASON, age 50, has served as Senior Vice President and Chief
Lending Officer since March 2003. Previously Mr. Bason was Vice President and
Real Estate Loan Officer at The Bank of New York where he had been employed
since 1991. At the Bank of New York, Mr. Bason was responsible for developing
and maintaining relationships with developers, builders, real estate investors
and brokers to provide construction and permanent real estate financing.
FRANK DEATON, age 36, has served as Senior Vice President of Operations
since January 2005 and formerly served as Chief Auditor since May 2001. Mr.
Deaton was previously Vice President and Risk Review Manager with Key Bank in
Cleveland, Ohio where he was responsible for developing the scope and overseeing
completion of credit, operational and regulatory compliance audits for a variety
of business units.
LINDA J. DUNN, age 49, has served as Senior Vice President, General
Counsel and Corporate Secretary since June 2001. Ms. Dunn had been a corporate
associate at the law firm Paul, Weiss, Rifkind, Wharton & Garrison since 1994.
CARMELO FELIX, age 56, has served as Senior Vice President and Chief
Auditor since January 2005. Mr. Felix was previously Deputy General Manager at
Korea Exchange Bank's Regional Headquarters for the Americas where he was
responsible for the administration of the bank's Internal Audit Department in
the Western Hemisphere.
WILLIAM GRAY, age 50, has served as Senior Vice President and Chief
Financial Officer since February 2002. Mr. Gray had been employed at the Dime
Savings Bank of New York since 1992, most recently serving as Vice
President/Director of Business Unit Planning and Support in the Controller's
Department where he was responsible for identifying and evaluating strategic
initiatives for several businesses.
DAVID HARGRAVES, age 42, has served as Senior Vice President and Chief
of Retail Banking since October 2004. Mr. Hargraves previously served at
Citibank as the Regional Vice President for Community Relations and was
responsible for community programs, sponsorships and community development in
108 branches in Manhattan, Brooklyn, Queens and Staten Island.
MARGARET D. PETERSON, age 54, has served as Senior Vice President and
Chief Human Resources Officer since June 2002. She joined Carver in October 1999
as Senior Vice President and Chief Administrative Officer. Ms. Peterson came to
Carver from Deutsche Bank where she had served as a Compensation Planning
Consultant in Corporate Human Resources.
ITEM 2. PROPERTIES.
The Bank currently conducts its business through one administrative office and
eight branch offices (including the main office) and four stand-alone ATM
centers. Carver Federal entered into a license agreement with Essex Corporation
on March 23, 2004 to operate an Investment Center at the Bank's Malcolm X
Boulevard branch but does not share any other owned or leased spaces with any
other businesses. The following table sets forth certain information regarding
Carver Federal's offices and other material properties at March 31, 2005. The
Bank believes that such facilities are suitable and adequate for its operational
needs.
LEASE LEASE
YEAR OWNED OR EXPIRATION EXTENTION NET BOOK
OPENED LEASED DATE DATE VALUE
----------- ----------- ------------ ------------ ------------------
(In thousands)
MAIN OFFICE
75 West 125th Street 1996 Owned $ 5,681
New York, NY
BRANCH OFFICES
1281 Fulton Street
Brooklyn, NY 1989 Owned 1,407
(Bedford-Stuyvesant Office)
1009-1015 Nostrand Avenue
Brooklyn, NY 1975 Owned 328
(Crown Heights Office)
115-02 Merrick Boulevard
Jamaica, NY 1996 Leased 2/28/2011 262
(St Albans Office)
130 Malcolm X Boulevard
New York, NY 2001 Leased 5/31/2006 5/31/2021 560
(Malcolm X Blvd. Office)
158-45 Archer Avenue
Jamaica, New York 2003 Leased 7/31/2018 7/31/2028 916
(Jamaica Center Branch)
1 Hanson Place
Brooklyn, NY 2004 Leased 7/31/2014 7/31/2024 1,111
(Atlantic Terminal Branch)
300 West 145 Street
New York, NY 2004 Leased 12/31/2009 12/31/2019 267
(Bradhurst Branch)
ATM CENTERS
503 West 125th Street
New York, NY 2003 Leased 3/1/2013 3/31/2023 145
601 West 137th Street
New York, NY 2003 Leased 10/31/2013 150
1 Hanson Place
Brooklyn, NY 2004 Leased 7/31/2009 7/31/2024 54
1400 5th Avenue
New York, NY 2005 Leased 8/30/2013 127
------------------
Total $ 11,008
==================
The net book value of Carver Federal's investment in premises and
equipment totaled approximately $13.7 million at March 31, 2005.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, Carver Federal is a party to various legal
proceedings incident to its business. Certain claims, suits, complaints and
investigations involving Carver Federal, arising in the ordinary course of
business, have been filed or are pending. The Company is of the opinion, after
discussion with legal counsel representing Carver Federal in these proceedings,
that the aggregate liability or loss, if any, arising from the ultimate
disposition of these matters would not have a material adverse effect on the
Company's consolidated financial position or results of operations. At March 31,
2005, except as set forth below, there were no material legal proceedings to
which the Company or its subsidiaries was a party or to which any of their
property was subject.
In January 2004, Michael Lee & Company ("Michael Lee"), former
accountants for Hale House Center, Inc., filed an action against Carver Federal
in New York County Supreme Court, asserting a single claim for contribution
against Carver Federal. The complaint alleges that Carver Federal should be
liable to Michael Lee in the event that Michael Lee is found liable to
non-parties Hale House Center, Inc. and its affiliated corporations ("Hale House
plaintiffs") in a separate action that the Hale House plaintiffs have filed
against Michael Lee asserting claims of professional malpractice and breach of
contract due to Michael Lee's alleged provision of deficient accounting services
to Hale House. The basis of Michael Lee's contribution claim against Carver
Federal is that Carver Federal allegedly breached a legal duty it owed Hale
House by improperly opening and maintaining a checking account on behalf of one
of the Hale House affiliates. Michael Lee seeks contribution from Carver Federal
in the amount of at least $8.5 million or the amount of any money judgment
entered against Michael Lee in favor of the Hale House plaintiffs. On February
4, 2004 Carver Federal filed a motion to dismiss the complaint in its entirety
and, on February 11, 2004, Michael Lee served a cross-motion for summary
judgment against Carver Federal. In May 2004, the court ruled in favor of Carver
Federal and judgment was entered in Carver Federal's favor on June 14, 2004.
Michael Lee has appealed the judgment. Carver Federal opposed the appeal as
untimely but it was found to be timely filed. Michael Lee's appeal is pending.
Carver Federal intends to defend itself vigorously. In the opinion of
management, after consultation with legal counsel, the lawsuit is without merit
and the ultimate outcome of this matter is not expected to have a material
adverse effect on the Company's results of operations, business operations or
consolidated financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended March 31, 2005, no matter was submitted to a
vote of our security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Holding Company's common stock is listed on the American Stock
Exchange under the symbol "CNY." As of May 31, 2005, there were 2,511,874 shares
of the common stock outstanding, held by approximately 990 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.
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
-------- ---------- ---------- --------- ---------- ----------
FISCAL YEAR 2005 FISCAL YEAR 2004
June 30, 2004 $23.95 $ 19.15 $ 0.05 June 30, 2003 $ 16.59 $13.66 $ 0.05
September 30, 2004 $20.45 $ 17.95 $ 0.07 September 30, 2003 $ 18.15 $16.25 $ 0.05
December 31, 2004 $20.82 $ 18.55 $ 0.07 December 31, 2003 $ 26.50 $17.60 $ 0.05
March 31, 2005 $20.07 $ 18.38 $ 0.07 March 31, 2004 $ 26.00 $23.02 $ 0.05
On October 26, 2004, the Holding Company's Board of Directors declared
a $0.07 cash dividend to shareholders for the second quarter of fiscal 2005.
This represents a $0.02 per share increase from the $0.05 previously paid each
quarter subsequent to the Board initially establishing payment of a quarterly
dividend on January 9, 2003. In each of the four fiscal years prior to fiscal
2003, the Company paid an annual $0.05 per common share cash dividend.
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. For
information concerning the Bank's liquidation account, see Note 11 of the Notes
to the Consolidated Financial Statements.
Unlike the Bank, the Holding Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent, in part, upon capital distributions
from the Bank. The Holding Company is subject to the requirements of Delaware
law, which generally limit dividends to an amount equal to the excess of the net
assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital, or if there is no such excess, to its
net profits for the current and/or immediately preceding fiscal year.
On August 6, 2002 the Holding Company announced a stock repurchase
program. To date, 83,584 shares of its common stock have been repurchased in
open market transactions at an average price of $17.03 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. The following table details purchases the
Holding Company made of its common stock during the fourth quarter of fiscal
2005.
Total Number Maximum
Total of Shares Number of Shares
Number of Average Purchased as part that May Yet Be
Shares Price Paid of Publicly Purchased Under the
Purchased per Share Announced Plans Plans
- ---------------------------------------------------------------------------------------------------------
January 1, 2005 through
January 31, 2005 - - - 170,085
February 1, 2005 through
February 28, 2005 599 18.73 599 169,486
March 1, 2005 through
March 31, 2005 21,435 18.39 21,435 148,051
- ---------------------------------------------------------------------------------------------------------
22,034 18.40 22,034
- ---------------------------------------------------------------------------------------------------------
Carver has three equity compensation plans: (1) The Management
Recognition Plan ("MRP") which provides for automatic grants of restricted stock
to certain employees 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 who administers the plan. (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. (3) The Option Plan provides
for automatic option grants to certain employees as of the date the plan became
effective in June of 1995, and like the MRP, also makes provision for added
discretionary option grants to those employees 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.
The following table shows common stock securities authorized for
issuance under Carver' equity compensation plans at March 31, 2005:
Number of securities
remaining available
Number of securities to Weighted-average for future issuance
be issued upon exercise exercise price of under equity compensation
of outstanding options, outstanding options plans (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
-------------------------------------------------------------------------
(a) (b) (c)
Equity compensation plans
approved by security plan
holders 225,292 12.37 148,621
Equity compensation plans
not approved by security
plan holders -- -- --
-------------------- -------------------- --------------------
Total 225,292 12.37 148,621
==================== ==================== ====================
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are our selected consolidated financial and other data.
This financial data is derived in part from, and should be read in conjunction
with our consolidated financial statements and related notes.
AT OR FOR THE FISCAL YEAR ENDED MARCH 31,
----------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL CONDITION DATA:
Assets $ 626,377 $ 538,830 $ 509,845 $ 450,306 $ 424,500
Loans, net 421,987 351,900 292,738 289,710 283,437
Securities 149,335 139,877 165,585 105,464 87,788
Cash and cash equivalents 20,420 22,774 23,160 34,851 31,758
Deposits 453,454 373,665 347,164 324,954 279,424
Borrowed funds 115,299 104,282 108,996 75,651 105,600
Stockholders' equity $ 45,801 $ 44,645 $ 41,073 $ 36,742 $ 32,096
Number of deposit accounts 40,199 38,578 41,220 41,200 44,751
Number of offices 8 6 5 5 5
OPERATING DATA:
Interest income $ 28,546 $ 26,234 $ 27,390 $ 28,395 $ 28,336
Interest expense 9,758 8,700 8,983 12,047 14,278
---------- ---------- ---------- ---------- ----------
Net interest income 18,788 17,534 18,407 16,348 14,058
Provision for loan losses -- -- -- 900 1,793
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 18,788 17,534 18,407 15,448 12,265
Non-interest income 4,075 5,278 3,161 4,485 2,934
Non-interest expenses 18,696 15,480 14,704 14,339 15,490
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 4,167 7,332 6,864 5,594 (291)
Income tax 1,518 2,493 3,033 881 98
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 2,649 $ 4,839 $ 3,831 $ 4,713 $ (389)
========== ========== ========== ========== ==========
Diluted earnings (loss) per common share $ 1.03 $ 1.87 $ 1.52 $ 1.89 $ (0.26)
========== ========== ========== ========== ==========
SELECTED STATISTICAL DATA:
Return on average assets (1) 0.45% 0.93% 0.83% 1.11% (0.07)%
Return on average equity (2) 5.80 11.40 9.77 13.78 (0.89)
Net interest margin (3) 3.41 3.56 4.26 4.09 3.61
Average interest rate spread (4) 3.26 3.40 4.08 3.89 3.48
Efficiency ratio (5) 81.77 67.86 68.18 77.89 96.93
Operating expense to average assets (6) 3.21 2.97 3.18 3.37 3.72
Equity to total assets at end of period 7.31 8.29 8.06 8.16 7.56
Average equity to average assets 7.84 8.13 8.48 8.03 7.85
Dividend payout ratio (7) 24.64 9.86 3.19 2.55 (17.24)
ASSET QUALITY RATIOS:
Non-performing assets to total assets (8) 0.16% 0.39% 0.36% 0.63% 0.71%
Non-performing assets to total loans receivable (8) 0.23 0.60 0.61 0.96 1.04
Allowance for loan losses to total loans receivable 0.96 1.16 1.40 1.41 1.24
(1) Net income divided by average total assets
(2) Net income divided by average total equity
(3) Net interest income divided by average interest-earning assets.
(4) The difference between the weighted average yield on interest-earning assets
and the weighted average cost of interest-bearing liabilities.
(5) Non-interest expense (other than real estate owned expenses) divided by the
sum of net interest income and non-interest income (other than net security
gains and losses and other non-recurring income).
(6) Non-interest expense less real estate owned expenses, divided by average
total assets.
(7) Dividends paid to common stockholders as a percentage of net income (loss)
available to common stockholders.
(8) Non performing assets consist of non-accrual loans, loans accruing 90 days
or more past due, and property acquired in settlement of loans.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with our 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
Carver Bancorp Inc., is a bank holding company organized under the laws
of the state of Delaware and registered as a "bank holding company" under the
Bank Holding Company Act of 1956, as amended. Carver is committed to providing
superior customer service while offering a range of banking products and
financial services to both our retail and commercial customers. The Holding
Company's primary subsidiary is Carver Federal Savings Bank which operates from
eight branches in the New York City boroughs of Manhattan, Brooklyn and Queens.
Carver Federal's net income is consistent with the thrift industry,
namely that it is dependent primarily on net interest income, which is the
difference between interest income earned on its loan, investment and
mortgage-backed securities portfolios and the interest paid on its
interest-bearing liabilities, such as deposits and borrowings. In addition, net
income is affected by the level of provision for loan losses, as well as
non-interest income and operating expenses.
Carver's net interest income increased year over year based on the
growth in average interest-earning assets of $57.9 million to $550.8 million for
fiscal 2005 from $493.0 million for fiscal 2004. In fiscal 2005, the Bank
experienced strong growth in its core business with increases in net loans
receivable and deposits of 19.9% and 21.4%, respectively, compared to March 31,
2004. The resulting increase in net interest income offset net interest margin
compression resulting from the interest rate environment and the impact of loan
repayments. Net interest margin declined to 3.41% for fiscal 2005 from 3.56% for
fiscal 2004 as the Federal Open Market Committee ("FOMC") raised the federal
funds rate seven times during fiscal 2005, from June 2004. While short-term U.S.
Treasury yields have shown somewhat similar increases since June of 2004, the
two and three year U.S. Treasury yields have shown only modest increases and the
five, ten and thirty year U.S. Treasury yields decreased during the same period,
resulting in a significant flattening of the U.S Treasury yield curve.
Additionally, there has been interest rate volatility within the individual
quarters of fiscal 2005 which has resulted in volatility in cash flows and
refinance activity, although not to the magnitude experienced in fiscal 2004. In
addition, repayments on mortgage-backed securities and mortgage loans continued
at a similar pace to Fiscal 2004, thereby contributing to net interest margin
compression as these cash flows were reinvested at lower market yields.
As previously noted, net interest income may be impacted by the Bank's
asset quality. Fiscal 2005 was another strong year of performance by the Bank's
loan portfolio where asset quality remained excellent. As a result, the Company
did not provide for additional loan loss reserves as it considers the current
allowance for loan losses to be adequate. To maintain strong asset quality, the
Company seeks to follow its loan policies and underwriting practices, which
include: (1) granting loans on a sound and collectible basis; (2) understanding
the needs of borrowers and the economic conditions in the Company's target
market while maintaining a balance between yield and risk; (3) ensuring that
sources of repayment are adequate in relation to the amount of the loan; (4)
developing and maintaining adequate diversification of the Bank's loan portfolio
as a whole and within loan categories; (5) ensuring that each loan is properly
documented and monitored; and (6) developing and applying adequate collection
procedures.
Net income for fiscal 2005 was unfavorably impacted by increased
expenses to expand the Bank's franchise and by expenses related to the attempted
IFSB acquisition. During fiscal 2005, the Bank successfully opened two full
service state-of-the-art branches at Atlantic Terminal in Fort Greene, Brooklyn
and Bradhurst Court in Harlem. Additionally, in the last 12 months the Bank
opened two 24/7 ATM banking centers also in Harlem and Brooklyn. These
investments increased operating expenses substantially. In addition, financial
results were impacted by an impairment charge deemed other than temporary of
$1.5 million, resulting from the decline in the market price of the 150,000
shares of common stock of IFSB that the Company held and merger related expense
charges of $847,000 also related to the attempted IFSB acquisition. On May 11,
2005, the Company sold all 150,000 shares of common stock held in IFSB for
$10.50 per share for an aggregate price of $1,575,000.
The Bank's strategy to enhance fee income from operations has resulted
in year over year increases in depository fees and charges, primarily ATM fees,
debit card income and commissions from the sale of investments and insurance. In
addition, the Bank benefited from the receipt of a net $1.1 million grant from
the Department of the Treasury, as well as high loan prepayment penalty income.
The outlook for fiscal 2006 reflects many of the economic and
competitive factors that the Bank faced in fiscal 2005. Structurally, the Bank's
balance sheet exhibits an asset sensitive bias over the long term. As a result,
the Bank's greatest exposure is to a lower rate environment as asset yields
would be expected to decline while deposit costs would be expected to stabilize.
Should rates continue to rise, additional margin compression would be expected
in the near term, however, management anticipates that the Bank's balance sheet
would benefit over time from a prolonged rising rate environment. Although the
U.S. Treasury yield curve is expected to continue to flatten during fiscal 2006,
the Bank will continue to focus on growth in its core businesses, namely the
expansion of commercial loans and retail deposits. Deposit growth is expected to
follow our new business and marketing effort to core customer groups including
landlords, churches and other non-profits as residents of the communities we
serve. New products designed to increase market share in these customer segments
include a new lock-box service for landlords to collect rental payments, a
checking overdraft line of credit in an effort to continue building our checking
account deposit base and participation in the Certificate of Deposit Account
Registry Services program to more efficiently address the collateral needs of
large balance depositors. Regarding mortgage lending, the strength of
originations and the purchase mortgage market coupled with the anticipated
reduced level of loan prepayments should result in continued strong loan
portfolio growth in fiscal 2006. Products such as sub-prime and jumbo mortgages
for sale in the secondary market will be introduced in fiscal 2006 to address
the needs of additional prospective borrowers, thereby fueling fee income
growth. A parallel to expanding non-interest income is lowering the Bank's
fiscal 2005 efficiency ratio of 81.77% for fiscal 2006, with an emphasis on cost
reduction through further outsourcing of operations and additional measures
including limiting further branch expansion in fiscal 2006. It is anticipated
that if further flattening of the U.S. Treasury yield curve occurs, the Bank may
utilize the cash flow of an expansion in its core business to reduce its
securities and borrowing portfolios, thereby limiting asset growth.
MERGER WITH INDEPENDENCE FEDERAL SAVINGS BANK
On March 15, 2004, the Company entered into a definitive merger
agreement to acquire IFSB in a cash transaction valued at approximately $33
million. The transaction was expected to close before the end of 2004 and was
subject to customary closing conditions, including regulatory approvals and the
approval of IFSB's shareholders.
On October 15, 2004 Carver was advised by the OTS of its denial of
Carver's application to consummate the merger agreement between Carver, the Bank
and IFSB. The merger agreement was subject to, among other things, approval by
the OTS. As a result, on October 26, 2004, the Company, the Bank and IFSB
announced their mutual agreement to terminate the merger agreement and to
release each party from all related liabilities.
On May 11, 2005, the Company sold all 150,000 shares of common stock
held in IFSB for $10.50 per share for an aggregate price of $1,575,000.
