UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004
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
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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
COMMON STOCK, PAR VALUE $.01 2,481,372
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Class Outstanding at January 31, 2005
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 2004 (unaudited) and March 31, 2004.......................................1
Consolidated Statements of Income for the Three and Nine Months
Ended December 31, 2004 and 2003 (unaudited)...........................................2
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income for the Nine Months Ended December 31, 2004 (unaudited) ..........3
Consolidated Statements of Cash Flows for the Nine Months
Ended December 31, 2004 and 2003 (unaudited)...........................................4
Notes to Consolidated Financial Statements (unaudited).................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................22
Item 4. Controls and Procedures........................................................................22
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings..............................................................................23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...................................23
Item 3. Defaults Upon Senior Securities................................................................24
Item 4. Submission of Matters to a Vote of Security Holders............................................24
Item 5. Other Information..............................................................................24
Item 6. Exhibits.......................................................................................24
SIGNATURES.......................................................................................................26
EXHIBITS........................................................................................................E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
DECEMBER 31, MARCH 31,
2004 2004
------------------ -----------------
(UNAUDITED)
ASSETS Cash and cash equivalents:
Cash and due from banks $ 13,136 $ 11,574
Federal funds sold 8,500 8,200
Interest earning deposits 600 3,000
------------------ -----------------
Total cash and cash equivalents 22,236 22,774
Securities:
Available-for-sale, at fair value (including pledged as collateral of
$114,109 at December 31, 2004 and $82,325 at March 31, 2004) 119,982 96,403
Held-to-maturity, at amortized cost (including pledged as collateral of
$31,054 at December 31, 2004 and $42,189 at March 31, 2004) 31,830 43,474
------------------ -----------------
Total securities 151,812 139,877
Loans receivable:
Real estate mortgage loans 411,509 350,015
Consumer and commercial business loans 1,643 6,010
Allowance for loan losses (4,119) (4,125)
------------------ -----------------
Total loans receivable, net 409,033 351,900
Office properties and equipment, net 13,323 11,682
Federal Home Loan Bank of New York stock, at cost 5,625 4,576
Accrued interest receivable 2,713 2,489
Other assets 11,326 5,532
------------------ -----------------
Total assets $ 616,068 $ 538,830
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 436,425 $ 373,665
Advances from the Federal Home Loan Bank of New York and other borrowed money 125,290 104,282
Other liabilities 8,791 16,238
------------------ -----------------
Total liabilities 570,506 494,185
Stockholders' equity:
Preferred stock (par value $0.01 per share; 1,000,000 shares authorized;
100,000 issued and 0 and 100,000 outstanding December 31, 2004 and
March 31, 2004, respectively) - 1
Common stock (par value $0.01 per share: 10,000,000 shares authorized;
2,524,691 and 2,316,358 shares issued at December 31, 2004 and
March 31, 2004, respectively; 2,480,393 and 2,285,267 outstanding at
December 31, 2004 and March 31, 2004, respectively) 25 23
Additional paid-in capital 23,913 23,882
Retained earnings 22,536 20,892
Unamortized awards of common stock under management recognition plan (11) (21)
Treasury stock, at cost (44,298 shares at December 31, 2004 and 31,091
shares at March 31, 2004) (751) (390)
Accumulated other comprehensive income (150) 258
------------------ -----------------
Total stockholders' equity 45,562 44,645
------------------ -----------------
Total liabilities and stockholders' equity $ 616,068 $ 538,830
================== =================
1
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- --------------------------------
(UNAUDITED) (UNAUDITED)
2004 2003 2004 2003
-------------- ------------- --------------- --------------
Interest Income:
Loans $ 5,780 $ 5,025 $ 16,897 $ 14,952
Total securities 1,411 1,396 3,962 4,507
Federal funds sold 32 62 89 143
-------------- ------------- --------------- --------------
Total interest income 7,223 6,483 20,948 19,602
Interest expense:
Deposits 1,449 1,140 3,886 3,560
Advances and other borrowed money 1,036 1,076 3,134 2,996
-------------- ------------- --------------- --------------
Total interest expense 2,485 2,216 7,020 6,556
Net interest income 4,738 4,267 13,928 13,046
Provision for loan losses - - - -
-------------- ------------- --------------- --------------
Net interest income after provision for loan losses 4,738 4,267 13,928 13,046
Non-interest income:
Depository fees and charges 600 479 1,655 1,454
Loan fees and service charges 466 1,037 1,547 2,175
Gain (loss) on sale of securities - - 94 31
Impairment of securities - - (1,472) -
Gain on sale of loans 28 55 74 55
Grant income - - 1,140 -
Other 109 6 135 577
-------------- ------------- --------------- --------------
Total non-interest income 1,203 1,577 3,173 4,292
Non-interest expense:
Employee compensation and benefits 2,365 1,989 6,435 5,592
Net occupancy expense 526 385 1,402 1,053
Equipment 400 331 1,165 1,113
Merger related expenses - - 847 -
Other 1,216 1,267 3,667 3,885
-------------- ------------- --------------- --------------
Total non-interest expense 4,507 3,972 13,516 11,643
Income before income taxes 1,434 1,872 3,585 5,695
Income taxes 514 636 1,328 1,946
-------------- ------------- --------------- --------------
Net income $ 920 $ 1,236 $ 2,257 $ 3,749
============== ============= =============== ==============
Dividends applicable to preferred stock $ 16 $ 49 $ 114 $ 148
Net income available to common stockholders $ 904 $ 1,187 $ 2,143 $ 3,601
============== ============= =============== ==============
Earnings per common share:
Basic $ 0.37 $ 0.52 $ 0.91 $ 1.58
============== ============= =============== ==============
Diluted $ 0.36 0.47 0.87 1.45
============== ============= =============== ==============
See accompanying notes to consolidated financial statements.
2
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED DECEMBER 31, 2004
(IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
PREFERRED COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
STOCK STOCK CAPITAL EARNINGS STOCK INCOME (LOSS)
-------------- ----------- ------------- ------------- ----------- --------------------
BALANCE-MARCH 31, 2004 $1 $23 $23,882 $20,892 ($390) $258
Comprehensive income:
Net Income for the three months
ended June 30, 2004 - - - 1,082 - -
Change in net unrealized gain on
securities, net of taxes - - - - - (1,110)
Dividends paid - - - (213) - -
Treasury stock activity - - 6 - 60 -
Allocation of shares for MRP - - 34 - - -
-------------- ----------- ------------- ------------- ----------- --------------------
BALANCE-JUNE 30, 2004 $1 $23 $23,922 $21,761 ($330) ($852)
Comprehensive income:
Net Income for the three months
ended September 30, 2004 - - - 255 - -
Change in net unrealized gain on
securities, net of taxes - - - - - 866
Dividends paid - - - (160) - -
Treasury stock activity - - (6) - 35 -
-------------- ----------- ------------- ------------- ----------- --------------------
BALANCE-SEPTEMBER 30, 2004 $1 $23 $23,916 $21,856 ($295) $14
Comprehensive income:
Net Income for the three months
ended December 31, 2004 - - - 920 - -
Change in net unrealized gain on
securities, net of taxes - - - - - (164)
Dividends paid - - - (240) - -
Treasury stock activity (1) 2 (3) - (456) -
-------------- ----------- ------------- ------------- ----------- --------------------
BALANCE-DECEMBER 31, 2004 $0 $25 $23,913 $22,536 ($751) ($150)
============== =========== ============= ============= =========== ====================
COMMON TOTAL
STOCK STOCK-
ACQUIRED HOLDERS'
BY MRP EQUITY
------------ ---------------
BALANCE-MARCH 31, 2004 ($21) $44,645
Comprehensive income:
Net Income for the three months
ended June 30, 2004 - $1,082
Change in net unrealized gain on
securities, net of taxes - ($1,110)
Dividends paid - ($213)
Treasury stock activity (81) ($15)
Allocation of shares for MRP - $34
------------ ---------------
BALANCE-JUNE 30, 2004 ($102) $44,423
Comprehensive income:
Net Income for the three months
ended September 30, 2004 - 255
Change in net unrealized gain on
securities, net of taxes - 866
Dividends paid - (160)
Treasury stock activity 91 120
------------ ---------------
BALANCE-SEPTEMBER 30, 2004 ($11) $45,504
Comprehensive income:
Net Income for the three months
ended December 31, 2004 - 920
Change in net unrealized gain on
securities, net of taxes - (164)
Dividends paid - (240)
Treasury stock activity - (458)
------------ ---------------
BALANCE-DECEMBER 31, 2004 ($11) $45,562
============ ===============
See accompanying notes to consolidated financial statements.
3
CARVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED DECEMBER 31,
----------------------------------------
2004 2003
------------------- ------------------
Cash flows from operating activities:
Net income $ 2,257 $ 3,749
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses - -
ESOP and MRP expense 114 18
Depreciation and amortization expense 1,070 850
Amortization of intangibles - 160
Other amortization 3,313 1,688
Gain from sale of securities (94) -
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (224) 930
(Increase) decrease in other assets (6,020) 7,200
Decrease in other liabilities (7,404) (4,986)
------------------- ------------------
Net cash used in operating activities (6,988) 9,609
------------------- ------------------
Cash flows from investing activities:
Purchases of securities:
Available-for-sale (78,125) (58,429)
Held-to-maturity - (19,860)
Proceeds from principal payments, maturities and calls
of securities:
Available-for-sale 44,661 60,193
Held-to-maturity 11,482 6,959
Proceeds from sales of available-for-sale securities 7,288 23,871
Disbursements for loan originations (77,351) (69,540)
Loans purchased from third parties (78,020) (69,158)
Principal collections on loans 90,778 87,365
(Purchase) redemption of FHLB-NY stock (1,049) 564
Proceeds from loans sold 6,999 6,512
Additions to premises and equipment (2,711) (1,526)
------------------- ------------------
Net cash used in investing activities (76,048) (33,049)
------------------- ------------------
Cash flows from financing activities:
Net increase in deposits 62,760 21,112
Net repayment of FHLB advances and
other borrowed money 20,966 (11,404)
Issuance of junior subordinated debentures - 12,728
Common stock repurchased (615) (303)
Dividends paid (613) (540)
------------------- ------------------
Net cash provided by financing activities 82,498 21,593
------------------- ------------------
Net decrease in cash and cash equivalents (538) (1,847)
Cash and cash equivalents at beginning of the period 22,774 23,160
------------------- ------------------
Cash and cash equivalents at end of the period $ 22,236 21,313
=================== ==================
Supplemental information:
Noncash Transfers-
Change in unrealized gain on valuation of
available-for-sale investments, net $ (244) $ (775)
Cash paid for-
Interest $ 7,048 $ 6,584
Income taxes 2,394 2,825
See accompanying notes to consolidated financial statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Carver
Bancorp, Inc. (the "Holding Company") have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP") for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange
Commission ("SEC"). Accordingly, they do not include all of the information and
footnotes required by GAAP for complete consolidated financial statements.
Certain information and note disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted
pursuant to the rules and regulations of the SEC. Certain reclassifications have
been made to prior period amounts to conform to the current period presentation.
In the opinion of management, all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the financial
condition, results of operations, changes in stockholders' equity and cash flows
of the Holding Company and its subsidiaries on a consolidated basis as of and
for the periods shown have been included.
The unaudited consolidated financial statements presented herein should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Holding Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 2004 ("2004 10-K") previously filed with the SEC.
The consolidated results of operations and other data for the three-month or
nine-month periods ended December 31, 2004 are not necessarily indicative of
results that may be expected for the entire fiscal year ending March 31, 2005
("fiscal 2005").
The accompanying unaudited consolidated financial statements include
the accounts of the Holding Company and its wholly owned subsidiaries, Carver
Federal Savings Bank (the "Bank" or "Carver Federal"), Alhambra Holding Corp.,
an inactive Delaware corporation, and the Bank's wholly-owned subsidiaries, CFSB
Realty Corp. and CFSB Credit Corp., and the Bank's majority owned subsidiary,
Carver Asset Corporation. The Holding Company and its consolidated subsidiaries
are referred to herein collectively as "Carver" or the "Company." All
significant inter-company accounts and transactions have been eliminated in
consolidation.
In addition, the Holding Company has a subsidiary, Carver Statutory
Trust I, which is not consolidated with Carver for financial reporting purposes
as a result of our adoption of Financial Accounting Standards Board ("FASB"),
revised Interpretation No. 46, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AND
INTERPRETATION OF ACCOUNTING RESEARCH BULLETIN NO. 51", effective January 1,
2004. Carver Statutory Trust I was formed in 2003 for the purpose of issuing
13,000 shares, liquidation amount $1,000 per share, of floating rate capital
securities ("trust preferred securities"). Gross proceeds from the sale of these
trust preferred securities were $13.0 million, and, together with the proceeds
from the sale of the trust's common securities, were used to purchase
approximately $13.4 million aggregate principal amount of the Holding Company's
floating rate junior subordinated debt securities due 2033. The junior
subordinated debt securities are repayable quarterly at the option of the
Holding Company, beginning on or after July 7, 2007, and have a mandatory
repayment date of September 17, 2033. Interest on the junior subordinated debt
securities is cumulative and payable at a floating rate per annum (reset
quarterly) equal to 3.05% over three-month LIBOR, with a rate of 5.55% as of
December 31, 2004. The Holding Company has fully and unconditionally guaranteed
the obligations of Carver Statutory Trust I to the trust's capital security
holders. See Note 8 for further discussion of the impact of our adoption of FIN
46R.
(2) NET INCOME PER COMMON SHARE
Basic earnings per common share is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding over the period of determination. Diluted earnings per common share
include any additional common shares as if all potentially dilutive common
shares were issued (for instance, convertible preferred stock and stock options
with an exercise price that is less than the average market price of the common
shares for the periods stated). For the purpose of these calculations,
unreleased ESOP shares are not considered to be outstanding. For each of the
three-month periods ended December 31, 2004 and 2003, preferred dividends of
$15,837 and $49,250, respectively, were deducted from net income to arrive at
the amount of net income available to common stockholders. Additionally, for
both the three-month periods ended December 31, 2004 and 2003, 33,967 and
208,333 shares of common stock, respectively, were potentially issuable from the
conversion of preferred stock. Also, 90,770 shares of common stock at December
31, 2004 and 112,358 shares of common stock at December 31, 2003 were
potentially issuable from the exercise of stock options with an exercise price
that is less than the average market price of the common shares for the
three-months ended December 31, 2004 and December 31, 2003, respectively. The
effects of both of these potentially dilutive common shares were considered in
determining the diluted net income per common share.
5
(3) STOCK OPTION PLAN
ACCOUNTING FOR STOCK BASED COMPENSATION
The Holding Company grants "incentive stock options" only to its
employees and grants "nonqualified stock options" to employees and non-employee
directors. Under Accounting Principle Board Opinion No. 25 "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES", no compensation expense is recognized if the exercise
price of the option is greater than or equal to the fair market value of the
underlying stock on the date of grant. Since we have elected to apply the
intrinsic value method of accounting for stock-based compensation, we are
required to disclose the pro-forma impact on net income and earnings per share
that the fair value-based method would have had if it were applied rather than
the intrinsic value method. Our policy with regard to stock-based compensation
has been to grant employee stock options and restricted stock awards after
fiscal year-end. Since most stock options are typically awarded after fiscal
year-end and contain a nominal vesting period, no pro-forma compensation expense
or its related effect on net income and earnings per share have been reported
herein. In December 2004, the FASB has adopted SFAS No. 123R which will require
the fair value method to be used to account for stock based compensation and
will require recognizing compensation expense in the financial statements after
June 15, 2005. Further disclosure is presented in Note 1 - "Summary of
Significant Accounting Policies -- Stock Based Compensation Plans" of our
audited consolidated financial statements in Carver's 2004 10-K which is
incorporated herein by reference.
(4) EMPLOYEE BENEFIT 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 pension
plan was curtailed and future benefit accruals ceased as of December 31, 2000.