CRITICAL ACCOUNTING POLICIES
Various elements of our accounting policies, by their nature, are
inherently subject to estimation techniques, valuation assumptions and other
subjective assessments. Our policy with respect to the methodologies used to
determine the allowance for loan losses is our most critical accounting policy.
This policy is important to the presentation of our financial condition and
results of operations, and it involves a higher degree of complexity and
requires management to make difficult and subjective judgments, which often
require assumptions or estimates about highly uncertain matters. The use of
different judgments, assumptions and estimates could result in material
differences in our results of operations or financial condition.
See Note 1 of Notes to Consolidated Financial Statements for a
description of our critical accounting policy related to allowance for loan
losses and an explanation of the methods and assumptions underlying its
application.
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of Carver Federal's net
income, is determined by the difference or "spread" between the yield earned on
interest-earning assets and the rates paid on its interest-bearing liabilities
and the relative amounts of such assets and liabilities. Because Carver
Federal's interest-bearing liabilities consist primarily of shorter term deposit
accounts, Carver Federal's interest rate spread can be adversely affected by
changes in general interest rates if its interest-earning assets are not
sufficiently sensitive to changes in interest rates. The Bank has sought to
reduce its exposure to changes in interest rates by more closely matching the
effective maturities and repricing periods of its interest-earning assets and
interest-bearing liabilities through a variety of strategies, including the
origination and purchase of adjustable-rate mortgage loans for its portfolio,
investment in adjustable-rate mortgage-backed securities and shorter-term
investment securities and the sale of all long-term fixed-rate mortgage loans
originated into the secondary market.
DISCUSSION OF MARKET RISK--INTEREST RATE SENSITIVITY ANALYSIS
As a financial institution, the Bank's primary component of market risk
is interest rate volatility. Fluctuations in interest rates will ultimately
impact both the level of income and expense recorded on a large portion of the
Bank's assets and liabilities, and the market value of all interest-earning
assets, other than those which are short term in maturity. Since all of the
Company's interest-bearing liabilities and virtually all of the Company's
interest-earning assets are held by the Bank, most of the Company's IRR exposure
is retained by the Bank. As a result, all significant IRR 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 IRR by monitoring and controlling
the variation in repricing intervals between its assets and liabilities. To a
lesser extent, Carver Federal also monitors its interest rate sensitivity by
analyzing the estimated changes in market value of its assets and liabilities
assuming various interest rate scenarios. As discussed more fully below, there
are a variety of factors which influence the repricing characteristics of any
given asset or liability.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity gap. An asset or liability
is said to be interest rate sensitive within a specific period if it will mature
or reprice within that period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific period of time and the amount of interest-bearing
liabilities repricing within that same time period. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities and is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of falling interest rates, a
negative gap could result in an increase in net interest income, while a
positive gap could adversely affect net interest income. Conversely, during a
period of rising interest rates a negative gap could adversely affect net
interest income, while a positive gap could result in an increase in net
interest income. As illustrated below, Carver Federal had a negative one-year
gap equal to 4.42% of total rate sensitive assets at March 31, 2005. As a
result, Carver Federal's net interest income could be negatively affected by
rising interest rates and positively affected by falling interest rates.
The following table sets forth information regarding the projected
maturities, prepayments and repricing of the major rate-sensitive asset and
liability categories of Carver Federal as of March 31, 2005. 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.
THREE OVER ONE OVER THREE
OR FOUR TO THROUGH THROUGH OVER FIVE OVER
LESS TWELVE THREE FIVE THROUGH TEN
MONTHS MONTHS YEARS YEARS TEN YEARS YEARS TOTAL
--------- --------- --------- -------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Rate Sensitive Assets:
Loans and Mortgage Backed Securities $ 64,946 $ 143,499 $ 74,730 $121,359 $ 55,344 $ 83,983 $ 543,861
Federal Funds Sold 6,800 -- -- -- -- -- 6,800
Investment Securities 6,020 2,758 3,922 8,275 -- -- 20,975
--------- --------- --------- -------- --------- --------- ---------
Total interest-earning assets 77,766 146,257 78,652 129,634 55,344 83,983 571,636
RATE SENSITIVE LIABILITIES:
NOW demand 551 771 7,320 1,568 4,676 9,209 24,095
Savings and clubs 7,424 11,850 15,706 11,939 31,036 59,855 137,810
Money market savings 4,154 3,521 18,621 1,096 4,390 4,512 36,294
Certificates of Deposit 108,651 77,543 21,953 19,933 1,601 3 229,684
Borrowings 8,000 26,840 52,334 15,108 218 -- 102,500
--------- --------- --------- -------- --------- --------- ---------
Total interest-bearing liabilities $ 128,780 $ 120,525 $ 115,934 $ 49,644 $ 41,921 $ 73,579 $ 530,383
Interest Sensitivity Gap $ (51,014) $ 25,732 $ (37,282) $ 79,990 $ 13,423 $ 10,404 $ 41,253
Cumulative Interest Sensitivity $ (51,014) $ (25,282) $ (62,564) $ 17,426 $ 30,849 $ 41,253 --
Ratio of Cumulative Gap to Total Rate
Sensitive assets -8.92 -4.42% -10.94% 3.05% 5.40% 7.22% --
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.
Under this methodology, IRR exposure is assessed by reviewing the
estimated changes in net interest income ("NII") and NPV that would
hypothetically occur if interest rates rapidly rise or fall along the yield
curve. Projected values of NII and NPV at both higher and lower regulatory
defined rate scenarios are compared to base case values (no change in rates) to
determine the sensitivity to changing interest rates.
Presented below, as of March 31, 2005, is an analysis of the Bank's IRR
as measured by changes in NPV and NII for instantaneous and sustained parallel
shifts of 100 basis points in market interest rates. Such limits have been
established with consideration of the impact of various rate changes and the
Bank's current capital position. The Bank considers its level of IRR for fiscal
2005, 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 IRR exposure lies at the Bank level, management believes the table
below also similarly reflects an analysis of the Company's IRR.
NPV AS A %
NET PORTFOLIO VALUE OF PV OF ASSETS
------------------------------------- ------------------------
CHANGE IN RATE $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
- -------------------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
+300 bp 63,884 (21,049) -25% 10.28% -275 bp
+200 bp 72,273 (12,660) -15% 11.42% -161 bp
+100 bp 79,480 (5,453) -6% 12.36% -67 bp
0 bp 84,933 -- -- 13.03% --
-100 bp 88,049 3,116 4% 13.38% +35 bp
-200 bp 89,358 4,425 5% 13.49% +45 bp
MARCH 31, 2004
--------------
RISK MEASURES: +200 BP RATE SHOCK
Pre-Shock NPV Ratio: NPV as % of PV of Assets 13.03%
Post-Shock NPV Ratio 11.42%
Sensitivity Measure; Decline in NPV Ratio 161 bp
Certain shortcomings are inherent in the methodology used in the above
IRR measurements. Modeling changes in NPV require the making of certain
assumptions, which may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV table
presented assumes that the composition of Carver Federal's interest sensitive
assets and liabilities existing at the beginning of a period remains constant
over the period being measured and also assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or repricing of specific assets and liabilities.
Accordingly, although the NPV table provides an indication of Carver Federal's
IRR exposure at a particular point in time, such measurements are not intended
to and do not provide a precise forecast of the effect of changes in market
interest rates on Carver Federal's net interest income and 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 reflects the average yield on assets and the average cost of
liabilities for the years indicated. These yields and costs are derived by
dividing income or expense by the average balances of assets or liabilities,
respectively, for the periods shown. Average balances are derived from average
month-end balances, except for federal funds which are derived from daily
balances. The use of average monthly balances instead of average daily balances
on all other accounts should not result in material differences in the
information presented.
The table also presents information for the years indicated with
respect to the difference between the weighted average yield earned on
interest-earning assets and the weighted average rate paid on interest-bearing
liabilities, or "interest rate spread," which savings institutions have
traditionally used as an indicator of profitability. Another indicator of an
institution's profitability is its "net interest margin," which is its net
interest income divided by the average balance of interest-earning assets. Net
interest income is affected by the interest rate spread and by the relative
amounts of interest-earning assets and interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income.
MONTH ENDED
MARCH 31, 2005 YEAR ENDED MARCH 31, 2005
----------------------- ------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/COST BALANCE INTEREST YIELD/COST
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning Assets:
Loans (1) $ 408,966 5.70% $ 384,916 $ 22,940 5.96%
Investment securities (2) 28,046 3.02% 29,547 827 2.80%
Mortgage-backed securities 129,006 3.95% 125,643 4,605 3.67%
Federal funds 20,696 2.62% 10,724 174 1.62%
---------- ---------- ---------- ---------- ----------
Total interest-earning assets 586,714 5.08% 550,830 28,546 5.18%
Non-interest-earning assets 36,073 31,677
---------- ----------
Total assets $ 622,787 $ 582,507
========== ==========
INTEREST-BEARING LIABILITIES:
Deposits:
NOW demand $ 24,620 0.29% $ 22,933 $ 69 0.30%
Savings and clubs 136,695 0.61% 133,621 801 0.60%
Money market savings 35,407 1.36% 30,116 302 1.00%
Certificates of deposit 229,420 2.26% 208,584 4,258 2.04%
---------- ---------- ---------- ---------- ----------
Total deposits 426,142 1.54% 395,254 5,430 1.37%
Mortgagors deposits 2,322 1.52% 2,217 25 1.15%
Borrowed money 115,294 4.10% 109,787 4,303 3.92%
---------- ---------- ---------- ---------- ----------
Total deposits and interest-bearing liabilities 543,758 2.09% 507,258 9,758 1.92%
----------
Non-interest-bearing liabilities:
Demand 26,973 22,857
Other liabilities 5,728 6,724
---------- ----------
Total liabilities 576,459 536,839
Stockholders' equity 46,328 45,668
---------- ----------
Total liabilities and stockholders' equity $ 622,787 $ 582,507
========== ==========
Net interest income $ 18,788
==========
Average interest rate spread 2.99% 3.26%
========== ==========
Net interest margin 3.05% 3.41%
========== ==========
Ratio of average interest-earning assets to
interest-bearing liabilities 107.90% 108.59%
========== ==========
(1) Includes non-accrual loans.
(2) Includes FHLB-NY stock.
YEAR ENDED MARCH 31,
----------------------------------------------------------------------------------
2004 2003
--------------------------------------- ---------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
Interest Earning Assets: BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Loans (1) $ 314,297 $ 20,117 6.40% $ 282,439 $ 21,194 7.50%
Investment securities (2) 29,708 1,161 3.91% 36,660 1,614 4.40%
Mortgage-backed securities 126,764 4,789 3.78% 93,002 4,282 4.60%
Fed funds sold 22,194 167 0.75% 19,744 300 1.52%
----------- ----------- ----------- ----------- ----------- -----------
Total interest earning assets 492,963 26,234 5.32% 431,845 27,390 6.34%
Non-interest earning assets 28,423 30,414
----------- -----------
Total assets $ 521,386 $ 462,259
=========== ===========
INTEREST BEARING LIABILITIES:
Deposits
NOW demand $ 23,286 $ 85 0.37% $ 18,138 $ 130 0.72%
Savings and clubs 130,509 1,001 0.77% 127,004 1,477 1.16%
Money market savings 27,662 235 0.85% 16,747 189 1.13%
Certificates of deposit 163,382 3,304 2.02% 155,187 3,964 2.55%
----------- ----------- ----------- ----------- ----------- -----------
Total deposits 344,839 4,625 1.34% 317,076 5,760 1.82%
Mortgagers deposits 1,643 24 1.46% -- -- --
Borrowed money 106,350 4,051 3.81% 80,861 3,223 3.99%
----------- ----------- ----------- ----------- ----------- -----------
Total interest bearing liabilities 452,832 8,700 1.92% 397,937 8,983 2.26%
----------- -----------
Non-interest-bearing liabilities:
Demand 19,408 15,234
Other liabilities 6,746 9,880
----------- -----------
Total liabilities 478,986 423,051
Stockholders' equity 42,400 39,208
----------- -----------
Total liabilities and stockholders' equity $ 521,386 $ 462,259
=========== ===========
Net interest income $ 17,534 $ 18,407
=========== ===========
Average interest rate spread 3.40% 4.08%
=========== ===========
Net interest margin 3.56% 4.26%
=========== ===========
Ratio of avgerage interest-earning assets to
interest-bearing liabilities 108.86% 108.52%
=========== ===========
(1) Includes non-accrual loans.
(2) Includes FHLB-NY stock.
RATE/VOLUME ANALYSIS
The following table sets forth information regarding the extent to
which changes in interest rates and changes in volume of interest related assets
and liabilities have affected Carver Federal's interest income and expense
during the periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided for changes attributable to:
(1) changes in volume (changes in volume multiplied by new rate); (2) changes in
rates (change in rate multiplied by old volume); and (3) changes in rate/volume.
Changes in rate/volume variance are allocated proportionately between changes in
rate and changes in volume.
YEAR ENDED MARCH 31,
--------------------------------------------------------------------------
2005 VS. 2004 2004 VS. 2003
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------------- -----------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest Earning Assets:
Loans $ 4,209 $ (1,386) $ 2,823 $ 2,039 $ (3,116) $ (1,077)
Investment securities (5) (329) (334) (273) (180) (453)
Mortgage-backed securities (41) (143) (184) 1,270 (763) 507
Fed funds (186) 193 7 18 (151) (133)
--------- --------- --------- --------- --------- ---------
Total interest earning assets 3,977 (1,665) 2,312 3,054 (4,210) (1,156)
INTEREST BEARING LIABILITIES:
Deposits
NOW demand 1 15 16 19 (64) (45)
Savings and clubs (19) 219 200 27 (503) (476)
Money market savings (25) (43) (68) 93 (47) 46
Certificates of deposit (923) (31) (954) 165 (801) (636)
--------- --------- --------- --------- --------- ---------
Total deposits (966) 160 (806) 304 (1,415) (1,111)
Borrowed money (142) (110) (252) 1,024 (196) 828
--------- --------- --------- --------- --------- ---------
Total deposits and interest
bearing liabilities (1,108) 50 (1,058) 1,328 (1,611) (283)
Net change in interest income $ 2,869 $ (1,615) $ 1,254 $ 1,726 $ (2,599) $ (873)
========= ========= ========= ========= ========= =========
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2005 AND 2004
At March 31, 2005, total assets increased by $87.5 million, or 16.3%,
to $626.4 million compared to $538.8 million at March 31, 2004. The increase in
total assets was primarily attributable to increases in loans receivable, total
securities, premises and equipment and other assets.
Loans receivable, net, increased by $70.1 million, or 19.9%, to $422.0
million as of March 31, 2005 compared to $351.9 million one year ago. The net
loan growth during fiscal 2005 reflects loan originations of $85.8 million and
loan purchases of $104.7 million, offset by principal repayments of $112.6
million and loans sold to FNMA of $8.1 million. One- to four-family mortgage
loans increased by $57.2 million, or 57.9%, to $155.8 million at March 31, 2005
compared to $98.6 million at March 31, 2004. The increase in one- to four-family
loans is primarily due to additional loan purchases of $81.9 million and to, a
lesser extent, loan originations of $15.4 million. Multifamily real estate loans
decreased by $18.4 million, or 15.3%, to $101.9 million at March 31, 2005
compared to $120.3 million at March 31, 2004 as repayments exceeded total
additions. Non-residential real estate loans increased by $14.1 million, or
13.8%, to $116.8 million at March 31, 2005 compared to $102.6 million at March
31, 2004 primarily as a result of originations of $30.8 million and purchases of
$6.4 million during the year. Construction loans increased by $21.2 million, or
77.5%, to $48.6 million at March 31, 2005 compared to $27.4 million at March 31,
2004 primarily due to purchases. The Bank continues to grow its balance sheet
through focusing on the origination of real estate loans in the markets it
serves and will augment these originations with loan purchases. Consumer and
business loans decreased by $4.3 million, or 71.8%, to $1.7 million at March 31,
2005 compared to $6.0 million at March 31, 2004 reflecting the payoff of four
secured business loans in the amount of $1.0 million each which were originated
during fiscal 2004.
Total securities at March 31, 2005 increased $9.5 million to $149.3
million from $139.9 million at March 31, 2004, reflecting a $21.6 million
increase in available-for-sale securities and a $12.1 million decrease in
held-to-maturity securities. The increase in available-for-sale securities
primarily reflects purchases of $83.2 million partially offset by $51.4 million
in principal repayments, maturities and calls, $7.3 million in proceeds from
sales of securities, and an $2.4 million decrease in the market value of the
portfolio of which $1.5 million was a permanent impairment charge on IFSB stock
held in portfolio. The decrease in held-to-maturity securities reflects
principal payments and maturities of $12.0 million. Available-for-sale
securities represented 79.0% of the total securities portfolio at March 31, 2005
compared to 68.9% at March 31, 2004. The Bank invests in securities to help
diversify its asset portfolio and satisfy collateral requirements for certain
deposits.
At March 31, 2005, total liabilities increased $86.4 million, or 17.5%,
to $580.6 million compared to $494.2 million at March 31, 2004. Deposits
increased $79.8 million, or 21.4%, to $453.5 million at March 31, 2005 from
$373.7 million at March 31, 2004. The increase in deposits was primarily
attributable to increases of $61.7 million in certificates of deposit, $6.6
million in regular savings and club accounts, $6.0 million in demand accounts
and $5.5 million in money market accounts. Deposit increases reflects $50
million in new certificates of deposit from the City and the State under New
York State`s Banking Development District program and new money from the Bank's
increased retail depositors from the new branches. These additional funds from
deposit growth were used to fund loan originations and purchases. Total FHLB-NY
borrowings increased $11.0 million, or 10.6%, to $115.3 million at March 31,
2005 from $104.3 million at March 31, 2004 as a result of net additional
advances.
At March 31, 2005, stockholders' equity increased $1.2 million, or
2.6%, to $45.8 million compared to $44.6 million at March 31, 2004. The increase
in stockholders' equity was primarily attributable to net income of $2.6 million
partially offset by a decrease of $493,000 in accumulated other comprehensive
income related to the mark-to-market of the Bank's available-for-sale securities
and net repurchases of the Company's common stock of $263,000 and dividends
declared of $793,000. The Bank's capital levels meet regulatory requirements of
a well capitalized financial institution.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2005 AND 2004
NET INCOME
The Bank reported net income for fiscal 2005 of $2.6 million compared
to $4.8 million for the prior fiscal year. Net income available to common
stockholders for fiscal 2005 was $2.5 million, or $1.03 per diluted common share
compared to $4.6 million, or $1.87 per diluted common share, for fiscal 2004.
The decrease in net income was primarily due to an increase in non-interest
expense of $3.2 million and a decrease in non-interest income of $1.2 million
partially offset by an increase in net interest income of $1.3 million and a
$975,000 reduction in income tax expense.
INTEREST INCOME
Interest income increased for fiscal 2005 by $2.3 million, or 8.8% to
$28.5 million, from the prior fiscal year. The average balance of
interest-earning assets increased to $550.8 million for fiscal 2005 from $493.0
million for the prior fiscal year. This increase was partially offset by a
decline in the average yield on interest-earning assets to 5.08% for fiscal 2005
compared to 5.32% for fiscal 2004.
Interest income on loans increased by $2.8 million, or 14.0%, to $22.9
million for fiscal 2005 compared to $20.1 million for the prior fiscal year. The
increase in interest income from loans was primarily the result of a $70.6
million increase in average loan balances to $384.9 million for fiscal 2005
compared to $314.3 million for fiscal 2004, the effects of which were partially
offset by a 44 basis point decrease in the average rate earned on loans to 5.96%
for fiscal 2005 from 6.40% for the prior fiscal year. The increase in the
average balance of loans reflects originations and purchases in excess of
principal collections. The decline in the average rate earned on loans was
principally due to the downward pricing on loan products during the low interest
rate environment experienced during most of fiscal 2005, see "Item 7. Management
Discussion and Analysis--Liquidity and Capital Resources."
Interest income on mortgage-backed securities decreased by $184,000, or
3.8%, to $4.6 million for fiscal 2005 compared to $4.8 million for the prior
fiscal year, reflecting the combined effects an 11 basis point decrease in the
average rate earned on mortgage-backed securities to 3.67% for fiscal 2005 from
3.78% for the prior fiscal year, and a decrease of $1.1 million in the average
balance of mortgage-backed securities to $125.6 million for fiscal 2005 compared
to $126.8 million for fiscal 2004. The decrease in the average balance of such
securities demonstrates Management's commitment to invest proceeds received from
increased borrowings and deposits into higher yielding assets.