DIRECTORS' RETIREMENT PLAN
Concurrent with the conversion to a stock form of ownership, Carver
Federal adopted a retirement plan for non-employee directors. The directors'
retirement 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 components of net periodic pension
expense for the pension plan and directors' retirement plan for the three months
ended December 31 of the calendar years indicated.
EMPLOYEE PENSION PLAN NON-EMPLOYEE DIRECTORS' PLAN
2004 2003 2004 2003
--------------- --------------- ----------------- -----------------
(IN THOUSANDS)
Interest Cost $ 42 $ 43 $ 2 $ 3
Expected Return on Assets (59) (56) - -
--------------- --------------- ----------------- -----------------
Net Periodic Benefit Expense / (Credit) 4 (17) $ (13) $ 2 $ 3
=============== =============== ================= =================
(5) CONVERTIBLE PREFERRED STOCK
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 its
Series A and Series B Convertible Preferred Stock (the "Preferred Shares"), par
value $0.01 per share, 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 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 20, 2004 the Holding Company announced that the
holders of all 40,000 outstanding shares of its Series A Convertible Preferred
Stock and all 60,000 outstanding shares of
6
its Series B Convertible Preferred Stock had 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.
(6) COMMON STOCK DIVIDEND
On January 25, 2005, the Board of Directors of the Holding Company declared, for
the quarter ended December 31, 2004, a cash dividend of seven cents ($0.07) per
common share outstanding. The dividend is payable on February 24, 2005 to
stockholders of record at the close of business on February 10, 2005.
(7) RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING AND DISCLOSURE REQUIREMENT RELATED TO THE MEDICARE PRESCRIPTION DRUG,
IMPROVEMENT AND MODERNIZATION ACT OF 2003
In January 2004, FASB issued FASB Staff position ("FSP") 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.
In May 2004, the FASB issued FSP No. 106-2 "ACCOUNTING AND DISCLOSURE
REQUIREMENTS RELATED TO THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND
MODERNIZATION ACT OF 2003" ("Revised Medicare Act"), which supersedes FSP No.
106-1 of the same name. The Company is not affected by the Revised Medicare Act
since it does not provide retiree health-care benefits.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In December 2003, the FASB issued a revised Statement of Financial
Accounting Standards ("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. The Company has adopted the disclosure provisions of SFAS No. 132(R).
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In December 2003, the FASB issued "CONSOLIDATION OF VARIABLE INTEREST
ENTITIES, AND INTERPRETATION OF ACCOUNTING RESEARCH BULLETIN NO. 51" ("FIN46R").
FIN46R 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. FIN46R
replaces an earlier version that was issued in January 2003. All public
companies, such as Carver, were required to fully implement FIN46R no later than
the end of the first reporting period ending after March 15, 2004. The adoption
of FIN46R resulted in the deconsolidation of Carver Statutory Trust I, which did
not have a material impact on the Company'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 a material impact on the Company's financial condition or
results of operations.
7
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY
In May 2003, the FASB issued SFAS 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 and implementation 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" ("SFAS NO. 149"), which
amends and clarifies financial accounting and reporting of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under FASB Statement No. 133, "ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"("SFAS NO. 133"). 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 continue to be applicable in
accordance with their respective effective dates. In addition, the provisions of
SFAS No. 149 that relate to forward purchases or sales of when-issued
securities, or other securities that do not yet exist, are applicable 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 our financial
condition or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q,
which are not historical facts, are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). In addition, senior management may make
forward-looking statements orally to analysts, investors, the media and others.
These forward-looking statements may be identified by the use of such words as
"believe," "expect," "anticipate," "intend," "should," "will," "would," "could,"
"may," "planned," "estimated," "potential," "outlook," "predict," "project" and
similar terms and phrases, including references to assumptions. Forward-looking
statements are based on various assumptions and analyses made by the Company in
light of the management's experience and its perception of historical trends,
current conditions and expected future developments, as well as other factors
believed to be appropriate under the circumstances. These statements are not
guarantees of future performance and are subject to risks, uncertainties and
other factors, many of which are beyond the Company's control, that could cause
actual results to differ materially from future results expressed or implied by
such forward-looking statements. Factors which could result in material
variations include, without limitation, the Company's success in implementing
its initiatives, including expanding its product line, adding new branches and
ATM centers, successfully re-branding its image and achieving greater operating
efficiencies; increases in competitive pressure among financial institutions or
non-financial institutions; legislative or regulatory changes which may
adversely affect the Company's business or the cost of doing business;
technological changes which may be more difficult or expensive than we
anticipate; changes in interest rates which may reduce net interest margins and
net interest income; changes in deposit flows, loan demand or real estate values
which may adversely affect the Company's business; changes in accounting
principles, policies or guidelines which may cause the Company's condition to be
perceived differently; 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; the ability of
the Company to originate and purchase loans with attractive terms and acceptable
credit quality; and 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 decreased
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.
The forward-looking statements contained herein are made as of the date
of this Form 10-Q, and the Company assumes no obligation to, and expressly
disclaims any obligation to, update these forward-looking statements to reflect
actual results, changes in assumptions or changes in other factors affecting
such forward-looking statements or to update the reasons why actual results
could differ from those projected in the forward-looking statements. You should
consider these risks and uncertainties in evaluating forward-looking statements
and you should not place undue reliance on these statements.
8
As used in this Form 10-Q, "we," "us" and "our" refer to the Holding
Company and its consolidated subsidiaries, unless the context otherwise
requires.
OVERVIEW
The Holding Company, a Delaware corporation, is the holding company for
Carver Federal, a federally chartered savings bank, and, on a parent-only basis,
had minimal results of operations. The Holding Company is headquartered in New
York, New York. 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, Carver Federal, which, as of
January 31, 2005, operates eight full-service banking locations in the New York
City boroughs of Brooklyn, Queens and Manhattan and three standalone 24/7 ATM
centers.
The Holding Company is dependent on dividends from the Bank, its own
earnings, capital raised and borrowings for sources of funds. The information
below reflects principally the financial condition and results of operations of
the Bank. The Bank's results of operations are primarily dependent on its net
interest income, which is the difference between the interest earned on its
assets, primarily its loans and securities, and the interest paid on its
deposits and borrowings. The Bank's earnings are also affected by general
economic and competitive conditions, particularly changes in market interest
rates and government and regulatory policies.
Throughout the fiscal year ended March 31, 2004 ("fiscal 2004"), the
Bank was impacted by the low interest rate environment, which held steady within
historically low ranges. The low interest rate environment accelerated
repayments of our mortgage loans and mortgage-backed securities and also allowed
for lowering the Bank's cost of funds, the net effect of which resulted in a
decline in our net interest margin. Throughout fiscal 2005 interest rates began
to increase, which further negatively impacted our net interest margin as
interest rates paid on liabilities increased more quickly than yields earned on
assets.
The Bank pursues typical thrift activities through originating and
purchasing mortgage loans and funds that activity with the gathering of
deposits. The Bank supplements these mortgage lending activities with additional
interest-earning assets such as mortgage-backed securities and funding sources
such as advances from the Federal Home Loan Bank of New York ("FHLB-NY'). The
Bank also generates other income such as fee income on deposit and loan accounts
and, to a lesser extent, ATM fees, debit card interchange fees and, depending on
market conditions, net gains on sales of securities and loans. The level of its
expenses such as salaries and benefits, occupancy and equipment costs, other
general and administrative expenses, net losses on sales of securities and loans
and income tax expense further affects the Bank's net income. Our goal is to
continue profitable growth by increasing our loan and deposit market share in
our existing markets, closely managing the yields on earning assets and rates on
interest-bearing liabilities, introducing new financial products and services,
increasing non-interest income from investment and insurance brokerage services,
and controlling the growth of non-interest expenses.
The Bank's results reflect momentum building in our lending and retail
departments, which produced gains in total loans receivable as well as deposits.
While interest income increased year over year, the progress was not enough to
eliminate the impact of margin compression experienced throughout our industry,
as the U.S. Treasury yield curve continued to flatten. In addition, non-interest
income was negatively impacted by the decline in mortgage refinance activity,
significantly reducing income from mortgage prepayment penalties. As expected,
non-interest expense increased as a result of the successful launch of new
branches and 24/7 ATM centers during the year.