Interest income on investment securities decreased by approximately
$334,000, or 28.8%, to $827,000 for fiscal 2005 compared to $1.2 million for the
prior fiscal year. The decrease in interest income on investment securities
reflects a 111 basis point decrease in the average rate earned on investment
securities to 2.80% for fiscal 2005 from 3.91% for the prior fiscal year and a
decrease of $161,000 in the average balance of investment securities to $29.5
million for fiscal 2005 compared to $29.7 million for fiscal 2004.
Interest income on federal funds increased $7,000, or 4.2%, to
$174,000 for fiscal 2005 compared to $167,000 for the prior fiscal year. The
increase is primarily attributable to an 87 basis point increase in the average
rate earned on federal funds, partially offset by a $11.5 million decrease in
the average balance of federal funds year over year. This large increase in the
returns on federal funds was realized as the FRB continually increased the
federal funds rate during the entire fiscal year.
INTEREST EXPENSE
Interest expense increased by $1.1 million, or 12.2%, to $9.8 million
for fiscal 2005 compared to $8.7 million for the prior fiscal year. The increase
in interest expense reflects an increase of $54.4 million in the average balance
of interest-bearing liabilities to $507.2 million in fiscal 2005 from $452.8
million in fiscal 2004 as the total cost of interest-bearing liabilities
remained unchanged at 1.92% from year to year. The increase in the average
balance of interest-bearing liabilities in fiscal 2005 compared to fiscal 2004
was due to increases in both the average balance of interest-bearing deposits
and the average balance of borrowed money.
Interest expense on deposits increased $806,000, or 17.3%, to $5.5
million for fiscal 2005 compared to $4.6 million for the prior fiscal year. This
increase is attributable to a $50.4 million, or 14.6%, increase in the average
balance of interest-bearing deposits to $395.3 million for fiscal 2005 compared
to $344.8 million for fiscal 2004 and, to a much lesser extent, a 3 basis point
increase year over year in the cost of average deposits. The increase in the
average balance of interest-bearing deposits was primarily due to an increase in
the average balance of certificates of deposit of $45.2 million, or 27.7%, an
increase in the average balance of savings and club accounts of $3.1 million, or
2.4%, and an increase in the average balance of money market accounts of $2.5
million, or 8.92%. The increase in average interest-bearing deposits was
achieved largely through deposits generated by the two new branches and two new
ATM centers in fiscal 2005. The slight increase in the average rate paid on
deposits was principally due to the ascend in the interest rate environment
towards the end of fiscal 2005.
Interest expense on borrowed money increased by $252,000 or 6.2%, to
$4.3 million for fiscal 2005 compared to $4.1 million for the prior fiscal year.
The increase in interest expense on borrowed money for fiscal 2005 reflects a
$8.9 million, or 8.4%, increase in the average balance of borrowed money
reflecting the effects of the trust preferred debt securities being outstanding
for twelve months in fiscal 2005 as compared to six months in fiscal 2004, the
year they were issued. Also contributing to the increase in interest expense is
a rise of 11 basis points in the average cost of borrowed money primarily the
result of increases in the indexed rate of the trust preferred debt securities
which adjust quarterly and has increased in the current interest rate
environment.
NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends primarily upon the volume of interest-earning assets and
interest-bearing liabilities and the corresponding interest rates earned and
paid. Our net interest income is significantly impacted by changes in interest
rate and market yield curves. See "--Discussion of Market Risk--Interest Rate
Sensitivity Analysis" for further discussion on the potential impact of changes
in interest rates on our results of operations.
Net interest income before the provision for loan losses increased $1.3
million, or 7.2%, to $18.8 million for fiscal 2005 compared to $17.5 million for
the prior fiscal year. This increase was achieved despite a decline in the
return on average interest-earning assets of 14 basis points in fiscal 2005 from
fiscal 2004 while the cost of interest-bearing liabilities used to fund
interest-earning assets remained unchanged from year to year. The result was a
14 basis point decrease in the interest rate spread to 3.26% for fiscal 2005
compared to 3.40% for the prior fiscal year. The net interest margin also
decreased to 3.41% for fiscal 2005 compared to 3.56% for fiscal 2004.
PROVISION FOR LOAN LOSSES
During fiscal 2005 no provision was recorded for loan losses. The Bank
records provisions for loan losses, which are charged to earnings, in order to
maintain the allowance for loan losses at a level that is considered appropriate
to absorb probable losses inherent in the existing loan portfolio. Factors
considered when evaluating the adequacy of the allowance for loan losses include
the volume and type of lending conducted, the Bank's previous loan loss
experience, the known and inherent risks in the loan portfolio, adverse
situations that may affect the borrowers' ability to repay, the estimated value
of any underlying collateral and trends in the local and national economy and
trends in the real estate market.
During fiscal 2005, the Bank had net charge-offs of $28,000 compared to
$33,000 for fiscal 2004. At March 31, 2005, non-performing loans totaled
$998,000 or 0.2% of total loans compared to $2.1 million, or 0.6% of total
loans, at March 31, 2004. At March 31, 2005, the Bank's allowance for loan
losses was $4.1 million, substantially unchanged from the allowance at March 31,
2004, resulting in a ratio of the allowance to non-performing loans of 410.7% at
March 31, 2005 compared to 194.3% at March 31, 2004, and a ratio of allowance
for possible loan losses to total loans of 0.96% and 1.16% at March 31, 2005 and
March 31, 2004, respectively. The Bank believes its reported allowance for loan
loss at March 31, 2005 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 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 certain other miscellaneous non-interest
income. Non-interest income decreased $1.2 million, or 22.8%, to $4.1 million
for fiscal 2005 compared to $5.3 million for fiscal 2004. The decrease is
primarily due a $1.5 million impairment charge taken on the IFSB stock held in
our available for sale portfolio. Additionally, with the slow down in loan
refinancing activity, lower loan prepayment penalty income resulted in a decline
in loan fees and service charges of $739,000. Further, other non-interest income
declined $373,000 when compared to the same period last fiscal year when a
recovery of $558,000 was recorded as income in recognition of previously
unrecognized mortgage loan income. Offsetting these reductions to non-interest
income are income from the receipt of a net $1.1 million Community Development
Financial Institutions grant from the Department of Treasury, an increase of
$287,000 in depository fees and charges from additional depositors of our new
branches and ATMs, and a $63,000 gain from securities sale.
NON-INTEREST EXPENSE
Non-interest expense increased by $3.2 million, or 20.8%, to $18.7
million for fiscal 2005 compared to $15.5 million for the prior fiscal year. The
increase in non-interest expense was primarily attributable to increases of $1.9
million in salaries and employee benefits as a result of additions to staff from
the branch expansion, severance and related costs of $355,000 and increased
costs of benefits plans. Net occupancy and equipment expenses increased $514,000
and $122,000, respectively, mainly as a result of opening the new branches and
ATMs. Additionally, this fiscal year recorded a charge of $847,000 for merger
and acquisition expenses related to the attempted acquisition of IFSB. These
increases in non-interest expenses were slightly offset by a year over year
$141,000 decrease in other non-interest expense primarily the net result of
lower consulting, FDIC deposit assessment and loan related expenses Offset by
higher advertising, telephone and retail related expenses.
INCOME TAX EXPENSE
Income tax expense was approximately $1.5 million for fiscal 2005, a
decline of $975,000 or 39.1%, decrease from $2.5 million for fiscal 2004 due to
a reduction in the Company's net income before taxes. The effective tax rate in
fiscal 2005 was 36.4%, compared to 34.0% for fiscal 2004.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2004 AND 2003
NET INCOME
The Bank reported net income for fiscal 2004 of $4.8 million compared
to $3.8 million for the prior fiscal year. Net income available to common
stockholders for fiscal 2004 was $4.6 million, or $1.87 per diluted common share
compared to $3.6 million, or $1.52 per diluted common share, for fiscal 2003.
The increase in net income was primarily due to a $2.1 million increase in
non-interest income and a $540,000 reduction in income tax expense partially
offset by an $873,000 decrease in net interest income and a $776,000 increase in
non-interest expense.
INTEREST INCOME
Interest income for fiscal 2004 was $26.2 million, a decrease of $1.2
million, or 4.2%, from the prior fiscal year. The average balance of
interest-earning assets increased to $493.0 million for fiscal 2004 from $431.8
million for the prior fiscal year. This increase was more than offset by a
decline in the average yield on interest-earning assets to 5.32% for fiscal 2004
compared to 6.34% for fiscal 2003.
Interest income on loans decreased by $1.1 million, or 5.1%, to $20.1
million for fiscal 2004 compared to $21.2 million for the prior fiscal year. The
decrease in interest income from loans reflects a 110 basis point decrease in
the average rate earned on loans to 6.40% for fiscal 2004 from 7.50% for the
prior fiscal year, the effects of which were partially offset by an increase of
$31.9 million, or 11.3%, in the average balance of loans to $314.3 million for
fiscal 2004 compared to $282.4 million for fiscal 2003. The increase in the
average balance of loans reflects originations and purchases in excess of
principal collections. The decline in the average rate earned on loans was
principally due to the downward pricing on loan products during the low interest
rate environment experienced during fiscal 2004, see "Item 7. Management
Discussion and Analysis--Liquidity and Capital Resources."
Interest income on mortgage-backed securities increased by $507,000, or
11.8%, to $4.8 million for fiscal 2004 compared to $4.3 million for the prior
fiscal year, reflecting an increase of $33.8 million in the average balance of
mortgage-backed securities to $126.8 million for fiscal 2004 compared to $93.0
million for fiscal 2003. The increase in the average balance of such securities
was due to the utilization of part of the proceeds received from increased
borrowings and deposits, coupled with the redeployment of mortgage loan
principal repayments, to purchase mortgage-backed securities. This increase was
partially offset by an 82 basis point decrease in the average rate earned on
mortgage-backed securities to 3.78% for fiscal 2004 from 4.60% for the prior
fiscal year.
Interest income on investment securities decreased by approximately
$453,000, or 28.1%, to $1.2 million for fiscal 2004 compared to $1.6 million for
the prior fiscal year. The decrease in interest income on investment securities
reflects a 49 basis point decrease in the average rate earned on investment
securities to 3.91% for fiscal 2004 from 4.40% for the prior fiscal year and a
decrease of $7.0 million in the average balance of investment securities to
$29.7 million for fiscal 2004 compared to $36.7 million for fiscal 2003.
Interest income on federal funds decreased $133,000, or 44.3%, to
$167,000 for fiscal 2004 compared to $300,000 for the prior fiscal year. The
decrease is attributable to a 77 basis point decrease in the average rate earned
on federal funds, partially offset by a $2.5 million increase in the average
balance of federal funds.
INTEREST EXPENSE
Interest expense decreased by $283,000, or 3.2%, to $8.7 million for
fiscal 2004 compared to $9.0 million for the prior fiscal year. The decrease in
interest expense reflects a decline of 34 basis points in the average cost of
interest-bearing liabilities. This decline in average rate paid was partially
offset by a $54.9 million increase in the average balance of interest-bearing
liabilities to $452.8 million in fiscal 2004 from $397.9 million in fiscal 2003.
The increase in the average balance of interest-bearing liabilities in fiscal
2004 compared to fiscal 2003 was due to increases in the average balance of
interest-bearing deposits, as well as increases in the average balance of
borrowed money.
Interest expense on deposits decreased $1.1 million, or 19.3%, to $4.6
million for fiscal 2004 compared to $5.8 million for the prior fiscal year. This
decrease is attributable to a 48 basis point decrease in the cost of average
deposits partially offset by a $27.7 million, or 8.8%, increase in the average
balance of interest-bearing deposits to $344.8 million for fiscal 2004 compared
to $317.1 million for fiscal 2003. The increase in the average balance of
interest-bearing deposits was primarily due to an increase in the average
balance of money market accounts of $10.9 million, or 65.2%, and an increase in
the average balance of certificates of deposit of $8.2 million, or 5.3%. The
increase in average interest-bearing deposits was achieved in part through
deposits generated by a new branch and two new ATM centers in fiscal 2004. The
decrease in the average rate paid on deposits was principally due to the
declining interest rate environment experienced in fiscal 2004.
Interest expense on borrowed money increased by $828,000, or 25.7%, to
$4.1 million for fiscal 2004 compared to $3.2 million for the prior fiscal year.
The increase in interest expense on borrowed money for fiscal 2004 reflects a
$25.5 million increase in the average balance of borrowed money, of which $6.9
million resulted from the issuance of trust preferred debt securities, partially
offset by a decrease of 18 basis points in the average cost of borrowed money.
The decrease in average cost of borrowings was due to the continued declining
interest rate environment experienced during fiscal 2004.
NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends primarily upon the volume of interest-earning assets and
interest-bearing liabilities and the corresponding interest rates earned and
paid. Our net interest income is significantly impacted by changes in interest
rate and market yield curves. See "--Discussion of Market Risk--Interest Rate
Sensitivity Analysis" for further discussion on the potential impact of changes
in interest rates on our results of operations.
Net interest income before the provision for loan losses decreased
$873,000, or 4.7%, to $17.5 million for fiscal 2004 compared to $18.4 million
for the prior fiscal year. The 102 basis point decrease in the return on average
interest-earning assets, coupled with a 34 basis point decrease in the cost of
interest-bearing liabilities used to fund interest-earning assets, contributed
to a 68 basis point decrease in the interest rate spread to 3.40% for fiscal
2004 compared to 4.08% for the prior fiscal year. The net interest margin
decreased to 3.56% for fiscal 2004 compared to 4.26% for fiscal 2003.
PROVISION FOR LOAN LOSSES
During fiscal 2004 no provision was recorded for loan losses as
management considered that the allowance for loan losses was an appropriate
level to absorb probable losses inherent in the existing loan portfolio.
During fiscal 2004, the Bank had net charge-offs of $33,000 compared to
net recoveries of $30,000 for fiscal 2003. At March 31, 2004, non-performing
loans totaled $2.1 million, or 0.6% of total loans compared to $1.8 million, or
0.6% of total loans, at March 31, 2003. At March 31, 2004, the Bank's allowance
for loan losses was $4.1 million, substantially unchanged from that of March 31,
2003, resulting in a ratio of the allowance to non-performing loans of 194.3% at
March 31, 2004 compared to 230.7% at March 31, 2003, and a ratio of allowance
for possible loan losses to total loans of 1.16% and 1.40% at March 31, 2004 and
March 31, 2003, respectively. The Bank believes its reported allowance for loan
loss at March 31, 2004 is both appropriate in the circumstances and adequate to
provide for estimated probable losses in the loan portfolio. For further
discussion of non-performing loans and allowance for loan losses, see "Item
1--Business--General Description of Business--Asset Quality" and Note 1 of Notes
to the Consolidated Financial Statements.
NON-INTEREST INCOME
Non-interest income is comprised of loan fees and service charges,
gains or losses from the sale of securities and certain other items, fee income
for banking services and miscellaneous non-interest income. Non-interest income
increased $2.1 million, or 67.0%, to $5.3 million for fiscal 2004 compared to
$3.2 million for fiscal 2003. The increase is primarily due to a $1.3 million
increase in loan fees and service charges and a $590,000 increase in other, or
miscellaneous, non-interest income. Loan fees and service charges amounted to
$2.6 million for fiscal 2004, a 94.4% increase from the prior fiscal year,
primarily resulting from higher mortgage prepayment penalties relating to
increased refinancing activity including several loans whose prepayment
penalties were based on the yield maintenance method compared to a flat
declining rate method usually used by the Bank. The yield maintenance method is
calculated by using a stated contractual interest rate for the remaining term of
the loan multiplied by the current outstanding balance. Current loan production
does not incorporate the yield maintenance method. Additionally, a decline in
the refinance market could result in lower prepayment penalty fee income. Other
non-interest income amounted to $597,000 for fiscal 2004 compared to $7,000 for
the prior fiscal year. The increase in other non-interest income was primarily a
result of a recovery of $558,000 of which $411,000 was related to the
recognition of previously unrecognized mortgage loan income from one problem
loan that had been held in escrow pending the resolution of certain mechanics'
liens. The remaining recovery of $147,000 was from previously unrecognized
prepaid mortgage loan income.
NON-INTEREST EXPENSE
Non-interest expense increased by $776,000, or 5.3%, to $15.5 million
for fiscal 2004 compared to $14.7 million for the prior fiscal year. The
increase in non-interest expense was primarily attributable to increases of
$813,000 in salaries and employee benefits and $58,000 in net occupancy and
equipment expenses, slightly offset by a decrease of $95,000 in other
non-interest expense. The increase in salaries and employee benefits was
primarily attributable to annual salary increases, new hires and the increased
costs of benefit plans. Net occupancy expenses increased primarily from new and
upgraded 24/7 ATM centers and the Bank's Jamaica Center branch.
INCOME TAX EXPENSE
Income tax expense was approximately $2.5 million for fiscal 2004, a
$540,000, or 17.8%, decrease from $3.0 million for fiscal 2003 due to a
reduction in the Company's tax rate following the establishment of a REIT. The
effective tax rate in fiscal 2004 was 34.0% compared to 44.2% in fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Bank's ability to generate adequate cash
to meet financial obligations. The principal cash requirements of a financial
institution are to cover potential deposit outflows, fund increases in its loan
and investment portfolios and cover its ongoing operating expenses. The
Company's primary sources of funds are deposits, borrowed funds, principal and
interest payments on loans, mortgage-backed securities and investment securities
and fee income. While maturities and scheduled amortization of loans,
mortgage-backed securities and investment securities are predictable sources of
funds, deposit flows and loan and mortgage-backed securities prepayments are
strongly influenced by changes in general interest rates, economic conditions
and competition.
Management believes the Bank's short-term assets have sufficient
liquidity to cover loan demand, potential fluctuations in deposit accounts and
to meet other anticipated cash requirements. In addition, as previously
discussed, the Bank has the ability to borrow funds from the FHLB-NY to further
meet any liquidity needs. The Bank monitors its liquidity utilizing guidelines
that are contained in a policy developed by management of the Bank and approved
by the Bank's Board of Directors. The Bank's several liquidity measurements are
evaluated on a frequent basis. The Bank was in compliance with this policy as of
March 31, 2005.
Congress eliminated the statutory liquidity requirement which required
federal savings banks to maintain a minimum amount of liquid assets of between
4% and 10%, as determined by the Director of the OTS, the Bank's primary federal
regulator. The Bank is required to maintain sufficient liquidity to ensure its
safe and sound operation. As a result of the elimination of the liquidity
requirement, the Bank manages its liquidity through a Board-approved liquidity
policy. The Bank's most liquid assets are cash and short-term investments. The
level of these assets is dependent on the Bank's operating, investing and
financing activities during any given period. At March 31, 2005 and 2004, assets
qualifying for short-term liquidity, including cash and short-term investments,
totaled $30.2 million and $28.7 million, respectively.
The levels of the Bank's short-term liquid assets are dependent on the
Bank's operating, financing and investing activities during any given period.
The most significant liquidity challenge the Bank currently faces is the
variability in its cash flows as a result of mortgage refinance activity, which
has resulted in a lag in redeploying lower yielding federal funds into higher
yielding mortgage loans, which has had a negative impact on the Company's net
interest margin and net interest income. As mortgage interest rates decline,
customers' refinance activities tend to accelerate, causing the cash flow from
both the mortgage loan portfolio and the mortgage-backed securities portfolio to
accelerate. In addition, as mortgage interest rates decrease, customers
generally tend to prefer fixed rate mortgage loan products to variable rate
products. Since the Bank generally sells its 15-year and 30-year fixed rate loan
production into the secondary mortgage market, the origination of such products
for sale does not significantly reduce the Bank's liquidity. During fiscal 2003,
the federal funds rate was again lowered on three separate occasions a total of
125 basis points. During fiscal 2004 the federal funds rate remained unchanged.
In fiscal 2005 the federal funds rate increased seven separate times resulting
in a total increase in the federal funds rate of 175 basis points. While the
Bank experienced increases in loan and securities repayments over the last two
fiscal years primarily as a result of the increase in mortgage loan refinancing
activity caused by the lower interest rate environment, fiscal 2005 recognized a
leveling of these prepayments as rates begin to climb.