Net income for the three and nine months ended December 31, 2004
decreased compared to the three and nine months ended December 31, 2003. The
decrease in net income was primarily due to an increase in non-interest expense
and a decrease in non-interest income, partially offset by an increase in net
interest income. The increase in non-interest expense was primarily due to
merger-related charges and increases in employee compensation and benefits and
occupancy expenses as a result of new branch and ATM center openings.
Non-interest income was lower this period primarily as a result of the
recognition in fiscal 2004 of a recovery of previously unrecognized mortgage
loan income. The decline in non-interest income for the nine-month period also
reflects the decline in the second quarter of fiscal 2005 due to an impairment
charge on Independence Federal Savings Bank ("IFSB") stock owned by the Holding
Company partially offset by grant income received by the Bank. Net interest
income increased primarily as a result of higher mortgage loan income partially
offset by higher deposit expenses.
At December 31, 2004, total assets increased by $77.2 million to $616.1
million compared to $538.8 million at March 31, 2004. The asset growth primarily
reflects increases in net loans receivable and securities. Loans increased as
new mortgage loan originations and purchases exceeded mortgage loan repayments.
The increase in securities was attributable to the purchase of mortgage-backed
securities to meet the collateral requirements for New York State deposits
received in our Jamaica Center branch.
9
At December 31, 2004, total liabilities increased by $76.3 million to
$570.5 million compared to $494.2 million at March 31, 2004. Liabilities
increased mainly as a result of $62.8 million in deposit growth, $50.0 million
of which was deposited into various Bank branches by the City and State of New
York under the Banking Development District program and the remainder of which
was retail deposit growth. Additionally, advances from the FHLB-NY and other
borrowed money increased $21.0 million. The increase in deposits was partially
offset by a decrease in other liabilities of $7.4 million, resulting primarily
from the payment of bank checks and income taxes. The increase in liabilities
was primarily used to fund loan growth.
At December 31, 2004, total stockholders' equity increased $917,000 to
$45.6 million compared to $44.6 million at March 31, 2004. The increase in total
stockholders' equity was primarily attributable to growth in retained earnings
of $1.6 million generated from fiscal 2005 year-to-date earnings, partially
offset by a decrease in accumulated other comprehensive income of $408,000
related to the mark-to-market of the Bank's available-for-sale securities and a
reduction of $361,000 related to the Bank's repurchase of its outstanding common
stock through its stock repurchase program.
Asset quality of the Bank's loan portfolio remained strong. The Company
did not provide for additional loan loss reserves as the Company considers the
current overall allowance for loan losses to be adequate.
Net income available to common stockholders decreased $283,000 to
$904,000 compared to $1.2 million for the same three-month period last year.
Results were impacted by declines in non-interest income and higher operating
expenses offset by increases in net interest income.
This discussion and analysis of the Company's financial condition
should be read in conjunction with the audited Consolidated Financial
Statements, the notes thereto and other financial information included in the
Company's 2004 10-K.
CRITICAL ACCOUNTING POLICIES
Note 1 to our audited Consolidated Financial Statements for fiscal 2004
included in our 2004 10-K, as supplemented by this report, contains a summary of
our significant accounting policies and is incorporated herein. We believe our
policies with respect to the methodology for our determination of the allowance
for loan losses and asset impairment judgments, including other than temporary
declines in the value of our securities, involve a high degree of complexity and
require management to make subjective judgments which often require assumptions
or estimates about highly uncertain matters. Changes in these judgments,
assumptions or estimates could cause reported results to differ materially. The
description of these policies should be read in conjunction with the
corresponding section of our 2004 10-K.
ALLOWANCE FOR LOAN LOSSES
Carver Federal maintains a loan review system to monitor the overall
quality of its loan portfolio, 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 and
concentration of loans, type of collateral and financial condition of the
borrowers. Loan loss allowances are established, using the methodology described
below. Although management believes that adequate loan loss allowances have been
established, actual losses are dependent upon future events and, as such,
further adjustments to the level of the loan loss allowance may be necessary in
the future.
The allowance for loan losses is maintained at a level considered
adequate to provide for potential loan losses in the loan portfolio. Management
is responsible for determining the adequacy of the allowance for loan losses and
the periodic provisioning for estimated losses included in the consolidated
financial statements. The evaluation process is undertaken on a quarterly basis,
but may increase in frequency should conditions arise that would require
management's prompt attention, such as business combinations and opportunities
to dispose of non-performing and marginally performing loans by bulk sale or any
development which may indicate an adverse trend. The Asset/Liability and
Interest Rate Risk Committee of Carver Federal's Board of Directors reviews
management's determination on a quarterly basis.
The methodology employed for assessing the appropriateness of the
allowance for loan losses consists of the following criteria:
o Establishment of allowance 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.
This initial allocation or specific-allowance
methodology commences with loan officers and credit
officers 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 management's Internal Asset
Quality Review Committee for further analysis and
identification of those factors that may ultimately
affect the full recovery or collectibility of
principal and/or interest. These loans are subject to
continuous review and monitoring while they remain in
the criticized category. Additionally, the Internal
Asset Quality Review Committee is responsible for
performing periodic reviews of the loan
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portfolio that are independent from the
identification process employed by loan and credit
officers. Gradings that fall into criticized
categories are further evaluated and reserve amounts
are established for each loan.
o An average loss factor is applied to smaller balance
homogenous types of loans not subject to specific
review. These loans include residential one- to
four-family, multifamily, nonresidential and
construction properties, which also includes consumer
and business loans.
o Determination of the individual allowance amounts and
average loss factors considers actual loss
experience, business cycle changes and the real
estate components of loans. Since many loans depend
on the sufficiency of collateral, any adverse trend
in the real estate markets could seriously affect
underlying values available to protect against loss.
Recognition is also given to the changed risk profile
brought about by 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. 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 Peer comparisons with other
financial institutions;
o Economic data associated with the
real estate market in Carver
Federal's lending areas; and
o Opportunities to dispose of
marginally performing loans for
cash consideration.
In applying the methodology above, a loan is considered to be impaired,
as defined by 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. Management 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.
TERMINATION OF MERGER AGREEMENT
On October 15, 2004 the Holding Company was advised by the
Office of Thrift Supervision ("OTS") that the OTS had denied Carver's
application to consummate the merger agreement between the Holding Company, the
Bank and IFSB. That merger agreement was subject to, among other things,
approval by the OTS. Among the reasons communicated to Carver by the OTS for its
position was its concern related to the financial resources and future prospects
of the combined company, including concerns about the capitalization of the
combined company and its future profitability. As a result, on October 26, 2004
the Holding Company, the Bank and IFSB announced their mutual agreement to
terminate the merger agreement and to release each other party from all related
liabilities. The Company recognized an impairment charge deemed other than
temporary of $1.5 million resulting from the decline in market price of the
150,000 shares of common stock of IFSB that the Holding Company owns and reports
as a part of its available-for-sale securities portfolio. The market value of
the Bank's position in IFSB common stock was $1.6 million as of December 31,
2004. In addition, the Company recognized an $847,000 charge resulting from
expensing previously capitalized costs related to the proposed merger.
CONVERSION OF CONVERTIBLE PREFERRED STOCK
The holders of all 40,000 outstanding shares of the Company's Series A
Convertible Preferred Stock and all 60,000 outstanding shares of its Series B
Convertible Preferred Stock elected to convert their preferred shares on October
15, 2004 into shares of the Company's Common Stock. Upon conversion of their
preferred shares, the holders were issued an aggregate of 208,333 shares of
Common Stock.
11
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Bank's ability to generate adequate cash
to meet its financial obligations. The principal cash requirements of a
financial institution are to cover potential deposit outflows, fund increases in
its loan and investment portfolios and cover ongoing operating expenses. The
Company's primary sources of funds are deposits, borrowed funds and principal
and interest payments on loans, mortgage-backed securities and investment
securities. While maturities and scheduled amortization of loans,
mortgage-backed securities and investment securities are predictable sources of
funds, deposit flows and loan and mortgage-backed securities prepayments are
strongly influenced by changes in general interest rates, economic conditions
and competition.