The Consolidated Statements of Cash Flows present the change in cash
from operating, investing and financing activities. During fiscal 2005, cash and
cash equivalents decreased by $2.4 million. Net cash used in operating
activities was $5.0 million, representing primarily cash used for other assets
and the satisfaction of other liabilities offset by cash from operations. Net
cash used in investing activities was $86.3 million, which was primarily the
result of purchases of loans and securities, originations of loans and purchase
of equipment partially offset by repayments and maturities of loans and
securities and loan sales. Net cash provided by financing activities was $88.9
million, reflecting primarily net increases in deposits and borrowings from the
FHLB-NY partially offset by repurchases of Carver common stock and stock
dividend payments.
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. The Bank has
outstanding commitments and contractual obligations as follows:
March 31,
---------------------
2005 2004
------- -------
(In thousands)
Commitments to originate mortgage loans $44,129 $71,114
Commitments to originate commercial and
consumer loans 515 2,844
Letters of credit 1,908 1,908
------- -------
Total $46,552 $75,866
======= =======
The following table presents the Bank's contractual obligations at March 31,
2005.
Payments due by period
----------------------------------------------------------
Contractual Less than 1 - 3 3 - 5 More than
Obligations Total 1 year years years 5 years
- --------------------------------------------- ---------- ---------- ---------- ---------- ----------
(In Thousands)
Long term debt obligations:
FHLB advances $ 102,500 $ 34,840 $ 52,334 $ 15,107 $ 219
Guaranteed preferred beneficial interest in
junior subordinated debentures 12,799 12,799
---------- ---------- ---------- ---------- ----------
Total long term debt obligations 115,299 34,840 52,334 27,906 219
Operating lease obligations:
Lease obligations for rental properties 4,300 630 1,092 1,167 1,411
---------- ---------- ---------- ---------- ----------
Total contractual obligations $ 119,599 $ 35,470 $ 53,426 $ 29,073 $ 1,630
========== ========== ========== ========== ==========
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, 2005, the Bank had tangible, core, and total
risk-based capital ratios of 9.2%, 9.2% and 15.6%, respectively and was
considered well capitalized.
The following table reconciles the Bank's stockholders' equity at March
31, 2005 under GAAP to regulatory capital requirements.
REGULATORY CAPITAL REQUIREMENTS
----------------------------------------------
GAAP TANGIBLE LEVERAGE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
---------- ---------- ---------- ----------
(IN THOUSANDS)
Stockholders' Equity at March 31, 2005 (1) $ 57,449 $ 57,449 $ 57,449 $ 57,449
Add:
General valuation allowances -- -- 4,097
Deduct:
Unrealized loss on securities available-for-sale, net 235 235 235
Goodwill and qualifying intangible assets -- -- --
---------- ---------- ----------
Regulatory Capital 57,684 57,684 61,781
Minimum Capital requirement 9,404 25,078 31,670
---------- ---------- ----------
Regulatory Capital Excess $ 48,280 $ 32,606 $ 30,111
========== ========== ==========
(1) Reflects Bank only.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and accompanying notes appearing elsewhere
herein have been prepared in accordance with GAAP, which require the measurement
of financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of Carver Federal's operations. Unlike most industrial companies, nearly
all the assets and liabilities of the Bank are monetary in nature. As a result,
interest rates have a greater impact on Carver Federal's performance than do the
effects of the general level of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item appears under the caption
"Discussion of Market Risk--Interest Rate Sensitivity Analysis" in Item 7,
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
LETTERHEAD OF KPMG LLP
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 (the "Company") as of March
31, 2005 and 2004 and the related consolidated statements of income, changes in
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended March 31, 2005. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with standards established by the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
An audit includes consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of March 31, 2005 and 2004, and the results of its operations and its cash
flows for each of the years in the three-year period ended March 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
KPMG LLP
New York, New York
June 24, 2005
MANAGEMENT'S REPORT
Management of Carver Bancorp is responsible for the preparation,
integrity and fair presentation of the consolidated financial statements and
other information presented in this annual report. The consolidated financial
statements have been prepared in conformity with GAAP and, where necessary, are
based on management's best estimates and judgment. Other financial information
contained elsewhere in this annual report is consistent with that contained in
the consolidated financial statements.
Management maintains accounting systems and internal controls to meet its
responsibilities for reliable consolidated financial statements. There are
inherent limitations in the effectiveness of internal controls, including the
possibility of circumvention or overriding of controls. Furthermore, because of
changes in conditions, the effectiveness of internal controls may vary over
time. These systems and controls are designed to provide reasonable assurance
that assets are safeguarded and transactions are properly recorded and executed
in accordance with management's authorization. An internal audit function is
maintained to continually evaluate the adequacy and effectiveness of such
internal controls, policies and procedures.
KPMG LLP, independent auditors, are engaged to audit the Company's
consolidated financial statements in accordance with auditing standards
generally accepted in the United States of America and the independent auditor's
report expresses their opinion as to the fair representation, in all material
respects, of the consolidated financial statements in conformity with GAAP. The
audit provides an objective assessment of the degree to which management meet
its responsibility for financial reporting.
The Board fulfills its oversight role for the financial statements
through the Finance and Audit Committee, which is composed entirely of outside
directors. The Finance and Audit Committee meet regularly with management, the
internal auditors, and the independent auditors, to discuss internal controls
and accounting, auditing and financial reporting matters. The Finance and Audit
Committee reviews and approves the scope of internal and external audits, as
well as recommendations made with respect to internal controls by the
independent and internal auditors and the various regulatory agencies. KPMG LLP
and the internal auditors meet with the Finance and Audit Committee with and
without management present.
Management assessed the Company's system of internal control over
financial reporting as of March 31, 2005 based on criteria for effective
internal control over financial reporting described in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that as of March 31, 2005, the Company's system of internal controls
over financial reporting met those criteria.
/S/ DEBORAH C. WRIGHT /S/ WILLIAM C. GRAY
- --------------------- -------------------
Deborah C. Wright William C. Gray
Chairman, President Senior Vice President and
and Chief Executive Officer Chief Financial Officer
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31,
---------------------
2005 2004
--------- ---------
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 13,020 $ 11,574
Federal Funds sold 6,800 8,200
Interest Earning Deposits 600 3,000
--------- ---------
Total cash and cash equivalents 20,420 22,774
--------- ---------
Securities:
Available-for-sale, at fair value (including pledged as collateral
of $112,503 at March 31, 2005 and $82,325 at March 31, 2004 ) 118,033 96,403
Held-to-maturity, at amortized cost (including pledged as collateral
of $30,900 at March 31, 2005 and $42,189 at March 31, 2004;
fair value of $31,310 at March 31, 2005 and $43,794 at March 31, 2004 ) 31,302 43,474
--------- ---------
Total securities 149,335 139,877
--------- ---------
Loans receivable:
Real estate mortgage loans 424,387 350,015
Consumer and commercial business loans 1,697 6,010
Allowance for loan losses (4,097) (4,125)
--------- ---------
Total loans receivable, net 421,987 351,900
Office properties and equipment, net 13,658 11,682
Federal Home Loan Bank of New York stock, at cost 5,125 4,576
Accrued interest receivable 2,702 2,489
Other assets 13,150 5,532
--------- ---------
Total assets $ 626,377 $ 538,830
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 453,454 $ 373,665
Advances from the Federal Home Loan Bank of New York and other borrowed
money 115,299 104,282
Other liabilities 11,823 16,238
--------- ---------
Total liabilities 580,576 494,185
--------- ---------
Stockholders' equity:
Preferred stock (par value $0.01 per share; 1,000,000 shares authorized;
0 issued and outstanding at March 31, 2005 and 100,000 issued and
outstanding at March 31, 2004) -- 1
Common stock (par value $0.01 per share: 10,000,000 shares authorized;
2,524,691 and 2,316,358 shares issued at March 31, 2005 and March 31,
2004, respectively; 2,501,338
and 2,285,267 outstanding at March 31, 2005 and March 31, 2004,
respectively) 25 23
Additional paid-in capital 23,937 23,882
Retained earnings 22,748 20,892
Unamortized awards of common stock under ESOP and management recognition plan ("MRP") (254) (21)
Treasury stock, at cost (23,353 shares at March 31, 2005 and 31,091 at March 31, 2004) (420) (390)
Accumulated other comprehensive (loss) income (235) 258
--------- ---------
Total stockholders' equity 45,801 44,645
--------- ---------
Total liabilities and stockholders' equity $ 626,377 $ 538,830
========= =========
See accompanying notes to consolidated financial statements.
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
FOR THE YEAR ENDED MARCH 31,
-----------------------------------
2005 2004 2003
---------- ---------- ----------
Interest income:
Loans $ 22,940 $ 20,117 $ 21,194
Mortgage-backed securities 4,605 4,789 4,282
Investment securities 827 1,161 1,614
Federal funds sold 174 167 300
---------- ---------- ----------
Total interest income 28,546 26,234 27,390
---------- ---------- ----------
Interest expense:
Deposits 5,455 4,649 5,760
Advances and other borrowed money 4,303 4,051 3,223
---------- ---------- ----------
Total interest expense 9,758 8,700 8,983
---------- ---------- ----------
Net interest income 18,788 17,534 18,407
Provision for loan losses -- -- --
---------- ---------- ----------
Net interest income after provision for loan losses 18,788 17,534 18,407
---------- ---------- ----------
Non-interest income:
Depository fees and charges 2,212 1,925 1,813
Loan fees and service charges 1,868 2,607 1,341
Gain on sale of investment securities 94 31 --
Impairment of securities (1,547) -- --
Gain on sale of loans 84 116 --
Gain on sale of fixed assets -- 2 --
Grant income 1,140 -- --
Other 224 597 7
---------- ---------- ----------
Total non-interest income 4,075 5,278 3,161
---------- ---------- ----------
Non-interest expense:
Compensation and benefits 9,461 7,587 6,774
Net occupancy expense 1,957 1,443 1,261
Equipment 1,608 1,486 1,610
Other 5,670 4,964 5,059
---------- ---------- ----------
Total non-interest expense 18,696 15,480 14,704
---------- ---------- ----------
Income before income taxes 4,167 7,332 6,864
Income taxes 1,518 2,493 3,033
---------- ---------- ----------
Net income $ 2,649 $ 4,839 $ 3,831
========== ========== ==========
Dividends applicable to preferred stock $ 114 $ 197 $ 197
Net income available to common stockholders $ 2,535 $ 4,642 $ 3,634
========== ========== ==========
Earnings per common share:
Basic $ 1.06 $ 2.03 $ 1.59
========== ========== ==========
Diluted $ 1.03 $ 1.87 $ 1.52
========== ========== ==========
See accompanying notes to consolidated financial statements.
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS)
COMMON
ADDITIONAL ACCUMULATED STOCK
PREFERRED COMMON PAID-IN RETAINED TREASURY OTHER ACQUIRED BY
STOCK STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) ESOP
------------ ---------- ------------- -------------- ----------- ----------------- ------------
BALANCE - MARCH 31, 2002 $ 1 $ 23 $ 23,756 $ 13,194 $ (138) $ 116 $ (152)
Comprehensive income:
Net income - - - 3,831 - - -
Change in net unrealized gain
on available-for-sale
securities, net of taxes - - - - - 634 -
------------ ---------- ------------- -------------- ----------- ----------------- ------------
Comprehensive income, net of
taxes:
Dividends paid - - - (313) - - -
Purchase of treasury stock - - 5 - (52) - -
Allocation of ESOP Stock - - 20 - - - 152
Purchase of shares for MRP - - - - - - -
------------ ---------- ------------- -------------- ----------- ----------------- ------------
BALANCE - MARCH 31, 2003 1 23 23,781 16,712 (190) 750 -
Comprehensive income :
Net income - - - 4,839 - - -
Change in net unrealized gain
on available-for-sale
securities, net of taxes - - - - - (492) -
------------ ---------- ------------- -------------- ----------- ----------------- ------------
Comprehensive income, net of
taxes:
Dividends paid - - - (659) - - -
Treasury stock activity - - 82 - (200) - -
Allocation of ESOP Stock - - - - - - -
Purchase of shares for MRP - - 19 - - - -
------------ ---------- ------------- -------------- ----------- ----------------- ------------
BALANCE--MARCH 31, 2004 1 23 23,882 20,892 (390) 258 -
Comprehensive income :
Net income - - 2,649 - - -
Change in net unrealized gain
on available-for-sale
securities, net of taxes - - - - - (493) -
------------ ---------- ------------- -------------- ----------- ----------------- ------------
Comprehensive income, net of
taxes:
Dividends paid - - - (793) - - -
Preferred stock redemption (1) 2 -
Treasury stock activity - - 55 - (30) - -
Purchase of shares for ESOP - - - - - - (126)
Purchase of shares for MRP - - - - - - -
------------ ---------- ------------- -------------- ----------- ----------------- ------------
BALANCE--MARCH 31, 2005 $ - $ 25 - 23,937 $ 22,748 $ (420) $ (235) $ (126)
============ ========== ============= ============== =========== ================= ============
COMMON
STOCK
ACQUIRED BY TOTAL STOCK-
MRP HOLDERS' EQUITY
----------- ---------------
BALANCE - MARCH 31, 2002 $ (58) $ 36,742
Comprehensive income:
Net income - 3,831
Change in net unrealized gain
on available-for-sale
securities, net of taxes - 634
----------- ---------------
Comprehensive income, net of
taxes: 4,465
Dividends paid - (313)
Purchase of treasury stock - (47)
Allocation of ESOP Stock - 172
Purchase of shares for MRP 54 54
----------- ---------------
BALANCE - MARCH 31, 2003 (4) 41,073
Comprehensive income :
Net income - 4,839
Change in net unrealized gain
on available-for-sale
securities, net of taxes - (492)
----------- ---------------
Comprehensive income, net of
taxes: 4,347
Dividends paid - (659)
Treasury stock activity - (118)
Allocation of ESOP Stock - -
Purchase of shares for MRP (17) 2
----------- ---------------
BALANCE--MARCH 31, 2004 (21) 44,645
Comprehensive income :
Net income - 2,649
Change in net unrealized gain
on available-for-sale
securities, net of taxes - (493)
----------- ---------------
Comprehensive income, net of
taxes: 2,156
Dividends paid - (793)
Preferred stock redemption 1
Treasury stock activity - 25
Purchase of shares for ESOP - (126)
Purchase of shares for MRP (107) (107)
----------- ---------------
BALANCE--MARCH 31, 2005 $ (128) $ 45,801
=========== ===============
See accompanying notes to consolidated financial statements.
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended March 31,
-------------------------------------------
2005 2004 2003
---- ---- ----
Cash flows from operating activities:
Net income $ 2,649 $ 4,839 $ 3,831
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses - - -
ESOP and MRP expense 358 128 251
Depreciation and amortization expense 1,423 1,146 1,224
Amortization of intangibles - 178 213
Other amortization 1,502 1,848 481
Impairment charge on securities 1,547 - -
Gain from sale of securities (94) (31) -
Gain on sale of loans (84) (116) -
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (213) 857 (542)
(Increase) decrease in other assets (7,618) 4,478 (6,112)
(Decrease) increase in other liabilities (4,452) 3,481 (392)
------------- -------------- -------------
Net cash (used in) provided by operating activities (4,982) 16,808 (1,046)
------------- -------------- -------------
Cash flows from investing activities:
Purchases of securities:
Available-for-sale (83,219) (58,477) (91,112)
Held-to-maturity - (19,859) (4,145)
Proceeds from principal payments, maturities and calls of
securities:
Available-for-sale 51,383 65,060 28,705
Held-to-maturity 11,996 12,693 6,578
Proceeds from sales of available-for-sale securities 7,288 23,902 -
Disbursements for loan originations (85,801) (87,140) (59,595)
Loans purchased from third parties (104,734) (93,694) (42,260)
Principal collections on loans 112,602 111,937 96,432
(Purchase) Redemption of FHLB-NY stock (549) 864 (1,677)
Proceeds from loans sold 8,127 9,474 2,453
Additions to premises and equipment (3,399) (2,779) (1,166)
------------- -------------- -------------
Net cash used in investing activities (86,306) (38,019) (65,787)
------------- -------------- -------------
Cash flows from financing activities:
Net increase in deposits 79,789 26,501 22,210
Net proceeds from (repayment of) FHLB advances and
other borrowed money 10,959 (17,455) 33,345
Issuance of trust preferred securities, net - 12,741 -
Common stock repurchased (1,021) (303) (100)
Dividends paid (793) (659) (313)
------------- -------------- -------------
Net cash provided by financing activities 88,934 20,825 55,142
------------- -------------- -------------
Net (decrease) in cash and cash equivalents (2,354) (386) (11,691)
Cash and cash equivalents at beginning of the period 22,774 23,160 34,851
------------- -------------- -------------
Cash and cash equivalents at end of the period $ 20,420 $ 22,774 $ 23,160
============= ============== =============
Supplemental information:
Noncash Transfers-
Securities transferred from available-for-sale to
held-to-maturity $ - $ $ 22,811
Change in unrealized gain on valuation of available-
for-sale investments, net (493) (492) 634
Cash paid for-
Interest $ 9,718 $ 8,739 $ 9,616
Income taxes 2,395 2,825 3,106
============= ============== =============
See accompanying notes to consolidated financial statements
CARVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Carver Bancorp, Inc. (on a stand-alone basis, the "Holding Company" or
"Registrant"), was incorporated in May 1996 and its principal wholly owned
subsidiary is Carver Federal Savings Bank (the "Bank" or "Carver Federal").
Carver Statutory Trust I (the "Trust") is another wholly owned subsidiary of the
Holding Company. The Trust, which was formed in September 2003, exists for the
sole purpose of issuing trust preferred debt securities and investing the
proceeds in an equivalent amount of subordinated debentures of the Holding
Company. CFSB Realty Corp. and CFSB Credit Corp. are wholly owned subsidiaries
of the Bank. CFSB Credit Corp. is currently inactive. The Bank owns a majority
interest in Carver Asset Corporation, a real estate investment trust formed in
February 2004. The Bank was chartered in 1948 and began operations in 1949 as
Carver Federal Savings and Loan Association, a federally chartered mutual
savings and loan association. The Bank converted to a federal savings bank in
1986 and changed its name at that time. On October 24, 1994, the Bank converted
from mutual to stock form and issued 2,314,275 shares of its common stock, par
value $0.01 per share. On October 17, 1996, the Bank completed its
reorganization into a holding company structure (the "Reorganization") and
became a wholly owned subsidiary of the Holding Company. In connection with the
Reorganization, each share of the Bank's outstanding common stock was exchanged
for one share of the Holding Company's common stock, par value $0.01 per share.
On January 11, 2000, the Holding Company sold in a private placement, pursuant
to a Securities Purchase Agreement dated January 11, 2000, 40,000 shares of
Series A Convertible Preferred Stock (the "Series A Preferred Stock") to Morgan
Stanley & Co. Incorporated ("MSDW") and 60,000 Shares of Series B Convertible
Preferred Stock (the "Series B Preferred Stock") to Provender Opportunities Fund
L.P. ("Provender"). On June 1, 2004, Provender sold all 60,000 of its Series B
Preferred Stock to Keefe Bruyette & Woods, Inc ("KBW"). On October 15, 2004,
both MSDW and KBW elected to convert their Preferred Shares into shares of
Holding Company's common stock, thus an additional 208,333 shares of common
stock were issued to these parties. See Note 11 of Notes to the Consolidated
Financial Statements. Collectively, the Holding Company, the Bank and the
Holding Company's other direct and indirect subsidiaries are referred to herein
as the "Company" or "Carver."
Carver Federal's principal business consists of attracting deposit
accounts through its branch offices and investing those funds in mortgage loans
and other investments permitted by federal savings banks. The Bank has eight
branches located throughout the City of New York that primarily serve the
communities in which they operate.
BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the
Holding Company, Carver Statutory Trust I, the Bank and the Bank's wholly owned
or majority owned subsidiaries, Carver Asset Corporation, CFSB Realty Corp. and
CFSB Credit Corp. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated statement of financial condition
and revenues and expenses for the period then ended. Estimates that are
particularly susceptible to significant changes in the near-term relate to
prepayment assumptions on mortgage-backed securities and mortgage loans, the
determination of the allowance for loan losses and, if applicable, the valuation
of real estate owned. Actual results could differ significantly from those
estimates.
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 had extended mortgages and other credit
instruments.
In addition, the Office of Thrift supervision ("OTS") our 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
Cash and cash equivalents include cash and amounts due from depository
institutions and federal funds sold which 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.