Other sources of liquidity include the ability to borrow under
repurchase agreements, FHLB-NY advances utilizing unpledged mortgage-backed
securities and certain mortgage loans, the sale of available-for-sale securities
and the sale of loans. The Bank can borrow up to 30% of its total assets or up
to $184.8 million as of December 31, 2004. At December 31, 2004, based on
available collateral held at the FHLB-NY the Bank had the ability to borrow from
the FHLB-NY an additional $16.7 million on a secured basis, utilizing
mortgage-related loans and securities as collateral.
The unaudited Consolidated Statements of Cash Flows present the change
in cash from operating, investing and financing activities. During the nine
months ended December 31, 2004, total cash and cash equivalents decreased by
$538,000, reflecting cash used in operating and investing activities being
partially offset by cash provided by financing activities. Net cash used in
operating activities during this period was $7.0 million, primarily representing
decreases in other liabilities and an increase in other assets offset by
adjustments to the balances of depreciation and amortization expense and other
amortization. Net cash used in investing activities was $76.0 million, primarily
representing the purchase of securities and mortgage loans and the disbursements
for loan originations offset in part by the payment of principal on and the
maturities of securities, the sale of available-for-sale securities and
principal collections on loans. Net cash provided by financing activities was
$82.5 million, primarily representing a net increase in deposits and an increase
in advances from the FHLB-NY. See "Liabilities and Stockholders
Equity--Liabilities" for a discussion of the changes in deposits and FHLB-NY
deposits.
The Bank is required to maintain sufficient liquidity to ensure its
safe and sound operation. 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 by management on a frequent basis. The Bank was in
compliance with this policy as of December 31, 2004.
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
until recently has resulted in a lag in redeploying lower yielding federal funds
into higher yielding mortgage loans and 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 contrast, as mortgage interest rates
decrease, customers generally tend to prefer fixed rate mortgage loan products
over variable rate products. Since the Bank generally sells its 15-year and
30-year fixed rate loan production into the secondary mortgage market, the
origination of such products for sale does not significantly reduce the Bank's
liquidity.
In the first quarter of fiscal 2005, the Federal Open Market Committee
raised the federal funds rate 25 basis points for the first time since fiscal
2002. In the second quarter of fiscal 2005 the federal funds rate was again
raised another 50 basis points and in the third quarter it was raised another 50
basis points. Although short-term rates have increased, mortgage loans and
mortgage-backed securities are typically tied to longer-term rates which have
not increased dramatically over the last three quarters. When mortgage interest
rates increase, customers' refinance activities tend to decelerate, causing the
cash flow from both the mortgage loan portfolio and the mortgage-backed
securities portfolio to decline.
The OTS requires that the Bank meet minimum capital requirements.
Capital adequacy is one of the most important factors used to determine the
safety and soundness of individual banks and the banking system. At December 31,
2004, the Bank exceeded all regulatory minimum capital requirements and
qualified, under OTS regulations, as a well-capitalized institution. The table
below presents certain information relating to the Bank's capital compliance at
December 31, 2004.
12
REGULATORY CAPITAL
AT DECEMBER 31, 2004
(DOLLARS IN THOUSANDS)
Amount % of Assets
------ -----------
Total capital (to risk-weighted assets):
Capital level $61,211 15.45 %
Less requirement 31,702 8.00
------------ -------------
Excess $29,509 7.45
============ =============
Tier 1 capital (to risk-weighted assets):
Capital level $57,092 14.41 %
Less requirement 15,851 4.00
------------ -------------
Excess $41,241 10.41
============ =============
Tier 1 Leverage capital (to adjusted total assets):
Capital level $57,092 9.26 %
Less requirement 24,666 4.00
------------ -------------
Excess $32,426 5.26 %
============ =============
On November 23, 2004, the Company paid a dividend of $0.07 per common
share for the quarter ended September 30, 2004.
On January 25, 2005, the Board of Directors declared a dividend of
$0.07 per common share for the quarter ended December 31, 2004. The dividend
will be payable on February 24, 2005 to stockholders of record at the close of
business on February 10, 2005.
During the quarter ended December 31, 2004, the Holding Company
purchased shares of its Common Stock under its stock repurchase program. See
"Comparison of Financial Condition at December 31, 2004 and March 31,
2004--Liabilities and Stockholders' Equity--Stockholders' Equity."
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2004 AND MARCH 31, 2004
ASSETS
Total assets increased by $77.2 million, or 14.3%, to $616.1 million at
December 31, 2004 compared to $538.8 million at March 31, 2004. The asset growth
was primarily attributable to increases of $57.1 million in total loans
receivable, net, $11.9 million in total securities, $5.8 million in other
assets, $1.6 million in office properties and equipment and $1.0 million in
additional FHLB-NY stock. The increase in total assets was partially offset by a
decrease of $538,000 in total cash and cash equivalents.
Cash and cash equivalents for the nine-month period decreased $538,000,
or 2.4%, to $22.2 million at December 31, 2004 compared to $22.8 million at
March 31, 2004. The decrease was primarily a result of the Bank using its liquid
assets to fund mortgage loan originations and mortgage-backed security
purchases.
Total securities increased $11.9 million, or 8.5%, to $151.8 million
from $139.9 million at March 31, 2004 as new security purchases exceeded
repayments, maturities and sales. New purchases of investment securities were
$78.1 million of which $2.7 million was the purchase of 127,785 shares of IFSB
common stock and $35 million was for the purchase of additional GNMA
mortgage-backed securities to collateralize New York State deposits in the
Jamaica Center branch. This increase was offset in part by principal repayments
on investment securities of $33.5 million, maturities of $22.6 million, sales of
$7.3 million and a $408,000 reduction in net unrealized gains on securities.
Additionally, the Company recognized a $1.5 million impairment charge on the
150,000 IFSB common shares it currently owns.
Total loans receivable, net, increased $57.1 million, or 16.2%, to
$409.0 from $351.9 million at March 31, 2004. The increase resulted from
mortgage loan originations and purchases exceeding loan repayments during the
first nine months of fiscal 2005. During the nine-month period ended December
31, 2004, loan originations of $77.4 million and loan
13
purchases of $78.0 million were offset in part by loan repayments of $90.8
million and loan sales of $7.0 million. Management has evaluated yields and loan
quality in the competitive New York metropolitan area market and in certain
instances has decided to purchase loans to supplement internal originations.
Management will continue to assess yields and economic risk as it determines the
balance of interest-earning assets allocated to loan originations and purchases
compared to additional purchases of mortgage-backed securities. The $155.4
million in aggregate loan originations and purchases for the period was
comprised of $68.0 million in one- to four-family loans, $36.7 million in
non-residential real estate mortgage loans, $39.8 million in construction loans,
$10.8 million in multifamily loans and $96,000 in business and consumer loans.
Office properties and equipment, net, increased $1.6 million, or 14.1%,
to $13.3 million from $11.7 million at March 31, 2004 primarily due to capital
purchases related to building the Bank's Atlantic Terminal branch in Brooklyn.
Other assets increased $5.8 million, or 104.7%, to $11.3 million from
$5.5 million at March 31, 2004. The increase is primarily due to the Bank
investing $8.0 million in a bank owned life insurance ("BOLI") program for
officers, partially offset by a reduction of $1.7 million in the Bank's deferred
tax asset.
The Bank's BOLI was purchased in September 2004. The BOLI is invested
in the general accounts of two insurance companies that Standard and Poor's
rated as AA+ or better. Interest earnings increase the cash surrender value of
these policies. Interest earnings for the BOLI are based on interest rates that
reset each year. The increases in cash surrender value of these policies offsets
a portion of employee benefits costs. These increases were recognized in other
income and are not subject to income taxes. Borrowing on or surrendering the
policy may subject the Bank to income tax expense on the increase in cash
surrender value. For these reasons, management considers BOLI an illiquid asset.
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
At December 31, 2004, total liabilities increased by $76.3 million, or
15.4%, to $570.5 million compared to $494.2 million at March 31, 2004. The
increase in liabilities primarily reflects increases of $62.8 and $21.0 million
in deposits and advances from the FHLB-NY and other borrowed money,
respectively, offset by a decrease of $7.4 million in other liabilities.
The increase in deposit balances was largely attributable to a $58.9
million increase in certificates of deposit accounts, primarily deposits of
$15.0 million by the City of New York and $35.0 million by the State of New York
under New York State's Banking Development District program. Of these funds,
$45.0 million was deposited in our Jamaica Center branch in Queens and $5.0
million was deposited in our Malcolm X Blvd. branch in Harlem. In addition,
deposits increased by $1.8 million in savings and club accounts and $3.1 million
in NOW accounts, partially offset by declines in money market accounts of $1.1
million. Other factors contributing to deposit growth include a continued
emphasis on developing depository relationships with borrowers and the offer of
special promotions and campaigns to attract new depositors. At December 31,
2004, the Bank had seven branches and three stand-alone 24/7 ATM centers, and in
January 2005 opened its eighth branch in northern Harlem. We believe that
deposits will continue to grow with the addition of new branches and 24/7 ATM
centers coupled with our business development efforts.
The increase of $21.0 million in advances from the FHLB-NY and other
borrowed money was primarily additional FHLB-NY borrowings needed to fund loan
growth during the period. The decrease in other liabilities of $7.4 million was
primarily the result of payments of outstanding bank checks in the amount of
$4.0 million and a decline in the liability for income taxes of $2.8 million as
tax payments were remitted to taxing authorities.
Included in other borrowed money are gross proceeds from the issuance
of $13.0 million of junior subordinated debt. The junior subordinated debt
securities are repayable quarterly at the option of the Company, beginning on or
after July 7, 2007, and have a mandatory repayment date of September 17, 2033.
Interest on the junior subordinated debt securities is cumulative and payable at
a floating rate per annum (reset quarterly) equal to 3.05% over three-month
LIBOR, with a rate of 5.55% as of December 31, 2004. The $12.8 million net
proceeds from the issuance of junior subordinated debt securities are included
as other borrowed money and were contributed to the Bank to enhance regulatory
capital.
STOCKHOLDERS' EQUITY
Total stockholders' equity increased $917,000, or 2.1%, to $45.6
million at December 31, 2004 compared to $44.6 million at March 31, 2004. The
increase in total stockholders' equity was primarily attributable to an increase
in retained earnings of $1.6 million from net income derived during the first
nine months of fiscal 2005, partially offset by a decrease in accumulated other
comprehensive income of $408,000. Accumulated other comprehensive income
decreased as a result of net unrealized losses, net of taxes, relating to
certain investment and mortgage-backed securities. As required by SFAS No. 115
"ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES" investment
and mortgage-backed securities accounted for as held-to-maturity are carried at
cost while such securities designated as available-for-sale are carried at
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market with an adjustment directly to stockholders' equity, net of taxes, and
does not impact the unaudited Consolidated Statements of Income.
During the quarter ended December 31, 2004, the Holding Company
purchased 26,400 additional shares of its Common Stock under its stock
repurchase program announced on August 6, 2002. Under its repurchase program, to
date the Holding Company has purchased 61,550 shares of its Common Stock in open
market or privately negotiated transactions at an average price of $16.55 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
of Directors of the Holding Company deems advisable in compliance with
applicable law.
ASSET/LIABILITY MANAGEMENT
The Company's primary earnings source is net interest income, which is
affected by changes in the level of interest rates, the relationship between the
rates on interest-earning assets and interest-bearing liabilities, the impact of
interest rate fluctuation on asset prepayments, the level and composition of
deposits and the credit quality of earning assets. Management's asset/liability
objectives are to maintain a strong, stable net interest margin, to utilize its
capital effectively without taking undue risks, to maintain adequate liquidity
and to manage its exposure to changes in interest rates.
The Company's Asset/Liability and Interest Rate Risk Committee,
comprised of members of the Board of Directors, meets periodically with senior
management to evaluate the impact of changes in market interest rates on assets
and liabilities, net interest margin, capital and liquidity. Risk assessments
are governed by policies and limits established by senior management.
The economic environment is uncertain regarding future interest rate
trends. Management regularly monitors the Company's cumulative gap position,
which is the difference between the sensitivity to rate changes on our
interest-earning assets and interest-bearing liabilities. In addition, the
Company uses various tools to monitor and manage interest rate risk, such as a
model that projects net interest income based on increasing or decreasing
interest rates.
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 and in connection with our overall interest rate risk management
strategy. These instruments involve, to varying degrees, elements of credit,
interest rate and liquidity risk. In accordance with 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:
The bank has outstanding loan commitments as follows:
DECEMBER 31,
2004
---------------
(IN THOUSANDS)
Commitments to originate mortgage loans $ 88,610
Commitments to originate consumer loans 2,563
Letters of Credit 1,908
---------------
Total $ 93,081
===============
15
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 $ 112,506 $ 53,000 $ 46,874 $ 12,407 $ 225
Guaranteed preferred beneficial interest in
junior subordinated debentures 12,784 12,784
-------------- -------------- --------------- --------------- --------------
Total long term debt obligations 125,290 53,000 46,874 12,407 13,009
Operating lease obligations:
Lease obligations for rental properties 4,499 576 1,140 1,016 1,767
-------------- -------------- --------------- --------------- --------------
Total contractual obligations $ 129,789 $ 53,576 $ 48,014 $ 13,423 $ 14,776
============== ============== =============== =============== ==============
ANALYSIS OF EARNINGS
The Company's profitability is primarily dependent upon net interest
income, which mainly represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income is dependent on the difference between the average balances and
rates earned on interest-earning assets and the average balances and rates paid
on interest-bearing liabilities. Provisions for loan losses, non-interest
income, non-interest expense and income taxes further affect net income. The
earnings of the Company, which are principally earnings of the Bank, are
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, and to a lesser extent by
government policies and actions of regulatory authorities.
The following tables set forth, for the periods indicated, certain
information relating to Carver's average interest-earning assets, average
interest-bearing liabilities, net interest income, interest rate spread and
interest rate margin. It reflects the average yield on assets and the average
cost of liabilities. Such yields and costs are derived by dividing annualized
income or expense by the average balances of assets or liabilities,
respectively, for the periods shown. Average balances are derived from daily or
month-end balances as available. Management does not believe that the use of
average monthly balances instead of average daily balances has caused any
material difference in information presented. The average balance of loans
includes loans on which the Company has discontinued accruing interest. The
yield and cost include fees, which are considered adjustments to yields.
16
THREE MONTHS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
2004 2003
------------------------------------------- ---------------------------------------
Average Annualized Avg. Average Annualized Avg.
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------- ------------- --------------- ------------ ---------- ---------------
(Dollars in thousands)
Loans receivable (1) $389,757 $5,780 5.93% $313,293 $5,025 6.42%
Investment securities (2) 160,168 1,411 3.52% 156,186 1,396 3.57%
Federal funds 6,626 32 1.92% 27,114 62 0.91%
------------- ------------- --------------- ------------ ---------- ---------------
Total interest-earning assets 556,551 7,223 5.19% 496,593 6,483 5.23%
Non-interest-earning assets 34,309 27,797
------------- ------------
Total assets $590,860 $524,390
============= ============
Liabilities and Equity
- ----------------------
Deposits:
NOW accounts $21,792 $16 0.29% $23,400 $20 0.33%
Savings and club accounts 132,066 203 0.61% 129,796 240 0.73%
Money market accounts 28,547 74 1.03% 28,324 59 0.82%
Certificates of deposit 223,199 1,149 2.04% 162,690 816 1.99%
------------- ------------- --------------- ------------ ---------- ---------------
Total deposits 405,604 1,442 1.41% 344,210 1,135 1.31%
Mortgagor's deposits 2,091 7 1.27% 1,736 5 1.17%
Guaranteed beneficial interest in junior
subordinated debentures 12,775 181 5.64% 12,735 152 4.73%
Borrowed money 96,021 855 3.53% 97,638 924 3.76%
------------- ------------- --------------- ------------ ---------- ---------------
Total interest-bearing liabilities 516,491 2,485 1.91% 456,319 2,216 1.93%
Non-interest-bearing DDA accounts 22,553 19,073
Other non-interest-bearing liabilities 5,999 5,818
------------- ------------
Total liabilities 545,043 481,210
Stockholders' equity 45,817 43,180
------------- ------------
Total liabilities and stockholders'
equity $590,860 $524,390
============= ------------- ============ ----------
Net interest income $4,738 $4,267
============= ==========
Interest rate spread 3.28% 3.30%
=============== ================
Net interest margin 3.42% 3.45%
=============== ================
Ratio of average interest-earning assets to
deposits and interest-bearing liabilities 1.08x 1.09x
============= ==========
(1) Includes non-accrual loans
(2) Includes FHLB-NY stock
17
NINE MONTHS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
2004 2003
------------------------------------------- ---------------------------------------
Average Annualized Avg. Average Annualized Avg.