SECURITIES
The Bank does not have trading securities but does differentiate
between held-to-maturity securities and available-for-sale securities. When
purchased, securities are classified in either the securities held-to-maturity
portfolio or securities available-for-sale portfolio. Securities should be
classified held-to-maturity and carried at amortized cost only if the Bank has a
positive intent and ability to hold such securities to maturity. If not
classified as held-to-maturity, such securities are classified as securities
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.
Unrealized holding gains or losses for securities available-for-sale are to be
excluded from earnings and reported net of deferred income taxes as a separate
component of accumulated other comprehensive (loss) income, a component of
Stockholders' Equity. Any impairment in the available-for-sale securities deemed
other-than-temporary, is written down against the cost basis and charged to
earnings. During the twelve month period ended March 31, 2005, Carver recorded a
$1.5 million charge to earnings for impairment in available-for-sale securities
deemed other-than-temporary on the 150,000 shares of Independence Federal
Savings Bank common stock ("IFSB") that it held in portfolio.
Securities held-to-maturity are carried at cost, adjusted for the
amortization of premiums and the accretion of discounts using the level-yield
method over the remaining period until maturity.
Gains or losses on sales of securities of all classifications are
recognized based on the specific identification method.
LOANS RECEIVABLE
Loans receivable are carried at unpaid principal balances plus
unamortized premiums and certain deferred direct loan origination costs, less
the allowance for loan losses and deferred loan fees and discounts.
The Bank defers loan origination fees and certain direct loan
origination costs and accretes such amounts as an adjustment of yield over the
expected 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, adjusted for
prepayments when applicable, of the related loans using methodologies which
approximate the interest method.
Loans are generally placed on non-accrual status when they are past due
90 days or more as to contractual obligations or when other circumstances
indicate that collection is questionable. When a loan is placed on non-accrual
status, any interest accrued but not received is reversed against interest
income. Payments received on a non-accrual loan are either applied to the
outstanding principal balance or recorded as interest income, depending on an
assessment of the ability to collect the loan. A non-accrual loan is restored to
accrual status when principal and interest payments become less than 90 days
past due and its future collectibility is reasonably assured.
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at a level considered
adequate to provide for potential loan losses. Management is responsible for
determining the adequacy of the allowance for loan losses and the periodic
provisioning for estimated losses included in the consolidated financial
statements. The evaluation process is undertaken on a quarterly basis, but may
increase in frequency should conditions arise that would require management's
prompt attention, such as business combinations and opportunities to dispose of
non-performing and marginally performing loans by bulk sale or any development
which may indicate an adverse trend.
Carver Federal maintains a loan review system, which allows for a
periodic review of its loan portfolio and the early identification of potential
problem loans. Such system takes into consideration, among other things,
delinquency status, size of loans, type of collateral and financial condition of
the borrowers. Loan loss allowances are established for problem loans based on a
review of such information and/or appraisals of the underlying collateral. On
the remainder of its loan portfolio, loan loss allowances are based upon a
combination of factors including, but not limited to, actual loan loss
experience, composition of loan portfolio, current economic conditions and
management's judgment. Although management believes that adequate loan loss
allowances have been established, actual losses are dependent upon future events
and, as such, further additions to the level of the loan loss allowance may be
necessary in the future.
The methodology employed for assessing the appropriateness of the
allowance consists of the following criteria:
o Establishment of reserve amounts for all specifically
identified criticized loans that have been designated
as requiring attention by management's internal loan
review program, bank regulatory examinations or the
external auditors.
o An average loss factor, giving effect to historical
loss experience over several years and linked to
cyclical trends, is applied to smaller balance
homogenous types of loans not subject to specific
review. These loans include residential one- to
four-family, multifamily, nonresidential and
construction loans and also include consumer and
business loans.
Recognition is also given to the changed risk profile brought about by
business combinations, customer knowledge, the results of ongoing credit quality
monitoring processes and the cyclical nature of economic and business
conditions. An important consideration in applying these methodologies is the
concentration of real estate related loans located in the New York City
metropolitan area.
The initial allocation or specific-allowance methodology commences with
loan officers and underwriters grading the quality of their loans on an
eight-category risk classification scale. Loans identified from this process as
below investment grade are referred to the Internal Asset Review Committee for
further analysis and identification of those factors that may ultimately affect
the full recovery or collectibility of principal and/or interest. These loans
are subject to continuous review and monitoring while they remain in the
criticized category. Additionally, the Internal Asset Review Committee is
responsible for performing periodic reviews of the loan portfolio that are
independent from the identification process employed by loan officers and
underwriters. Gradings that fall into criticized categories are further
evaluated and reserve amounts are established for each loan.
The second allocation or loss factor approach to common or homogeneous
loans is made by applying the average loss factor based on several years of
loss experience to the outstanding balances in each loan category. It gives
recognition to the loss experience of acquired businesses, business cycle
changes and the real estate components of loans. Since many loans depend upon
the sufficiency of collateral, any adverse trend in the real estate markets
could seriously affect underlying values available to protect against loss.
Other evidence used to support the amount of the allowance and its
components are as follows:
o Regulatory examinations
o Amount and trend of criticized loans
o Actual losses
o Peer comparisons with other financial institutions
o Economic data associated with the real estate market in the
Company's market area
o Opportunities to dispose of marginally performing loans for
cash consideration
A loan is considered to be impaired, as defined by Statement of
Financial Accounting Standards ("SFAS") No. 114, "ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN" ("SFAS 114"), when it is probable that Carver Federal will
be unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement. Carver Federal tests loans covered
under SFAS 114 for impairment if they are on non-accrual status or have been
restructured. Consumer credit non-accrual loans are not tested for impairment
because they are included in large groups of smaller-balance homogeneous loans
that, by definition along with leases, are excluded from the scope of SFAS 114.
Impaired loans are required to be measured based upon the present value of
expected future cash flows, discounted at the loan's initial effective interest
rate, or at the loan's market price or fair value of the collateral if the loan
is collateral dependent. If the loan valuation is less than the recorded value
of the loan, an impairment reserve must be established for the difference. The
impairment reserve is established by either an allocation of the reserve for
credit losses or by a provision for credit losses, depending on various
circumstances. Impairment reserves are not needed when credit losses have been
recorded so that the recorded investment in an impaired loan is less than the
loan valuation.
CONCENTRATION OF RISK
The Bank's principal lending activities are concentrated in loans
secured by real estate, a substantial portion of which is located in the State
of New York. Accordingly, the ultimate collectibility of a substantial portion
of the Company's loan portfolio is susceptible to changes in New York's real
estate market conditions.
PREMISES AND EQUIPMENT
Premises and equipment are comprised of land, at cost, and buildings,
building improvements, furnishings and equipment and leasehold improvements, at
cost, less accumulated depreciation and amortization. Depreciation and
amortization charges are computed using the straight-line method over the
following estimated useful lives:
Buildings and improvements 10 to 25 years
Furnishings and equipment 3 to 5 years
Leasehold improvements Lesser of useful life or
remaining term of lease
Maintenance, repairs and minor improvements are charged to non-interest
expense in the period incurred.
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.
Returns on the BOLI assets are added to the carrying value and included as
non-interest income in the consolidated statement of operations. Any receipt of
benefit proceeds is recorded as a reduction to the carrying value of the BOLI
asset.
MORTGAGE SERVICING RIGHTS (MSR)
Mortgage servicing rights ("MSR") on mortgage loans are recognized at
the sale of mortgage loans where servicing rights are retained. At recognition,
this asset is recorded onto the balance sheet as a non-interest-earning asset.
The initial recognition of MSR is based on the fair value of total estimated
income from the servicing of these loans. The asset is then amortized over the
estimated life of the serviced loans.
REAL ESTATE OWNED
Real estate acquired by foreclosure or deed in lieu of foreclosure is
recorded at the fair value at the date of acquisition and thereafter carried at
the lower of cost or fair value less estimated selling costs. The fair value of
such assets is determined based primarily upon independent appraisals and other
relevant factors. The amounts ultimately recoverable from real estate owned
could differ from the net carrying value of these properties because of economic
conditions.
Costs incurred to improve properties or prepare them for sale are
capitalized. Revenues and expenses related to the holding and operating of
properties are recognized in operations as earned or incurred. Gains or losses
on sale of properties are recognized as incurred. At March 31, 2005, the Bank
had no foreclosed real estate, however as a result of a property tax redemption,
the Bank took fee ownership of a vacant tract of land in Bayshore, NY.
IDENTIFIABLE INTANGIBLE ASSETS
Carver Federal adopted Statement of Financial Accounting Standards
No.142 ("SFAS No. 142"), "GOODWILL AND OTHER INTANGIBLE ASSETS" on January 1,
2002. SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually.
Identifiable intangible assets relate primarily to core deposit
premiums, resulting from the valuation of core deposit intangibles acquired in
the purchase of two branch offices. These identifiable intangible assets are
amortized using the straight-line method over periods not exceeding the
estimated average remaining life of the existing customer deposits acquired.
Amortization periods range from 5 to 15 years. Amortization periods for
intangible assets are monitored to determine if events and circumstances require
such periods to be reduced.
At March 31, 2005 Carver had no goodwill or identifiable intangible
assets on its books.
INCOME TAXES
Carver Federal accounts for income taxes using the asset and liability
method. Temporary differences between the basis of assets and liabilities for
financial reporting and tax purposes are measured as of the balance sheet date.
Deferred tax liabilities or recognizable deferred tax assets are calculated on
such differences, using current statutory rates, which result in future taxable
or deductible amounts. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
IMPAIRMENT
The Company annually evaluates long-lived assets, certain identifiable
intangibles, deferred cost and goodwill for indication of impairment in value.
There was no impairment on these assets for the past three years. When required,
asset impairment will be recorded as an expense in the current period.
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings per share ("EPS") is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding. Diluted EPS includes any additional common shares as if all
potentially dilutive common shares were issued (e.g. convertible preferred
stock). For the purpose of these calculations, unreleased shares of the Carver
Federal Savings Bank Employee Stock Ownership Plan ("ESOP") are not considered
to be outstanding.
TREASURY STOCK
Treasury stock is recorded at cost and is presented as a reduction of
stockholders' equity.
PENSION PLANS
In February 1998, the FASB issued SFAS No. 132, "EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS" ("SFAS 132"). SFAS 132 revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. Carver Federal
has made the required disclosures in the accompanying Notes to the Consolidated
Financial Statements.
STOCK-BASED COMPENSATION PLANS
Compensation expense is recognized for the Bank's ESOP equal to the
fair value of shares committed to be released for allocation to participant
accounts. Any difference between the fair value at that time and the ESOP's
original acquisition cost is charged or credited to stockholders' equity
(additional paid-in capital). The cost of unallocated ESOP shares (shares not
yet committed to be released) is reflected as a reduction of stockholders'
equity.
The Holding Company accounts for its stock option plan ("Stock Option
Plan") in accordance with Accounting Principles Board ("APB") Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Accordingly, compensation expense is
recognized only if the exercise price of the option is less than the fair value
of the underlying stock at the grant date. SFAS 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" ("SFAS 123"), encourages entities to recognize the fair value of
all stock-based awards (measured on the grant date) as compensation expense over
the vesting period. Alternatively, SFAS 123 allows entities to apply the
provisions of APB Opinion No. 25 and provide pro forma disclosures of net income
and earnings per share as if the fair-value-based method defined in SFAS 123 had
been applied. The Holding Company has elected to apply the provisions of APB
Opinion No. 25 and provide these pro forma disclosures.
The Holding Company's management recognition and retention plan ("MRP")
is also accounted for in accordance with APB Opinion No. 25. The fair value of
the shares awarded, measured at the grant date, is recognized as unearned
compensation (a deduction from stockholders' equity) and amortized to
compensation expense as the shares become vested. When MRP shares become vested,
the Company records a credit to additional paid-in capital for tax benefits
attributable to any MRP deductions in excess of the grant-date fair value
charged to expense, for financial reporting purposes.
Carver Federal applies APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES," and related interpretations in accounting for our stock-based
Plan under which there is no charge to earnings for stock option awards and the
dilutive effect of outstanding options is reflected as additional share dilution
in the computation of earnings per share.
Alternatively, Carver Federal could have accounted for its Stock Option
Plan under SFAS 123, under which compensation cost for stock option awards would
be calculated and recognized over the service period (generally equal to the
vesting period). The following table illustrates net income and earnings per
common share pro forma results with the application of SFAS 123 for Carver's
Stock Option Plan, for the years ended March 31:
2005 2004 2003
-------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) available to common shareholders:
As reported $2,535 $4,642 $3,634
Total stock-based employee compensation expense
determined under fair value based methods for
all awards, net of related tax effects (124) (158) (88)
-------------- --------------- ---------------
Pro forma $ 2,411 $ 4,484 $ 3,546
============== =============== ===============
Basic earnings (loss) per share:
As reported $1.06 $2.03 $1.59
Pro forma 1.01 1.96 1.55
Diluted earnings (loss) per share:
As reported $1.03 $1.87 $1.52
Pro forma 0.98 1.81 1.48
Weighted average number of shares outstanding 2,381,980 2,283,802 2,290,934
The fair value of the option grants was estimated on the date of the
grant using the Black-Scholes option pricing model applying the following
weighted average assumptions: risk-free interest rates of 3.50%, 2.50% and
2.50%, for the relevant fiscal years ended March 31, 2005, 2004 and 2003
("fiscal 2005", "fiscal 2004" and "fiscal 2003"), respectively; volatility of
35% for fiscal 2005 and 45% fiscal 2004 and 40% fiscal 2003; expected dividend
yield was calculated using annual dividends of $0.28 per share for fiscal 2005
and $0.20 for fiscal 2004 and fiscal 2003; and an expected life of seven years
for employees and directors option grants.
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement No. 123 (revised) "ACCOUNTING FOR STOCK BASED COMPENSATION,
SHARE BASED PAYMENT", ("SFAS 123R") which replaces the guidance prescribed in
SFAS 123. SFAS 123R requires that compensation cost relating to share-based
payment transactions be recognized in the financial statements. The associated
costs will be measured based on the fair value of the equity or liability
instruments issued. SFAS 123R covers a wide range of share-based compensation
arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans. SFAS 123R
is effective as of the first interim or annual reporting period beginning after
June 15, 2005. Carver Federal will adopt SFAS 123R as of April 1, 2006. SFAS
123R applies to all awards granted after the required effective date and to
awards modified, repurchased or cancelled after that date. Additionally,
beginning on the required effective date, public entities will recognize
compensation cost for the portion of outstanding awards for which the requisite
service has not yet been rendered, based on the grants-date fair value of those
awards calculated under SFAS 123 for either recognition or pro forma
disclosures. The cumulative effect of initially applying SFAS 123R, if any, is
recognized as of the required effective date. For period before the required
effective date, public entities may elect, although they are not required, to
retroactively restate financial statements for prior periods to recognize
compensation cost on a basis consistent with the pro forma disclosures required
for those periods by SFAS 123. Management has not yet made a determination on
the transition method that will be applied upon adoption of SFAS 123R. However,
the impact of adoption regardless of the transition method chosen is expected to
be a reduction in net income comparable to that shown in the previous table
disclosing 2005 pro forma effects of SFAS 123.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements presented for prior
periods have been reclassified to conform to the current year presentation.
NOTE 2. SECURITIES
The following is a summary of securities at March 31, 2005:
GROSS UNREALIZED
--------------------------
AMORTIZED ESTIMATED
COST GAINS LOSSES FAIR-VALUE
------------- ------------ ------------ -----------
(IN THOUSANDS)
AVAILABLE-FOR-SALE:
Mortgage-backed securities:
Pass-through certificates:
Government National Mortgage Association $ 83,861 $ 98 $ (534) $ 83,425
Federal Home Loan Mortgage Corporation 3,922 14 (28) 3,908
Federal National Mortgage Association 8,247 17 (115) 8,149
------------- ------------ ------------ -----------
Total mortgage-backed securities 96,030 129 (677) 95,482
Equity Securities 1,575 - - 1,575
U.S. Government Agency Securities 21,144 - (168) 20,976
------------- ------------ ------------ -----------
Total available-for-sale 118,749 129 (845) 118,033
------------- ------------ ------------ -----------
HELD-TO-MATURITY:
Mortgage-backed securities:
Pass-through certificates:
Government National Mortgage Association 1,070 59 - 1,129
Federal Home Loan Mortgage Corporation 18,779 32 (71) 18,740
Federal National Mortgage Association 11,116 110 (120) 11,106
Small Business Administration 337 - (2) 335
------------- ------------ ------------ -----------
Total mortgage-backed securities 31,302 201 (193) 31,310
U.S. Government Agency Securities - - - -
------------- ------------ ------------ -----------
Total held-to-maturity 31,302 201 (193) 31,310
------------- ------------ ------------ -----------
Total securities $ 150,051 $ 330 $ (1,038) $ 149,343
============= ============ ============ ===========
The following is a summary of securities at March 31, 2004:
GROSS UNREALIZED
-------------------------
AMORTIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ------------ ------------
(IN THOUSANDS)
AVAILABLE-FOR-SALE:
Mortgage-backed securities:
Pass-through certificates:
Government National Mortgage Association $ 55,703 $ 169 $ (360) $ 55,512
Federal Home Loan Mortgage Corporation 6,753 52 (93) 6,712
Federal National Mortgage Association 12,657 47 (78) 12,626
------------ ----------- ------------ ------------
Total mortgage-backed securities 75,113 268 (531) 74,850
Equity Securities 48 10 - 58
U.S. Government Agency Securities 21,200 296 (1) 21,495
------------ ----------- ------------ ------------
Total available-for-sale 96,361 574 (532) 96,403
------------ ----------- ------------ ------------
HELD-TO-MATURITY:
Mortgage-backed securities:
Pass-through certificates:
Government National Mortgage Association 1,465 96 - 1,561
Federal Home Loan Mortgage Corporation 21,305 362 (1) 21,666
Federal National Mortgage Association 20,386 94 (234) 20,246
Small Business Administration 318 3 - 321
------------ ----------- ------------ ------------
Total mortgage-backed securities 43,474 555 (235) 43,794
U.S. Government Agency Securities - - - -
------------ ----------- ------------ ------------
Total held-to-maturity 43,474 555 (235) 43,794
------------ ----------- ------------ ------------
Total securities $ 139,835 $ 1,129 $ (767) $ 140,197
============ =========== ============ ============
The net unrealized loss on available-for-sale securities was
$716,000 ($444,000 after taxes) at March 31, 2005 as compared to an unrealized
gain of $42,000 ($26,000 after taxes) at March 31, 2004. On November 30, 2002
the Bank transferred $22.8 million of mortgage-backed securities from
available-for-sale to held-to-maturity as a result of management's intention to
hold these securities in portfolio until maturity. A related unrealized gain of
$468,000 was recorded as a separate component of stockholders' equity and is
being amortized over the remaining lives of the securities as an adjustment to
yield. As of March 31, 2005 the carrying value of these securities is $17.3
million and a related net unrealized gain of $209,000 (net of amortization)
continues to be reported. Changes in unrealized holding gains and losses between
fiscal 2005 and fiscal 2004 resulted in an after-tax decrease in stockholders'
equity of $493,000. These gains and losses will continue to fluctuate based on
changes in the portfolio and market conditions.
Sales of available-for-sale securities resulted in gross realized
gains during fiscal 2005 and fiscal 2004 of $94,000 and $31,000, respectively.
There were no sales of securities in fiscal 2003.
At March 31, 2005 the Bank pledged securities of $34.1 million as
collateral for advances from the Federal Home Loan Bank of New York ("FHLB-NY").
The following is a summary of the carrying value (amortized cost)
and fair value of securities at March 31, 2005, 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.