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------- ------------- --------------- ------------ ---------- ---------------
(Dollars in thousands)
Loans receivable (1) $376,783 $16,897 5.98% $304,967 $14,952 6.54%
Investment securities (2) 156,054 3,962 3.39% 165,382 4,507 3.63%
Federal funds 9,731 89 1.21% 19,245 143 0.99%
------------- ------------- --------------- ------------ ---------- ---------------
Total interest-earning assets 542,568 20,948 5.15% 489,594 19,602 5.34%
Non-interest-earning assets 28,012 29,444
------------- ------------
Total assets $570,580 $519,038
============= ============
Liabilities and Equity
Deposits:
NOW accounts $23,286 $51 0.29% $23,549 $68 0.38%
Savings and club accounts 132,601 603 0.60% 130,724 803 0.82%
Money market accounts 29,645 210 0.94% 27,057 174 0.86%
Certificates of deposit 202,027 3,004 1.97% 161,969 2,495 2.04%
------------- ------------- --------------- ------------ ---------- ---------------
Total deposits 387,559 3,868 1.32% 343,299 3,540 1.37%
Mortgagor's deposits 1,623 18 1.48% 1,719 20 1.54%
Guaranteed beneficial interest in junior
subordinated debentures 12,760 504 5.24% 4,909 175 4.73%
Borrowed money 93,530 2,630 3.73% 101,027 2,821 3.71%
------------- ------------- --------------- ------------ ---------- ---------------
Total interest-bearing liabilities 495,472 7,020 1.88% 450,954 6,556 1.93%
Non-interest-bearing DDA accounts 21,658 19,225
Other non-interest-bearing liabilities 7,950 6,703
------------- ------------
Total liabilities 525,080 476,882
Stockholders' equity 45,500 42,156
------------- ------------
Total liabilities and stockholders'
equity $570,580 $519,038
============= ------------- ============ ----------
Net interest income $13,928 $13,046
============= ==========
Interest rate spread 3.27% 3.41%
=============== ================
Net interest margin 3.43% 3.56%
=============== ================
Ratio of average interest-earning assets to
deposits and interest-bearing liabilities 1.10x 1.09x
============= ==========
(1) Includes non-accrual loans
(2) Includes FHLB-NY stock
18
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31,
2004 AND 2003
OVERVIEW. The Company reported consolidated net income for the
three-month period ended December 31, 2004 of $920,000, a decline of $316,000
from the corresponding prior year period. These results primarily reflect an
increase in interest expense of $269,000, a decline in non-interest income of
$374,000 and an increase in non-interest expense of $535,000, partially offset
by increased interest income of $740,000 and a decrease in income tax expense of
$122,000. Net income available to common stockholders (after adjustment for
dividends payable on the Company's preferred stock) was $904,000, or $0.36 per
diluted common share, a decrease of $283,000, or $0.11 per diluted common share.
Net income for the nine-month period ended December 31, 2004 was $2.3
million, a decline of $1.5 million from the corresponding prior year period.
These results primarily reflect an increase in interest expense of $464,000, a
decline in non-interest income of $1.1 million and an increase in non-interest
expense of $1.9 million, partially offset by increased interest income of $1.3
million and a decrease in income tax expense of $618,000. The decline in
non-interest income was primarily a result of a $1.5 million impairment charge
resulting from the decline in the market value of IFSB common stock the company
holds. Additionally, included in the increase in non-interest expense was an
$847,000 charge that resulted from expensing previously capitalized costs
pertaining to the terminated merger with IFSB. Excluding the charges related to
the terminated merger with IFSB, net income available to common stockholders
(after adjustment for dividends payable on the Company's preferred stock) would
have been $3.6 million. Net income available to common stockholders (after
adjustment for dividends payable on the Company's preferred stock) was $2.1
million, or $0.87 per diluted common share, a decrease of $1.5 million, or $0.58
per diluted common share.
Selected operating ratios for the three and nine months ended December
31, 2004 and 2003 are set forth in the table below and the following analysis
discusses the changes in components of operating results giving rise to net
income. The decline in the return on average equity was primarily due to lower
net income for the current quarter and nine-month period. Return on average
assets decreased as a result of lower net income coupled with an increase in
average assets for both the current quarter and nine-month period.
THREE MONTHS ENDED NINE MONTHS ENDED
SELECTED OPERATING RATIOS: DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
--------------- ------------ ------------ ------------
Return on average assets (1) 0.62 % 0.94 % 0.53 % 0.96 %
Return on average equity (1) 8.03 11.45 6.61 11.86
Interest rate spread (1) 3.28 3.30 3.27 3.41
Net interest margin (1) 3.42 3.45 3.43 3.56
Operating expenses to average assets (1,2) 3.05 3.15 3.16 3.04
Equity-to-assets 7.40 8.18 7.40 8.18
Efficiency ratio (3) 75.86 68.78 79.04 67.48
Average interest-earning assets to
interest-bearing liabilities 1.08x 1.09x 1.10x 1.09x
(1) Annualized
(2) Excluding merger related expenses the ratio would be 2.96% for the
nine-month period ended December 31, 2004
(3) Excluding the stock impairment charge, grant income and merger related
expenses the ratio would be 72.67% for the nine-month period ended December
31, 2004
INTEREST INCOME. Interest income increased by $740,000, or 11.4%, to
$7.2 million for the three months ended December 31, 2004 compared to $6.5
million in the prior year period. Interest income increased primarily as a
result of higher average real estate mortgage loan and investment securities
balances partially offset by a decline in federal funds balances compared to the
prior year period. The average balance of interest-earning assets increased by
$60.0 million, or 12.1%, to $556.6 million for the three months ended December
31, 2004 compared to $496.6 million for the prior year period. The increase in
total interest income was offset by a four basis point decrease in the
annualized average yield on interest-earning assets to 5.19% for the three
months ended December 31, 2004 compared to 5.23% for the prior year period,
reflecting yield declines in mortgage loans and investment securities. Net
interest margin declined three basis points to 3.42% for the three months ended
December 31, 2004 compared to 3.45% for the prior year period.
19
Similarly, interest income for the nine-month period ended December 31,
2004 increased by $1.3 million, or 6.9%, to $20.9 million compared to $19.6
million in the prior year period. The increase was primarily a result of higher
average real estate mortgage loan balances partially offset by a decline in both
the average balance of investment securities and federal funds compared to the
prior year period. Partially offsetting the increase in total interest income
was a 19 basis point decrease in the annualized average yield on
interest-earning assets to 5.15% for the nine months ended December 31, 2004
compared to 5.34% for the prior year period. Net interest margin declined 13
basis points to 3.43% for the nine months ended December 31, 2004 compared to
3.56% for the prior year period.
Interest income on loans increased by $755,000, or 15.0%, to $5.8
million for the three months ended December 31, 2004 compared to $5.0 million
for the prior year period. The change was primarily due to an increase in
average mortgage loan balances of $76.5 million to $389.8 million compared to
$313.3 million for the prior year period partially offset by decreased yields in
the loan portfolio. The annualized average yield on loans for the three months
ended December 31, 2004 declined 49 basis points to 5.93% compared to 6.42% for
the prior year period. For the nine-month period ended December 31, 2004
interest income on loans increased by $1.9 million, or 13.0%, to $16.9 million
compared to $15.0 million for the prior year period. Again, this change was
primarily due to an increase in average mortgage loan balances of $71.8 million
to $376.8 million compared to $305.0 million for the prior year period partially
offset by decreased yields in the loan portfolio. The annualized average yield
on loans for the nine months ended December 31, 2004 declined 56 basis points to
5.98% compared to 6.54% for the prior year period.