AMORTIZED FAIR
COST VALUE
------------- -------------
(IN THOUSANDS)
AVAILABLE-FOR-SALE :
Less than one year $ 10,369 $ 10,354
One through five years 12,927 12,793
Five through ten years 1,839 1,827
After ten years 93,614 93,059
------------- -------------
$ 118,749 $ 118,033
============= =============
HELD-TO-MATURITY:
Less than one year - -
One through five years 99 102
Five through ten years - -
After ten years 31,203 31,208
------------- -------------
$ 31,302 $ 31,310
============= =============
The unrealized losses and fair value of securities in an unrealized
loss position at March 31, 2005 for less than 12 months and 12 months or longer
were as follows:
----------------------- ----------------------- ------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
----------------------- ----------------------- ------------------------
UNREALIZED FAIR UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE LOSSES VALUE
----------------------- ----------------------- ------------ -----------
(IN THOUSANDS)
AVAILABLE-FOR-SALE:
Mortgage-backed securities $ (225) $ 42,625 $ (452) $ 27,522 $ (677) $ 70,147
U.S. Government Agency Securities (168) 20,976 - - (168) 20,976
------------ ---------- ----------- ----------- ------------ -----------
Total available-for-sale (393) 63,601 (452) 27,522 (845) 91,123
------------ ---------- ----------- ----------- ------------ -----------
HELD-TO-MATURITY:
Mortgage-backed securities (3) 1,186 (190) 10,475 (193) 11,661
------------ ---------- ----------- ----------- ------------ -----------
Total securities $ (396) $ 64,787 $ (642) $ 37,997 $ (1,038) $ 102,784
============ ========== =========== =========== ============ ===========
The unrealized losses and fair value of securities in an unrealized loss
position at March 31, 2004 for less than 12 months and 12 months or longer were
as follows:
------------------------- ------------------------- ------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
------------------------- ------------------------- ------------------------
Unrealized Fair Unrealized Fair Unrealized Fair
Losses Value Losses Value Losses Value
------------ ------------ ------------------------- ------------ -----------
(in thousands)
AVAILABLE-FOR-SALE:
Mortgage-backed securities $ (342) $ 32,035 $ (189) $ 15,220 $ (531) $ 47,255
U.S. Government Agency Securities (1) 6,394 - - (1) 6,394
------------ ------------ ------------ ------------ ------------ -----------
Total available-for-sale (343) 38,429 (189) 15,220 (532) 53,649
------------ ------------ ------------ ------------ ------------ -----------
HELD-TO-MATURITY:
Mortgage-backed securities (226) 17,951 (9) 1,379 (235) 19,330
------------ ------------ ------------ ------------ ------------ -----------
Total securities $ (569) $ 56,380 $ (198) $ 16,599 $ (767) $ 72,979
============ ============ ============ ============ ============ ===========
A total of 33 securities had an unrealized loss at March 31, 2005.
Based on estimated fair value, all the securities in an unrealized loss position
were United States government agency-backed securities, which represents 68.8%
and 52.1% of total securities at March 31, 2005 and 2004, respectively. The
cause of the temporary impairment is directly related to the change in interest
rates. In general, as interest rates rise, the fair value of securities will
decline, and conversely as interest rates decline, the fair value of securities
will increase. 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 decline in fair value to movements in interest rates, the
life of the investments and their high credit quality.
NOTE 3. LOANS RECEIVABLE, NET
A summary of loans receivable, net follows:
MARCH 31,
---------------------------------------------------------
2005 2004
--------------------------- --------------------------
AMOUNT PERCENT AMOUNT PERCENT
------------- ------------- --------------------------
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS:
One- to four-family $ 155,797 36.69 % $ 98,645 27.80 %
Multifamily 101,899 23.99 120,252 33.88
Nonresidential 116,769 27.49 102,641 28.92
Construction 48,579 11.43 27,376 7.71
Consumer and business 1,697 0.40 6,010 1.69
------------- ------------- --------------------------
Total gross loans 424,741 100.00 % 354,924 100.00 %
============= =============
ADD:
Premium on loans 1,743 1,264
LESS:
Deferred fees and loan discounts (400) (163)
Allowance for loan Losses (4,097) (4,125)
------------- -------------
Total $ 421,987 $ 351,900
============= =============
At March 31, 2005, 78.6% of the Company's real estate loans receivable
were principally secured by properties located in the State of New York.
The mortgage loan portfolios serviced for Federal National Mortgage
Association ("FNMA") are not included in the accompanying consolidated financial
statements. The unpaid principal balances of these loans aggregated $17.9
million, $11.7 million and $4.1 million at March 31, 2005, 2004 and 2003,
respectively. Custodial escrow balances, maintained in connection with the
above-mentioned loan servicing, were approximately $56,000, $40,000 and $16,000
at March 31, 2005, 2004 and 2003, respectively. During the year ended March 31,
2005 the Bank sold $8.0 million in loans with a recognized gain of $84,000, as
compared to $9.4 million in loans sold during fiscal 2004 with a $116,000 gain
recognized.
At March 31, 2005 the Bank pledged $144.3 million in total mortgage
loans as collateral for borrowings from the FHLB-NY.
The following is an analysis of the allowance for loan losses:
Year ended March 31,
--------------------------------------------------
2005 2004 2003
--------------- ---------------- ----------------
Balance at beginning of the year $ 4,125 $ 4,158 $ 4,128
Provision charged to operations - - -
Recoveries of amounts previously charged-off 45 292 258
Charge-offs of loans (73) (325) (228)
--------------- ---------------- ----------------
Balance at ending of the year $ 4,097 $ 4,125 $ 4,158
=============== ================ ================
Non-accrual loans consist of loans for which the accrual of interest
has been discounted as a result of such loans becoming 90 days or more
delinquent as to principal and/or interest payments. Interest income on
non-accrual loans is recorded when received. Restructured loans consist of loans
where borrowers have been granted concessions in regards to the terms of their
loans due to financial or other difficulties, which rendered them unable to
repay their loans under the original contractual terms.
At March 31, 2005, 2004 and 2003 the recorded investment in impaired
loans was $998,000, $2.1 million and $1.8 million, respectively, all of which
represented non-accrual loans. The related allowance for credit losses was
approximately $160,000, $317,000 and $195,000 at March 31, 2005, 2004 and 2003,
respectively. The impaired loan portfolio is primarily collateral dependent. The
average recorded investment in impaired loans during the fiscal years ended
March 31, 2005, 2004 and 2003 was approximately $1.6 million, $2.0 million and
$1.8 million, respectively. For the fiscal years ended March 31, 2005, 2004 and
2003, the Company did not recognize any interest income on these impaired loans.
Interest income of $83,000, $185,000 and $173,000, respectively, for the fiscal
years ended March 31, 2005, 2004 and 2003 would have been recorded on impaired
loans had they performed in accordance with their original contract.
At March 31, 2005, 2004 and 2003, there were no loans to officers or
directors.
NOTE 4. PREMISES AND EQUIPMENT, NET
The detail of premises and equipment is as follows:
MARCH 31,
-----------------------------
2005 2004
-------------- -------------
(IN THOUSANDS)
Land $ 415 $ 415
Building and improvements 9,195 8,838
Leasehold improvements 3,939 1,976
Furniture and Equipment 7,734 6,655
-------------- -------------
21,283 17,884
Less accumulated depreciation and amortization 7,625 6,202
-------------- -------------
$ 13,658 $ 11,682
============== =============
Depreciation and amortization charged to operations for the fiscal
years ended March 31, 2005, 2004 and 2003 amounted to $1.4 million, $1.1 million
and $1.2 million, respectively.
NOTE 5. ACCRUED INTEREST RECEIVABLE
The detail of accrued interest receivable is as follows:
MARCH 31,
-------------------------------
2005 2004
-------------- --------------
(IN THOUSANDS)
Loans receivable $ 1,895 $ 1,683
Mortgage-backed securities 576 580
Investments and other interest bearing assets 231 226
-------------- --------------
Total accrued interest receivable $ 2,702 $ 2,489
============== ==============
NOTE 6. DEPOSITS
Deposit balances and weighted average stated interest rates at March 31
follow:
2005 2004
------------------------------------------ -----------------------------------------
PERCENT OF PERCENT OF
TOTAL WEIGHTED TOTAL WEIGHTED
AMOUNT DEPOSITS AVERAGE RATE AMOUNT DEPOSITS AVERAGE RATE
------------- ------------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Non-interest -bearing demand $ 25,570 5.6 % - % $ 20,966 5.6 % - %
NOW demand 24,095 5.3 0.30 22,671 6.0 0.30
Savings and clubs 137,810 30.4 0.62 131,120 35.1 0.60
Money Market savings 36,294 8.0 1.34 30,842 8.3 0.74
Certificates of deposit 229,685 50.7 2.30 168,066 45.0 1.97
------------- ------------- ------------ ------------- ------------ ------------
Total $ 453,454 100.0 % 1.48 % $ 373,665 100.0 % 1.18 %
============= ============= ============= ============
Scheduled maturities of certificates of deposit follow:
MARCH 31,
-----------------------------
2005 2004
------------- -------------
(IN THOUSANDS)
Certificates of deposit by remaining
term to contractual maturity:
Within one year $ 186,585 $ 127,739
After one but within two years 13,412 15,817
After two but within three years 8,512 6,573
After three years 21,176 17,937
------------- -------------
Total $ 229,685 $ 168,066
============= =============
The aggregate amount of certificates of deposit with minimum
denominations of $100,000 or more was approximately $161.7 million at March 31,
2005 compared to $104.3 million at March 31, 2004.
Interest expense on deposits for the years ended March 31 follows:
2005 2004 2003
------------- ------------- -------------
(IN THOUSANDS)
NOW demand $ 69 $ 85 $ 131
Savings and clubs 811 1,000 1,477
Money market savings 302 235 189
Certificates of deposit 4,258 3,316 3,975
------------- ------------- -------------
5,440 4,636 5,772
Mortgagors deposits 25 24 -
Penalty for early withdrawal of
certificates of deposit (10) (11) (12)
------------- ------------- -------------
Total interest expense $ 5,455 $ 4,649 $ 5,760
============= ============= =============
NOTE 7. BORROWED MONEY
FEDERAL HOME LOAN BANK ADVANCES. FHLB-NY advances and weighted average
interest rates by remaining period to maturity at March 31 follow:
2005 2004
--------------------------- ---------------------------
(DOLLARS IN THOUSANDS)
MATURING
YEAR ENDED WEIGHTED WEIGHTED
MARCH 31, AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT
- ---------------------- ------------- ----------- ---------------------------
2005 - % $ - 4.05 % $ 26,000
2006 3.41 34,840 3.46 32,840
2007 4.21 36,134 4.42 28,134
2008 3.65 16,200 3.49 3,300
2009 3.78 15,107 2.86 1,000
2012 3.50 219 3.50 242
------------- ----------- ------------- -----------
3.78 % $ 102,500 3.92 % $ 91,516
============= =========== ============= ===========
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 $156.6 million at March 31, 2005. 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, 2005, advances were secured by pledges of the Bank's
investment in the capital stock of the FHLB-NY totaling $5.1 million and a
blanket assignment of the Bank's unpledged qualifying mortgage loans of $144.3
million and mortgage-backed and investment securities of $34.1 million. Included
in the total assets held at the FHLB-NY as collateral for borrowings is excess
borrowing capacity of $60.9 million.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. In securities sold
under agreements to repurchase, the Bank borrows funds through the transfer of
debt securities to the FHLB-NY, as counterparty, and concurrently agrees to
repurchase the identical securities at a fixed price on a specified date.
Repurchase agreements are collateralized by the securities sold and, in certain
cases, by additional margin securities. At March 31, 2005 and 2004 there were no
securities sold under agreements to repurchase outstanding.
SUBORDINATED DEBT SECURITIES. On September 17, 2003, Carver Statutory
Trust I, issued 13,000 shares, liquidation amount $1,000 per share, of floating
rate capital securities. Gross proceeds from the sale of these trust preferred
debt securities were $13.0 million, and, together with the proceeds from the
sale of the trust's common securities, were used to purchase approximately $13.4
million aggregate principal amount of the Holding Company's floating rate junior
subordinated debt securities due 2033. The trust preferred debt securities are
redeemable quarterly at the option of the Company beginning on or after July 7,
2007 and have a mandatory redemption date of September 17, 2033. Cash
distributions on the trust preferred 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. At March 31, 2005 and 2004 the rate paid on these trust
preferred debt securities was 6.08% and 4.16%, respectively.
The following table sets forth certain information regarding Carver
Federal's borrowings at the dates and for the periods indicated:
AT OR FOR THE YEAR ENDED
MARCH 31,
--------------------------------
2005 2004
------------- -------------
(DOLLARS IN THOUSANDS)
Amounts outstanding at the end of period:
FHLB-NY advances $ 102,500 $ 91,516
Guaranteed preferred beneficial interest in junior subordinated debentures 12,799 12,741
Loan for employee stock ownership plan - 25
Rate paid at period end:
FHLB-NY advances 3.78% 3.92%
Guaranteed preferred beneficial interest in junior subordinated debentures 6.08% 4.16%
Loan for employee stock ownership plan - 4.00%
Maximum amount of borrowing outstanding at any month end:
FHLB-NY advances $ 112,506 $ 112,030
Guaranteed preferred beneficial interest in junior subordinated debentures 12,799 12,742
Loan for employee stock ownership plan 25 207
Approximate average amounts outstanding for period:
FHLB-NY advances $ 97,013 $ 99,359
Guaranteed preferred beneficial interest in junior subordinated debentures 12,768 6,854
Loan for employee stock ownership plan 6 137
Approximate weighted average rate paid during period (1):
FHLB-NY advances 3.71% 3.74%
Guaranteed preferred beneficial interest in junior subordinated debentures 5.49% 4.78%
Loan for employee stock ownership plan 3.86% 4.07%
(1) The approximate weighted average rate paid during the period was computed
by dividing the average amounts outstanding into the related interest
expense for the period.
NOTE 8. INCOME TAXES
The components of income tax expense for the years ended March 31 are
as follows:
2005 2004 2003
------------- ------------- -------------
(IN THOUSANDS)
Federal income tax expense (benefit):
Current $ 1,978 $ 1,634 $ 4,200
Deferred (782) 427 (1,626)
------------- ------------- -------------
1,196 2,061 2,574
------------- ------------- -------------
State and local income tax expense (benefit):
Current 418 342 1,104
Deferred (96) 90 (645)
------------- ------------- -------------
322 432 459
------------- ------------- -------------
Valuation allowance - - -
Total provision for income tax $ $ 1,518 $ 2,493 $ 3,033
============= ============= =============
The reconciliation of the expected federal income tax rate to the
consolidated effective tax rate for fiscal years ended March 31 follows:
2005 2004 2003
---------------------- ---------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- --------- ------------ --------- ------------- ---------
(IN THOUSANDS)
Statutory Federal income tax $ 1,417 34.0 % $ 2,493 34.0 % $ 2,334 34.0 %
State and local income taxes, net of Federal tax benefit 213 5.1 285 3.9 303 4.4
Change in valuation allowance - - - - - -
Other (112) (2.7) (285) (3.9) 396 5.8
----------- --------- ------------ --------- ------------- ---------
Total income tax expense $ 1,518 36.4 % $ 2,493 34.0 % $ 3,033 44.2 %
=========== ========= ============ ========= ============= =========
Carver Federal's stockholders' equity includes approximately $2.8
million at each of March 31, 2005, 2004 and 2003, which has been segregated for
federal income tax purposes as a bad debt reserve. The use of this amount for
purposes other than to absorb losses on loans may result in taxable income for
federal income taxes at the then current tax rate.
Tax effects of existing temporary differences that give rise to
significant portions of deferred tax assets and deferred tax liabilities at
March 31 of the years indicated follow:
2005 2004
----------- -----------
(IN THOUSANDS)
Deferred tax assets
Income from affiliate $ 1,873 $ 1,943
Allowance for loan losses 1,393 1,414
Deferred loan fees 137 52
Compensation and benefit plans 384 100
Reserves for losses on other assets 32 20
Non-accrual loan interest 274 242
Investment securities impairment 588 -
----------- -----------
Total deferred tax assets before valuation
allowance 4,681 3,771
Valuation allowance - -
----------- -----------
Total deferred tax assets 4,681 3,771
----------- -----------
Deferred tax liabilities
Unrealized (loss) gain on available-for-sale
securities (144) 159
Depreciation 428 393
----------- -----------
Total deferred tax liabilities 284 552
----------- -----------
Net deferred tax assets $ 4,397 $ 3,219
=========== ===========
A valuation allowance against the deferred tax assets at March 31, 2005
and 2004 was not established since it is more likely than not that the results
of future operations will generate sufficient future taxable income to realize
the deferred tax asset.
NOTE 9. EARNINGS PER COMMON SHARE
The following table reconciles the earnings (loss) available to common
shareholders (numerator) and the weighted average common stock outstanding
(denominator) for both basic and diluted earnings per share for the periods
presented:
YEAR ENDED MARCH 31,
--------------------------------------------
2005 2004 2003
------------- ------------- -------------
(IN THOUSANDS)
Net income $ 2,649 $ 4,839 $ 3,831
Preferred stock dividends (114) (197) (197)
------------- ------------- -------------
Net income - basic 2,535 4,642 3,634
Impact of conversion/potential conversion of convertible preferred stock
to common stock 114 197 197
------------- ------------- -------------
Net income - diluted $ 2,649 $ 4,839 $ 3,831
============= ============= =============
Weighted average common shares outstanding - basic 2,382 2,284 2,291
Effect of dilutive securities convertible preferred stock and options 197 305 235
------------- ------------- -------------
Weighted average common shares outstanding - diluted 2,579 2,589 2,526
============= ============= =============
NOTE 10. STOCKHOLDERS' EQUITY
CONVERSION AND STOCK OFFERING. On October 24, 1994, the Bank issued in
an initial public offering 2,314,375 shares of common stock (par value $0.01) at
a price of $10 per share resulting in net proceeds of $21.5 million. As part of
the initial public offering, the Bank established a liquidation account at the
time of conversion, in an amount equal to the surplus and reserves of the Bank
at September 30, 1994. In the unlikely event of a complete liquidation of the
Bank (and only in such event), eligible depositors who continue to maintain
accounts shall be entitled to receive a distribution from the liquidation
account. The total amount of the liquidation account may be decreased if the
balances of eligible deposits decreased as measured on the annual determination
dates. The balance of the liquidation account was approximately $2.1 million
(unaudited) at both March 31, 2005 and 2004, based on an assumed decrease of
15.25% of eligible deposits per annum. On October 17, 1996, the Bank completed
the Reorganization and became the wholly owned subsidiary of the Holding
Company. Pursuant to an Agreement and Plan of Reorganization, dated May 21,
1996, each share of the Bank's outstanding common stock was exchanged for one
share of the Holding Company's common stock. In connection with the
Reorganization, a shareholder of the Bank exercised appraisal rights and 100
shares of the Bank's common stock were purchased from such shareholder in the
fourth fiscal quarter of 1997. Accordingly, 2,314,275 shares of the Holding
Company's common stock were issued in exchange for each outstanding share of
Bank common stock. The Bank is not permitted to pay dividends to the Holding
Company on its capital stock if the effect thereof would cause its net worth to
be reduced below either: (i) the amount required for the liquidation account, or
(ii) the amount required for the Bank to comply with applicable minimum
regulatory capital requirements.
CONVERTIBLE PREFERRED STOCK. On January 11, 2000, the Holding Company
sold in a private placement, pursuant to a Securities Purchase Agreement, dated
January 11, 2000, 40,000 shares of Series A Convertible Preferred Stock (the
"Series A Preferred Stock") to Morgan Stanley & Co. Incorporated ("MSDW") and
60,000 Shares of Series B Convertible Preferred Stock (the "Series B Preferred
Stock") to Provender Opportunities Fund L.P. ("Provender"). In addition, Carver
Federal entered into a Registration Rights Agreement, dated January 11, 2000,
with MSDW and Provender. The gross proceeds from the private placement were $2.5
million. On June 1, 2004, Provender sold all 60,000 of its Series B Preferred
Stock to Keefe Bruyette & Woods, Inc.
The Series A Preferred Stock and Series B Preferred Stock (collectively
the "Preferred Stock") accrued annual dividends at $1.97 per share. Dividends
were paid semi-annually on June 15 and December 15 of each year. Each share of
Preferred Stock was convertible at the option of the holder, at any time, into
2.08333 shares of Carver Federal's Common Stock, subject to certain antidilution
adjustments. The Holding Company had the option to redeem the Preferred Stock
beginning January 15, 2004. In the event of any liquidation, dissolution or
winding up of Carver Federal, whether voluntary or involuntary, the holders of
the shares of Preferred Stock would be entitled to receive $25 per share of
Preferred Stock plus all dividends accrued and unpaid thereon. Each share of
Preferred Stock would be entitled to one vote for each share of Common Stock
into which the Preferred Stock would be converted. On September 15, 2004, the
Holding Company issued a press release and mailed a Notice of Redemption and a
related Letter of Transmittal to the holders of the Preferred Stock, stating
that it would redeem all 40,000 outstanding shares of its Series A Convertible
Preferred Stock and all 60,000 outstanding shares of its Series B Convertible
Preferred Stock. The Preferred Stock shares were to be redeemed on October 15,
2004 ("Redemption Date") at a redemption price of $26.97 per share plus $0.65 in
accrued and unpaid dividends to, but excluding, the Redemption Date for an
aggregate redemption price of $27.62 per Preferred Share. Dividends on the
Preferred Shares would have ceased to accrue on the Redemption Date. On October
15, 2004 the holders of all 40,000 outstanding shares of its Series A
Convertible Preferred Stock and all 60,000 outstanding shares of its Series B
Convertible Preferred Stock, elected, prior to the Redemption Date, pursuant to
the Certificate of Designations, Preferences and Rights of the Preferred Shares,
to convert their Preferred Shares into shares of Carver's common stock, par
value $0.01 (the "Common Stock"). Upon conversion of their Preferred Shares, the
holders were issued an aggregate of 208,333 shares of Common Stock.
Subsequent to the conversion of the Preferred Stock, the Holding
Company has a recorded 2,524,691 shares of common stock issued.
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, as amended ("FDICIA"), stipulates that an
institution with less than 4.0% core capital is deemed undercapitalized. At
March 31, 2005 and 2004, the Bank exceeded all of its regulatory capital
requirements.
The following is a summary of the Bank's actual capital amounts and
ratios as of March 31, 2005 and 2004 compared to the OTS requirements for
minimum capital adequacy and for classification as a well-capitalized
institution:
MINIMUM CAPITAL CLASSIFICATION AS
BANK ACTUAL ADEQUACY WELL CAPITALIZED
------------------ -------------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------- ------------ ------- --------- --------
(DOLLARS IN THOUSANDS)
March 31, 2005
- --------------
Tangible capital $ 57,684 9.2 % $ 9,404 1.5 % N/A N/A %
Leverage capital 57,684 9.2 25,078 4.0 31,348 5.0
Risk-based capital:
Tier 1 $ 57,684 14.6 $ 15,877 4.0 $ 23,753 6.0
Total 61,781 15.6 31,670 8.0 39,587 10.0
March 31, 2004
- --------------
Tangible capital $ 57,191 10.6 % $ 8,082 1.5 % N/A N/A %
Leverage capital 57,191 10.6 21,553 4.0 26,941 5.0
Risk-based capital:
Tier 1 $ 57,191 16.5 $ 13,863 4.0 $ 20,794 6.0
Total 61,316 17.7 27,726 8.0 34,657 10.0
The following table reconciles the Bank's stockholders' equity at March
31, 2005, in accordance with accounting principles generally accepted in the
U.S. to regulatory capital requirements:
REGULATORY CAPITAL REQUIREMENTS
--------------------------------------------------------------
GAAP TANGIBLE LEVERAGE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------------- -------------- -------------- --------------
(IN THOUSANDS)
Stockholders' Equity at March 31, 2005 (1) $ 57,449 $ 57,449 $ 57,449 $ 57,449
Add:
General valuation allowances - - 4,097
Deduct:
Unrealized loss on securities available-for-sale, net 235 235 235
-------------- -------------- --------------
Regulatory Capital 57,684 57,684 61,781
Minimum Capital requirement 9,404 25,078 31,670
-------------- -------------- --------------
Regulatory Capital Excess $ 48,280 $ 32,606 $ 30,111
============== ============== ==============
(1) Reflects Bank only.
COMPREHENSIVE INCOME. Comprehensive income represents net income and
certain amounts reported directly in stockholders' equity, such as the net
unrealized gain or loss on securities available for sale. The Holding Company
has reported its comprehensive income for fiscal 2005 and 2004 in the
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income. Carver Federal's other comprehensive income or loss (other than net
income or loss) is attributable to unrealized gains and losses on securities
which were at March 31, 2005 an unrealized loss of $235,000 and at March 31,
2004 an unrealized gain of $258,000. Included in the amounts at March 31, 2005
and 2004 were unrealized gains of $209,000 and $232,000, respectively, relating
to available-for-sale securities that were transferred during fiscal 2003 to
held-to-maturity. This unrealized gain is an unrealized gain reported as a
separate component of stockholders' equity and is amortized over the remaining
lives of the securities as an adjustment to yield.
NOTE 11. EMPLOYEE BENEFIT AND STOCK COMPENSATION PLANS
PENSION PLAN. Carver Federal has a non-contributory defined benefit
pension plan covering all eligible employees. The benefits are based on each
employee's term of service. Carver Federal's policy is to fund the plan with
contributions which equal the maximum amount deductible for federal income tax
purposes. The plan was curtailed during the fiscal year ended March 31, 2001.
The following table sets forth the plan's changes in benefit
obligation, changes in plan assets and funded status and amounts recognized in
Carver Federal's consolidated financial statements at March 31:
MARCH 31,
2005 2004
------------- ---------------
(IN THOUSANDS)
Change in projected benefit obligation during the year
Projected benefit obligation at the beginning of year $ 2,736 $ 2,752
Interest cost 167 172
Actuarial loss 136 43
Benefits paid (254) (231)
------------- ---------------
Projected benefit obligation at end of year $ 2,785 $ 2,736
============= ===============
Change in fair value of plan assets during the year
Fair value of plan assets at beginning of year $ 3,068 $ 2,907
Actual return on plan assets 136 392
Benefits paid (254) (231)
------------- ---------------
Fair value of plan assets at end of year $ 2,950 $ 3,068
============= ===============
Funded status $ 165 $ 332
Unrecognized loss / (gain) 203 (33)
------------- ---------------
Accrued pension cost $ 368 $ 299
============= ===============
Net periodic pension benefit included the following components for the
years ended March 31 are:
2005 2004 2003
------------- -------------- ------------
(IN THOUSANDS)
Interest cost $ 167 $ 172 $ 178
Expected return on plan assets (236) (223) (260)
Amortization of:
Unrecognized (gain) - - (19)
------------- -------------- ------------
Net periodic pension (benefit) $ (69) $ (51) $ (101)
============= ============== ============
Significant actuarial assumptions used in determining plan benefits for
the years ended March 31 are:
YEAR ENDED MARCH 31,
2005 2004 2003
------------ --------------- ------------
Annual salary increase (1) N/A N/A N/A
Expected Long-term return on assets 8.00% 8.00% 8.00%
Discount rate used in measurement of benefit obligations 6.38% 6.50% 6.50%
(1) The annual salary increase rate is not applicable as the plan is frozen.
SAVINGS INCENTIVE PLAN. Carver has a savings incentive plan, pursuant
to Section 401(k) of the Code, for all eligible employees of the Bank. Pursuant
to the plan, Carver may make an annual non-elective contribution to the 401(k)
plan on behalf of each eligible employee up to 2% of the employee's annual pay,
subject to IRS limitations. This non-elective Carver contribution may be made
regardless of whether or not the employee makes a contribution to the 401(k)
plan. To be eligible for the non-elective Carver contribution, the employee must
be 21 years of age, have completed at least one year of service and be employed
as of the last day of the plan year, December 31. In addition, Carver matches
contributions to the plan equal to 100% of pre-tax contributions made by each
employee up to a maximum of 4% of their pay, subject to IRS limitations. All
such matching contributions to the plan will be fully vested and non-forfeitable
at all times regardless of the years of service. However, the non-elective
Carver contribution, if awarded, vests over a five-year period. Total savings
incentive plan expenses for the years ended March 31, 2005, 2004 and 2003 were
$174,000, $95,000 and $127,000, respectively.
DIRECTORS' RETIREMENT PLAN. Concurrent with the conversion to the stock
form of ownership, Carver Federal adopted a retirement plan for non-employee
directors. The plan was curtailed during the fiscal year ended March 31, 2001.
The benefits are payable based on the term of service as a director. The
following table sets forth the plan's changes in benefit obligation, changes in
plan assets and funded status and amounts recognized in Carver Federal's
consolidated financial statements at March 31:
2005 2004
------------ ------------
(IN THOUSANDS)
Change in projected benefit obligation during the year
Projected benefit obligation at beginning of year $ 169 $ 200
Interest cost 9 12
Actuarial (gain) 1 -
Benefits paid (43) (43)
------------ ------------
Projected benefit obligation at end of year $ 136 $ 169
============ ============
Change in fair value of plan assets during the year
Fair value of plan assets at beginning of year $ - $ -
Employer contributions 43 43
Benefits paid (43) (43)
------------ ------------
Fair value of plan assets at end of year $ - $ -
============ ============
Funded Status $ (136) $ (169)
Unrecognized (gain) (16) (17)
------------ ------------
Accrued pension cost $ (152) $ (186)
============ ============
Net periodic pension cost for the years ended March 31, 2005, 2004 and
2003 included the following:
2005 2004 2003
------------- ------------ ------------
(IN THOUSANDS)
Interest cost $ 9 $ 12 $ 17
------------- ------------ ------------
Net periodic pension cost $ 9 $ 12 $ 17
============= ============ ============
The actuarial assumptions used in determining plan benefits include a
discount rate of 6.1%, 6.4% and 6.5% for the years ended March 31, 2005, 2004
and 2003, 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, 2005 the Consolidated Statement of Conditions
reflects a net cash surrender value of $8.2 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 provides for automatic
grants of restricted stock to certain employees as of the 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. Using a performance-accelerated vesting schedule, with return on
assets ("ROA") as the performance measure, the vesting period can be accelerated
in years three and four if the Bank meets or exceeds the three-year average ROA
for its peer group. Awards will become 100% vested upon termination of service
due to death or disability. When shares become vested and are distributed, the
recipients will receive an amount equal to any accrued dividends with respect
thereto. On September 23, 2003, the MRP was amended to increase the number of
shares available to 119,431. Pursuant to the MRP, the Bank recognized $158,00,
$128,000 and $79,000 as expense for the years ended March 31, 2005, 2004 and
2003, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN. Effective upon conversion, an ESOP was
established for all eligible employees. The ESOP used $1,821,320 in proceeds
from a term loan obtained from a third-party institution to purchase 182,132
shares of Bank common stock in the initial public offering. The term loan
principal was payable over forty equal quarterly installments through September
2004. Interest on the term loan was payable quarterly, initially at a rate of
3.0% over the average federal funds rate. On May 20, 2002, the term loan was
modified to provide for interest at a fixed rate of 4.0% per annum. Each year
until the loan paid off in June of 2004, the Bank made discretionary
contributions to the ESOP, which were 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. Currently, shares are purchased in the open market
in accordance with Carver's common stock repurchase program and are held in a
suspense account for future allocation among the participants on the basis of
compensation, as described by the Plan, in the year of allocation. Accordingly,
the ESOP shares pledged as collateral are reported as unearned ESOP shares in
the consolidated statements of financial condition. As shares are committed to
be released from collateral, the Bank reports compensation expense equal to the
current market price of the shares, and the shares become outstanding for net
income per common share computations. ESOP compensation expense was $200,000, $0
and $172,000 for the years ended March 31, 2005, 2004 and 2003, respectively.
The ESOP shares at March 31 follow:
2005 2004
------------- ------------
(IN THOUSANDS)
Allocated shares 78 177
Unreleased shares - 5
Unallocated shares 5 -
------------- ------------
Total ESOP shares 83 182
============= ============
Fair value of unreleased/unallocated shares $ 95 $ 117
============= ============
STOCK OPTION PLAN. During 1995, the Holding Company adopted the 1995
Stock Option Plan (the "Plan") to advance the interests of the Bank through
providing stock options to select key employees and directors of the Bank and
its affiliates. The number of shares reserved for issuance under the plan is
338,862. At March 31, 2005, there were 225,292 options outstanding and 151,846
were exercisable. Options are granted at the fair market value of Carver Federal
common stock at the time of the grant for a period not to exceed ten years.
Under the Plan 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. Using
a performance-accelerated vesting schedule, ROA as the performance measure, the
vesting period can be accelerated in years three and four if the Bank meets or
exceeds the three-year average ROA for its peer group. All options are
exercisable immediately upon a participant's disability, death or a change in
control, as defined in the Plan.
Information regarding stock options as of and for the years ended March
31 follows:
2005 2004 2003
------------------------------ ---------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------------- ------------- -------------- ------------ ------------- ------------
Outstanding, beginning of year 229,636 $ 11.25 192,176 $ 10.07 134,767 $ 9.10
Granted 39,347 19.65 43,638 16.35 65,142 12.05
Exercised (35,954) 12.75 (77) 12.06 (333) 9.93
Forfeited (7,737) 14.38 (6,101) 10.39 (7,400) 10.14
-------------- ------------- -------------- ------------ ------------- ------------
Outstanding, end of year 225,292 12.37 229,636 11.25 192,176 10.07
============== ============= ============== ============ ============= ============
Exercisable at year end 151,846 108,925 106,020
============== ============== =============
Information regarding stock options at March 31, 2005 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
- ---------------------- ------------- ------------- ----------- ------------- ------------
$ 8.00 $ 8.99 68,000 5 years $ 8.24 68,000 $ 8.24
9.00 9.99 38,560 6 years 9.92 38,560 9.92
10.00 10.99 7,000 6 years 10.53 6,400 10.54
12.00 12.99 43,076 7 years 12.10 28,182 12.09
13.00 13.99 1,000 3 years 13.81 1,000 13.81
16.00 16.99 29,128 8 years 16.41 9,704 16.41
19.00 19.99 37,418 9 years 19.64 - -
20.00 20.99 729 10 years 20.00
21.00 21.99 381 9 years 21.76 - -
------------- -------------
Total 225,292 151,846
============= =============
NOTE 12. 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 has outstanding various commitments as follows:
MARCH 31,
--------------------------------
2005 2004
--------------- --------------
(IN THOUSANDS)
Commitments to originate mortgage loans $ 44,129 $ 71,114
Commitments to originate commercial & consumer loans 515 2,844
Letters of Credit 1,908 1,908
--------------- --------------
Total $ 46,552 $ 75,866
=============== ==============
At March 31, 2005, of the $44.1 million in outstanding commitments to
originate mortgage loans, $37.4 million represented construction loans at an
average rate of 5.70%, $3.4 million represented commitments to originate
non-residential mortgage loans at rates within a range of 6.00% to 7.75% and
$3.3 million represented the balance of one-four and multi-family residential
loans at rates between 5.88% to 6.75%.
The balance of commitments on business and consumer loans at March 31,
2005 is primarily undisbursed funds from approved unsecured commercial lines of
credit. All such lines carry adjustable rates mainly tied to prime. At March 31,
2005, the Bank maintains one letter of credit in the amount of $1.9 million.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the counter-party.
LEASE COMMITMENTS. Rentals, including real estate taxes, under
long-term operating leases for certain branch offices aggregated approximately
$479,000, $245,000, and $186,000 for the years ended March 31, 2005, 2004 and
2003, respectively. As of March 31, 2005, minimum rental commitments under all
noncancellable leases with initial or remaining terms of more than one year and
expiring through 2018 follow:
YEAR ENDING MINIMUM
MARCH 31, RENTAL
--------- ------
(IN THOUSANDS)
2006 630
2007 549
2008 543
2009 575
2010 592
Thereafter 1,411
-------------
$ 4,300
=============
The Bank also has, in the normal course of business, commitments for
services and supplies. Management does not anticipate losses on any of these
transactions.
LEGAL PROCEEDINGS. From time to time, Carver Federal is a party to
various legal proceedings incident to its business. Certain claims, suits,
complaints and investigations involving Carver Federal, arising in the ordinary
course of business, have been filed or are pending. The Company is of the
opinion, after discussion with legal counsel representing Carver Federal in
these proceedings, that the aggregate liability or loss, if any, arising from
the ultimate disposition of these matters would not have a material adverse
effect on the Company's consolidated financial position or results of
operations. At March 31, 2005, except as set forth below, there were no material
legal proceedings to which the Company or its subsidiaries was a party or to
which any of their property was subject.
In January 2004, Michael Lee & Company ("Michael Lee"), former
accountants for Hale House Center, Inc., filed an action against Carver Federal
in New York County Supreme Court, asserting a single claim for contribution
against Carver Federal. The complaint alleges that Carver Federal should be
liable to Michael Lee in the event that Michael Lee is found liable to
non-parties Hale House Center, Inc. and its affiliated corporations ("Hale House
plaintiffs") in a separate action that the Hale House plaintiffs have filed
against Michael Lee asserting claims of professional malpractice and breach of
contract due to Michael Lee's alleged provision of deficient accounting services
to Hale House. The basis of Michael Lee's contribution claim against Carver
Federal is that Carver Federal allegedly breached a legal duty it owed Hale
House by improperly opening and maintaining a checking account on behalf of one
of the Hale House affiliates. Michael Lee seeks contribution from Carver Federal
in the amount of at least $8.5 million or the amount of any money judgment
entered against Michael Lee in favor of the Hale House plaintiffs. On February
4, 2004 Carver Federal filed a motion to dismiss the complaint in its entirety
and, on February 11, 2004, Michael Lee served a cross-motion for summary
judgment against Carver Federal. In May 2004, the court ruled in favor of Carver
Federal and judgment was entered in Carver Federal's favor on June 14, 2004.
Michael Lee has appealed the judgment. Carver Federal opposed the appeal as
untimely but it was found to be timely filed. Michael Lee's appeal is pending.
Carver Federal intends to defend itself vigorously. In the opinion of
management, after consultation with legal counsel, the lawsuit is without merit
and the ultimate outcome of this matter is not expected to have a material
adverse effect on the Company's results of operations, business operations or
consolidated financial condition.
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is defined as the amount at
which the instrument could be exchanged in a current transaction between willing
parties, other than a forced or liquidation sale. Significant estimations were
used by the Bank for the purpose of this disclosure. Estimated fair values have
been determined by the Bank using the best available data and estimation
methodology suitable for each category of financial instrument. For those loans
and deposits with floating interest rates, it is presumed that estimated fair
values generally approximate their recorded book balances. The estimation
methodologies used and the estimated fair values and carrying values of the
Bank's financial instruments are set forth below:
CASH AND CASH EQUIVALENTS AND ACCRUED INTEREST RECEIVABLE
The carrying amounts for cash and cash equivalents and accrued interest
receivable approximate fair value because they mature in three months or less.
SECURITIES
The fair values for securities available-for-sale, mortgage-backed
securities held-to-maturity and investment securities held-to-maturity are based
on quoted market or dealer prices, if available. If quoted market or dealer
prices are not available, fair value is estimated using quoted market or dealer
prices for similar securities.
LOANS RECEIVABLE
The fair value of loans receivable is estimated by discounting future
cash flows, using current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities of
such loans.
MORTGAGE SERVICING RIGHTS
The fair value of mortgage servicing rights is estimated by discount
future cash flows, using current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities of
such loans.
DEPOSITS
The fair value of demand, savings and club accounts is equal to the
amount payable on demand at the reporting date. The fair value of certificates
of deposit is estimated using rates currently offered for deposits of similar
remaining maturities. The fair value estimates do not include the benefit that
results from the low-cost funding provided by deposit liabilities compared to
the cost of borrowing funds in the market.
BORROWINGS
The fair values of advances from the Federal Home Loan Bank of New
York, securities sold under agreement to repurchase and other borrowed money are
estimated using the rates currently available to the Bank for debt with similar
terms and remaining maturities.
COMMITMENTS
The fair market value of unearned fees associated with financial
instruments with off-balance sheet risk at March 31, 2005 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, 2005 and 2004 follow:
AT MARCH 31,
------------------------------------------------------
2005 2004
-------------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------ ------------ ------------
(IN THOUSANDS)
Financial Assets:
Cash and cash equivalents $ 20,420 $ 20,420 $ 22,774 $ 22,774
Investment securities available-for-sale 22,551 22,551 21,553 21,553
Mortgage backed securities available-for-sale 95,482 95,482 74,850 74,850
Mortgage backed securities held-to-maturity 31,302 31,310 43,474 43,794
Loans receivable 421,987 424,886 351,900 362,684
Accrued interest receivable 2,702 2,702 2,489 2,489
Mortgage Servicing Rights - -
Financial Liabilities:
Deposits $ 453,454 $ 451,752 $ 373,665 $ 375,294
Advances from FHLB of New York 102,500 101,651 91,516 94,469
Other borrowed money 12,799 12,799 12,766 13,027
LIMITATIONS
The fair value estimates are made at a discrete point in time based on
relevant market information about the financial instruments. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the entire holdings of a particular financial instrument. Because no
quoted market value exists for a significant portion of the Bank's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
In addition, the fair value estimates are based on existing off balance
sheet financial instruments without attempting to value anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets and liabilities include premises and equipment and
advances from borrowers for taxes and insurance. In addition, the tax
ramifications related to the realization of unrealized gains and losses can have
a significant effect on fair value estimates and have not been considered in any
of the estimates.
Finally, reasonable comparability between financial institutions may not be
likely due to the wide range of permitted valuation techniques and numerous
estimates which must be made given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
introduces a greater degree of subjectivity to these estimated fair values.
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly financial data for
fiscal years ended March 31, 2005 and 2004:
THREE MONTHS ENDED
-----------------------------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 2005
Interest income $6,712 $7,013 $7,223 $7,597
Interest expense (2,168) (2,368) (2,485) (2,737)
-------------- -------------- -------------- --------------
Net interest income 4,544 4,645 4,738 4,860
Provision for loan losses - - - -
Non-interest income 1,139 1,198 1,203 901
Non-interest expense (3,938) (5,069) (4,507) (5,179)
Income tax expense (663) (291) (514) (190)
-------------- -------------- -------------- --------------
Net income $1,082 $483 $920 $392
============== ============== ============== ==============
Earnings per common share
Basic $0.45 $0.09 $0.37 $0.16
Diluted $0.42 $0.09 $0.36 $0.15
FISCAL 2004
Interest income $6,516 $6,602 $6,483 $6,633
Interest expense (2,230) (2,109) (2,217) (2,144)
-------------- -------------- -------------- --------------
Net interest income 4,286 4,493 4,266 4,489
Provision for loan losses - - - -
Non-interest income 1,140 1,574 1,577 984
Non-interest expense (3,780) (3,890) (3,971) (3,836)
Income taxes (expense) benefit (559) (751) (636) (547)
-------------- -------------- -------------- --------------
Net income (loss) $1,087 $1,426 $1,236 $1,090
============== ============== ============== ==============
Earnings (loss) per common share
Basic $0.45 $0.60 $0.52 $0.46
Diluted $0.42 $0.55 $0.47 $0.42
NOTE 15. CARVER BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31,
---------------------------
2005 2004
------------- ------------
(IN THOUSANDS)
ASSETS
Cash on deposit with the Bank $ 289 $ 93
Investment Securities 1,575 59
Investment in the Subsidiaries 57,851 57,846
Other Assets 140 12
------------- ------------
TOTAL ASSETS $ 59,855 $ 58,010
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings $ 13,202 $ 13,144
Accounts payable to Subsidiaries 667 22
Other liabilities 185 199
------------- ------------
Total liabilities $ 14,054 $ 13,365
------------- ------------
Stockholders' equity 45,801 44,645
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 59,855 $ 58,010
============= ============
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
--------------------------
2005 2004 2003
------ ------ ------
(IN THOUSANDS)
Income
Equity in net income from Subsidiaries $7,119 $8,328 $7,320
Interest income from deposit with the Bank 7 9 6
Other income 23 9 --
------ ------ ------
Total income 7,149 8,346 7,326
EXPENSES
Interest Expense on Borrowings 721 337 --
Salaries and employee benefits 225 169 52
Legal expense -- -- 102
Shareholder expense 488 458 248
Other 1,548 50 60
------ ------ ------
Total expense 2,982 1,014 462
Income before income taxes 4,167 7,332 6,864
Income tax expense 1,518 2,493 3,033
------ ------ ------
NET INCOME $2,649 $4,839 $3,831
====== ====== ======
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
--------------------------------------------
2005 2004 2003
------------ ------------ -------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,649 $ 4,839 $ 3,831
Adjustments to reconcile net loss to net cash
provided by operating activities:
Equity in net income of Subsidiaries (7,119) (8,328) (7,320)
Income taxes from the Bank 1,518 2,493 3,033
Increase (decrease) in accounts payable to Bank 645 21 (13)
Decrease (increase) in other liabilities (14) 131 (1,182)
Other, net 2,534 1,772 1,664
------------ ------------ -------------
Net cash provided by operating activities 213 928 13
CASH FLOWS FROM INVESTING ACTIVITIES
Dividends Received from Bank 4,866 -
Additional Investment in Bank & other subsidiaries - (13,153) -
Purchase of investment securities (3,074) (59) -
------------ ------------ -------------
Net cash (used in) provided by investing activities 1,792 (13,212) -
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Sub Debt - 13,144 -
Purchase of treasury stock, net (1,021) (200) (52)
Dividends paid (788) (654) (313)
------------ ------------ -------------
Net cash (used in) provided by financing activities (1,809) 12,290 (365)
------------ ------------ -------------
Net increase in cash 196 6 (352)
Cash and cash equivalents - beginning 93 87 439
------------ ------------ -------------
Cash and cash equivalents - ending $ 289 $ 93 $ 87
============ ============ =============
NOTE 16. RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR STOCK BASED COMPENSATION
In December 2004, the FASB issued SFAS 123R "ACCOUNTING FOR STOCK BASED
COMPENSATION, SHARE BASED PAYMENT", which replaces the guidance prescribed in
SFAS 123. SFAS 123R requires that compensation cost relating to share-based
payment transactions be recognized in the financial statements. The associated
costs will be measured based on the fair value of the equity or liability
instruments issued. SFAS 123R covers a wide range of share-based compensation
arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans. SFAS 123R
is effective as of the first interim or annual reporting period beginning after
June 15, 2005. Adoption of this pronouncement is not expected to have a material
impact on the Company's consolidated financial conditions or results.
ACCOUNTING AND DISCLOSURE REQUIREMENT RELATED TO THE MEDICARE PRESCRIPTION DRUG,
IMPROVEMENT AND MODERNIZATION ACT OF 2003
In January 2004, FASB issued Staff position No. 106-1 "ACCOUNTING AND
DISCLOSURE REQUIREMENTS RELATED TO MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND
MODERNIZATION ACT OF 2003" ("Medicare Act") for annual financial statements of
fiscal years ending after December 7, 2003. The Medicare Act introduced both a
Medicare prescription-drug benefit and federal subsidy to sponsors of retiree
health-care plans that provide a benefit at least "actuarially equivalent" to
the Medicare benefit. Carver Federal is not affected by the Medicare Act since
it does not provide retiree health-care benefits.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFIT
In December 2003, the FASB issued a revised SFAS No. 132, "EMPLOYERS'
DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS - AN AMENDMENT OF
FASB STATEMENTS NOS. 87, 88 AND 106" (SFAS No. 132(R)). SFAS No. 132 (R)
requires additional disclosures to those in the original statement about the
assets, obligations, cash flows and net periodic benefit cost of defined benefit
pension plans and other defined postretirement plans. SFAS No. 132 (R) also
amends Accounting Principles Board ("APB") Opinion No. 28, "INTERIM FINANCIAL
REPORTING," to require interim disclosure of the components of net periodic
benefit cost and, if significantly different from previously disclosed amounts,
the amounts of contributions and projected contributions to fund pension plans
and other postretirement benefit plans. SFAS No. 132 (R) is effective for
financial statements for fiscal years ending after December 15, 2003, except for
disclosure of estimated future benefit payments, which is effective for fiscal
years ending after June 15, 2004. As the provisions of SFAS No. 132 (R) are
disclosure related, the adoption of SFAS No. 132 (R) had no impact on Carver
Federal's financial condition or results of operations.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In December 2003, the FASB issued Interpretation No. 46 (revised),
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51,"
("FIN 46R"). Fin 46R addresses how a business enterprise should evaluate whether
it has a controlling financial interest in an entity through means other than
voting rights and, accordingly, should consolidate the variable interest entity
("VIE"). FIN 46R replaces FIN46 that was issued in January 2003. All public
companies, such as Carver Federal, are required to fully implement FIN 46R no
later than the end of the first reporting period ending after March 15, 2004.
The adoption of FIN 46R resulted in the deconsolidation of the Trust, which did
not have a material impact on Carver Federal's financial condition or results of
operations.
ACCOUNTING FOR CERTAIN LOANS OR DEBT SECURITIES ACQUIRED IN A TRANSFER
In December 2003, the American Institute of Certified Public
Accountants issued Statement of Position No. 03-3,"ACCOUNTING FOR CERTAIN LOANS
OR DEBT SECURITIES ACQUIRED IN A TRANSFER" (SOP No. 03-3). SOP No. 03-3
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in loans or
debt securities acquired in a transfer if those differences are attributable, at
least in part, to credit quality. SOP No. 03-3 prohibits "carry over" or
creation of valuation allowances in the initial accounting of all loans acquired
in transfers within the scope of SOP No. 03-3, which includes loans acquired in
a business combination. SOP No. 03-3 is effective for loans acquired in fiscal
years beginning after December 15, 2004. The adoption of SOP No. 03-3 is not
expected to have an impact on Carver Federal's financial condition or results of
operations.
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY
In May 2003, the FASB issued Statement No. 150, "ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY"("SFAS
No. 150"). The SFAS No. 150 requires issuers to classify as liabilities (or
assets in some circumstances) three classes of freestanding financial
instruments that embody obligations for the issuer. Generally, the statement is
effective for financial instruments entered into or modified after May 31, 2003
and is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a
material impact on the Company's earnings or financial position.
AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT 133
ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," which amends and clarifies
financial accounting and reporting of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES." SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003, and should generally be applied prospectively. The provisions of
SFAS No. 149 that relate to SFAS No. 133 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15, 2003, should continue
to be applied in accordance with their respective effective dates. In addition,
the provisions of SFAS No. 149 which relate to forward purchases or sales of
when-issued securities or other securities that do not yet exist, should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The adoption of SFAS No. 149 did not have a material impact on Carver
Federal's financial condition or results of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission (the "SEC"). As of March 31, 2005, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective and timely in alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
There were no changes in our internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting and we did not identify any significant deficiencies or
material weaknesses requiring corrective action with respect to those controls.
ITEM 9B. OTHER INFORMATION
On February 1, 2005, Carver filed a current report on Form 8-K
announcing the resignation of Catherine Papayiannis, its Chief Operations
Officer. Also included in that announcement were certain changes to its then
current management structure and new additions to the management team to fill
certain vacancies. Frank Deaton was reassigned from Chief Auditor to a newly
created position as Senior Vice President of Operations, and David Hargraves,
the Chief Retail Officer, and James Bason, the Chief Lending Officer, had their
responsibilities expanded to include new business opportunities and efforts in
their respective areas. The new additions to the management team included
Carmelo Felix as the new Chief Auditor and Fred Benedicto as the new Chief
Information Officer.
On June 3, 2005, Linda J. Dunn resigned as the Senior Vice President,
General Counsel and Corporate Secretary of Carver and Carver Federal, such
resignation to be effective July 6, 2005.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning Executive Officers of the Company which responds
to this Item is incorporated by reference from the section entitled "Executive
Officers and Key Managers of Carver and Carver Federal" in the Holding Company's
definitive proxy statement for the Annual Meeting of Stockholders for the fiscal
year ended March 31, 2005 (the "Proxy Statement"). The information that responds
to this Item with respect to Directors is incorporated by reference from the
section entitled "Election of Directors" in the Proxy Statement. Information
with respect to compliance by the Company's Directors and Executive Officers
with Section 16(a) of the Exchange Act is incorporated by reference from the
subsection entitled "Section 16 (a) Beneficial Ownership Reporting Compliance"
in the Proxy Statement.
AUDIT COMMITTEE FINANCIAL EXPERT
Information regarding the audit committee of the Company's Board of
Directors, including information regarding audit committee financial experts
serving on the audit committee, is presented under the heading "Corporate
Governance" in the Company's Proxy Statement and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in response to this Item is incorporated by
reference from the section entitled "Compensation of Directors and Executive
Officers" in the Proxy Statement.
ITEM 12. 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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in response to this Item is incorporated by
reference from the section entitled "Transactions with Certain Related Persons"
in the Proxy Statement.
ITEM 14. 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. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) List of Documents Filed as Part of this Annual Report on Form 10-K
(1) The following consolidated financial statements are in Item 8
of this annual report:
o Report of Independent Registered Public Accounting Firm
o Consolidated Statement of Financial Condition as of March 31,
2005 and 2004
o Consolidated Statements of Operations for the years ended as
of March 31, 2005, 2004 and 2003
o Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the years ended March 31, 2005, 2004
and 2003
o Consolidated Statements of Cash Flows for the years ended
March 31, 2005, 2004 and 2003
o Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. All financial statement
schedules have been omitted, as the required information is
either inapplicable or included under Item 8, "Financial
Statement and Supplementary Data".
(b) Exhibits required by Item 601 of Regulation S-K:
(1) See Index of Exhibits on page E-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CARVER BANCORP, INC.
June 27, 2005 By /s/ Deborah C. Wright
---------------------
Deborah C. Wright
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below on June 27, 2005 by the following persons on
behalf of the Registrant and in the capacities indicated.
/s/ Deborah C. Wright Chairman, President and Chief Executive Officer
- --------------------------- (Principal Executive Officer)
Deborah C. Wright
/s/ William Gray Senior Vice President and Chief Financial Officer (Principal
- -------------------------- Financial and Accounting Officer)
William Gray
/s/ Carol Baldwin Moody Director
- --------------------------
Carol Baldwin Moody
/s/ David L. Hinds Director
- --------------------------
David L. Hinds
/s/ Robert Holland, Jr. Director
- --------------------------
Robert Holland, Jr.
/s/ Pazel Jackson Director
- --------------------------
Pazel G. Jackson, Jr.
/s/ Edward B. Ruggiero Director
- --------------------------
Edward B. Ruggiero
/s/ Strauss Zelnick Director
- --------------------------
Strauss Zelnick
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
2.1 Agreement and Plan of Merger dated as of March 15, 2004 by and between Carver
Bancorp, Inc., Carver Federal Savings Bank and Independence Federal Savings Bank
(10)
3.1 Certificate of Incorporation of Carver Bancorp, Inc. (1)
3.2 Amended and Restated Bylaws of Carver Bancorp, Inc. (*)
4.1 Stock Certificate of Carver Bancorp, Inc. (1)
4.2 Federal Stock Charter of Carver Federal Savings Bank (1)
4.3 Bylaws of Carver Federal Savings Bank (1)
4.4 Amendments to Bylaws of Carver Federal Savings Bank (2)
4.5 Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock (4)
4.6 Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock (4)
10.1 Carver Bancorp, Inc. 1995 Stock Option Plan, effective as of September 12, 1995 (1)
10.2 Carver Federal Savings Bank Retirement Income Plan, as amended and restated effective as of January
1, 1997 and as further amended through January 1, 2001 (9)
10.3 Carver Federal Savings Bank 401(k) Savings Plan in
RSI Retirement Trust, as amended and restated
effective as of January 1, 1997 and including
provisions effective through January 1, 2002 (9)
10.4 Carver Bancorp, Inc. Employee Stock Ownership Plan, effective as of January 1, 1994, incorporating
Amendment No. 1, incorporating Second Amendment, incorporating Amendment No. 2, incorporating
Amendment No. 2A, incorporating Amendment No. 3 and incorporating Amendment No. 4 (9)
10.5 Carver Federal Savings Bank Deferred Compensation Plan, effective as of August 10, 1993 (1)
10.6 Carver Federal Savings Bank Retirement Plan for Nonemployee Directors, effective as of October 24,
1994 (1)
10.7 Carver Bancorp, Inc. Management Recognition Plan, effective as of September 12, 1995 (1)
10.8 Carver Bancorp, Inc. Incentive Compensative Plan, effective as of September 12, 1995 (1)
10.9 Employment Agreement by and between Carver Federal Savings Bank and Deborah C. Wright, entered into
as of June 1, 1999 (3)
10.10 Employment Agreement by and between Carver Bancorp, Inc. and Deborah C. Wright, entered into as of
June 1, 1999 (3)
10.11 Securities Purchase Agreement by and among Carver Bancorp, Inc., Morgan Stanley & Co. Incorporated
and Provender Opportunities Fund L.P. (5)
10.12 Registration Rights Agreement by and among Carver Bancorp, Inc., Morgan Stanley & Co. Incorporated
and Provender Opportunities Fund L.P. (5)
10.13 Settlement Agreement and Mutual Release by and among BBC Capital Market, Inc., The Boston Bank of
Commerce, Kevin Cohee and Teri Williams; Carver Bancorp, Inc., Deborah C. Wright, David N. Dinkins,
Linda H. Dunham, Robert J. Franz, Pazel G. Jackson, Jr., Herman Johnson and David R. Jones; Morgan
Stanley & Co., Incorporated; and Provender Opportunities Fund, L.P. and Frederick O. Terrell (5)
10.14 Amendment to the Carver Bancorp, Inc. 1995 Stock Option Plan (6)
10.15 Amended and Restated Employment Agreement by and between Carver Federal Savings Bank and Deborah C.
Wright, entered into as of June 1, 1999 (7)
10.16 Amended and Restated Employment Agreement by and between Carver Bancorp, Inc. and Deborah C.
Wright, entered into as of June 1, 1999 (7)
10.17 Form of Letter Employment Agreement between Executive Officers and Carver Bancorp, Inc. (7)
10.18 Employment Agreement by and between Carver Federal Savings Bank and Catherine A. Papayiannis,
entered into as of April 22, 2002 (7)
10.19 Carver Bancorp, Inc. Compensation Plan for Non-Employee Directors (9)
10.20 Amendment Number One to Carver Federal Savings Bank Retirement Income Plan, as amended and restated
effective as of January 1, 1997 and as further amended through January 1, 2001 (9)
10.21 First Amendment to the Restatement of the Carver Federal Savings Bank 401(k) Savings Plan (9)
10.22 Second Amendment to the Restatement of the Carver Federal Savings Bank 401(k) Savings Plan for
EGTRRA (9)
10.23 Guarantee Agreement by and between Carver Bancorp, Inc. and U.S. Bank National Association, dated
as of September 17, 2003 (8)
10.24 Amended and Restated Declaration of Trust by and among, U.S. Bank National Association, as
Institutional Trustee, Carver Bancorp, Inc., as Sponsor, and Linda Dunn, William Gray and Deborah
Wright, as Administrators, dated as of September 17, 2003 (8)
10.25 Indenture, dated as of September 17, 2003, between Carver Bancorp, Inc., as Issuer, and U.S. Bank
National Association, as Trustee (8)
10.26 Second Amendment to the Carver Bancorp, Inc. Management Recognition Plan, effective as of September
23, 2003 (11)
10.27 Amended Share Voting Stipulation and Undertaking made by Carver Bancorp, Inc. in favor of the OTS,
made as of April 22, 2004 (11)
10.28 Trust Agreement between Carver Bancorp, Inc. and American Stock & Transfer Trust Company, dated May
3, 2004 (11)
10.29 First Amendment to Employment Agreement by and between Carver Federal Savings Bank and Catherine A.
Papayiannis, entered into as of May 27, 2004 (11)
10.30 First Amendment to the Carver Bancorp, Inc. Retirement Income Plan, effective as of March 28, 2005
(*)
10.31 Sixth Amendment to the Carver Bancorp, Inc. Employee Stock Ownership Plan, effective as of March
28, 2005 (*)
21.1 Subsidiaries of the Registrant (11)
23.2 Consent of KPMG LLP (*)
31.1 Certifications of Chief Executive Officer (*)
31.2 Certifications of Chief Financial Officer (*)
32.1 Written Statement of Chief Executive Officer furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (*)
32.2 Written Statement of Chief Financial Officer furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (*)
(*) Filed herewith. Copies of these exhibits are available at no charge
through the SEC website at http://www.sec.gov.
(1) Incorporated herein by reference to Registration Statement No. 333-5559
on Form S-4 of the Registrant filed with the Securities and Exchange
Commission on June 7, 1996.
(3) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1998.
(3) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1999.
(4) Incorporated herein by reference to the Exhibits to the Registrant's
Report on Form 8-K, dated January 14, 2000.
(5) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 2000.
(6) Incorporated herein by reference to the Registrant's Proxy Statement
dated January 25, 2001.
(7) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 2002.
(8) Incorporated herein by reference to the Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the three months ended September 30,
2003.
(9) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 2003
(10) Incorporated herein by reference to the Exhibits to the Registrant's
Report on Form 8-K, dated March 16, 2004.
(11) Incorporated herein by reference to the Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 2004