Interest income on investment securities was substantially unchanged at
$1.4 million for the three months ended December 31, 2004 compared to the prior
year period, primarily due to an increase of $4.0 million, or 2.5%, in the
average balance of investment securities to $160.2 million compared to $156.2
million in the prior year period related to the purchase of additional mortgage
backed securities for collateral purposes partially offset by a five basis point
decrease in the annualized average yield on securities to 3.52% from 3.57% in
the prior year period. For the nine-month period ended December 31, 2004
interest income on investment securities decreased $545,000, or 12.1%, to $4.0
million compared to $4.5 million for the prior year period. The change was
primarily due to a decrease of $9.3 million, or 5.6%, in the average balance of
investment securities to $156.1 million compared to $165.4 million in the prior
year period. Further contributing to the decline was a 24 basis point decrease
in the annualized average yield on securities to 3.39% from 3.63% in the prior
year period. The decrease in the average balance of securities, primarily
mortgage-backed securities, reflects the execution of our strategy to invest
cash flows from securities into higher yielding mortgage loans when prudent to
do so. Additionally, yields and income were impacted by prepayment activity,
which has shortened the anticipated life of mortgage-backed securities and
accelerated premium amortization.
Interest income on federal funds sold decreased by $30,000, or 48.4%,
to $32,000 for the three months ended December 31, 2004 compared to $62,000 for
the prior year period. The decline was primarily attributable to a decrease in
the average balance of federal funds of $20.5 million, or 75.6%, to $6.6 million
from $27.1 million in the prior year period partially offset by an increase of
101 basis points in the annualized yield on federal funds sold. Similarly,
interest income on federal funds sold for the nine months ended December 31,
2004 decreased by $54,000, or 37.8%, to $89,000 compared to $143,000 for the
prior year period. The decline was also primarily attributable to a decrease in
the average balance of federal funds of $9.5 million, or 49.4%, to $9.7 million
from $19.2 million in the prior year period partially offset by an increase of
22 basis points in the annualized yield on federal funds sold. The decline in
the average balance of federal funds sold was a result of using liquid funds
primarily to fund loan growth.
INTEREST EXPENSE. Total interest expense increased by $269,000, or
12.1%, to $2.5 million for the three months ended December 31, 2004 compared to
$2.2 million for the prior year period. The increase resulted primarily from an
increase in the average balance of interest-bearing liabilities of $60.2
million, or 13.2%, to $516.5 million from $456.3 million during the prior year
period. Modestly offsetting the increase, the annualized average cost of
interest-bearing liabilities decreased two basis points to 1.91% from 1.93% for
the prior year period. Similarly, interest expense for the nine months ended
December 31, 2004 increased by $464,000, or 7.1%, to $7.0 million compared to
$6.6 million for the prior year period and the annualized average cost of
interest-bearing liabilities decreased five basis points to 1.88% from 1.93%.
Interest expense on deposits increased $309,000, or 27.1%, to $1.4
million for the three months ended December 31, 2004 compared to $1.1 million
for the prior year period. The increase in interest expense on deposits was due
primarily to a $61.4 million increase in the average balance of interest-bearing
deposits to $405.6 million for the three months ended December 31, 2004 from
$344.2 million for the prior year period. Additionally, a 10 basis point rise in
the rate paid on deposits to 1.41% compared to 1.31% for the prior year period
added to the increase. Interest expense on deposits also increased $326,000, or
9.2% for the nine months ended December 31, 2004 to $3.9 million compared to
$3.6 million for the prior year period. Customer deposits have historically
provided Carver with a relatively low cost funding source from which its net
interest income and net interest margin have benefited. The Bank has grown core
deposits, including new deposits from the two new branches opened in 2004, which
has benefited net interest income and net interest margin. See "Liabilities
20
and Stockholders' Equity--Liabilities."
Interest expense on advances and other borrowed money decreased
$40,000, or 3.7%, to $1.0 million for the three months ended December 31, 2004
compared to $1.1 million for the prior year period. This was primarily due to a
23 basis point reduction in the cost of borrowed money from FHLB-NY advances to
3.53% from 3.76% for the prior year period as higher costing matured advances
were replaced at lower rates. Partially offsetting the decline was an increase
in the cost of debt service of 91 basis points to 5.64% from 4.73% for the prior
year period related to the issuance of $13 million in subordinated debentures
raised by the Company through an issuance of trust preferred securities by
Carver Statutory Trust I in September 2003. Conversely, interest expense on
advances and other borrowed money for the nine months ended December 31, 2004
increased $138,000, or 4.6%, to $3.1 million compared to $3.0 million for the
prior year period. The increase was primarily related an increase of $7.9
million in the average balance and an increase of 51 basis points in the cost of
the subordinated debentures for the nine-month period. Partially offsetting this
increase was a decrease of $7.5 million in the average balance of borrowed money
from FHLB-NY advances. The decrease in the average balance of FHLB-NY advances
reflects the execution of our strategy to replace matured FHLB-NY advances with
lower costing deposits when prudent to do so. See "Liabilities and Stockholders'
Equity--Liabilities."
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest
income before the provision for loan losses increased $471,000, or 11.0%, to
$4.7 million for the three months ended December 31, 2004 compared to $4.3
million for the prior year period. Similarly, for the nine months ended December
31, 2004 net interest income before the provision for loan losses increased
$882,000, or 6.8%, to $13.9 million compared to $13.0 million for the prior year
period. The increase resulted from the average balance of interest-earning
assets growing faster than our deposits and short-term borrowings. These
deposits and borrowings repriced at higher rates than our interest earning
assets. The Company's annualized average interest rate spread for the three
months ended December 31, 2004 decreased by two basis points to 3.28% compared
to 3.30% for the corresponding prior year period. Net interest margin,
represented by annualized net interest income divided by average total
interest-earning assets, decreased three basis points to 3.42% for the three
months ended December 31, 2004 from 3.45% for the corresponding prior year
period. The annualized average interest rate spread for the nine months ended
December 31, 2004 decreased by 14 basis points to 3.27% compared to 3.41% for
the corresponding prior year period. Net interest margin decreased 13 basis
points to 3.43% for the nine months ended December 31, 2004 from 3.56% for the
corresponding prior year period.
PROVISION FOR LOAN LOSSES AND ASSET QUALITY. The Company did not
provide for additional loan loss reserves for the three or nine-month period
ended December 31, 2004 or 2003 as the Company considers the overall allowance
for loan losses to be adequate. For the three months ended December 31, 2004, we
have not changed our overall approach in the determination of the allowance for
loan losses; however, since the construction loan portfolio balances have
increased over the course of the fiscal year and now represent $48.0 million, or
11.6% of the total loan portfolio, we have segregated this portfolio into
various types of construction loans for the purpose of determining the adequacy
of the allowance for these types of assets. Other than the segregation of the
construction loan portfolio, there have been no material changes in the
assumptions or estimation techniques compared to prior periods in determining
the adequacy of the allowance for loan losses. During the third quarter of
fiscal 2005, the Company recorded net recoveries of $13,000 compared to $10,000
in net charge-offs for the prior year period. At December 31, 2004, the Bank's
allowance for loan losses was $4.1 million, substantially unchanged from March
31, 2004. The ratio of the allowance for loan losses to non-performing loans was
254.1% at December 31, 2004 compared to 194.3% at March 31, 2004. The ratio of
the allowance for loan losses to total loans was 1.00% at December 31, 2004
compared to 1.16% at March 31, 2004.
At December 31, 2004, non-performing assets totaled $1.6 million, or
0.39% of total loans receivable, compared to $2.1 million, or 0.60% of total
loans receivable, at March 31, 2004. Non-performing assets include loans 90 days
past due, non-accrual loans and other real estate owned. Other real estate owned
consists of property acquired through foreclosure or deed in lieu of
foreclosure. The Bank had no foreclosed real estate as of December 31, 2004
other than fee ownership of a vacant tract of land in Bayshore, NY, a result of
a property tax redemption. Future levels of non-performing assets will be
influenced by economic conditions, including the impact of those conditions on
our customers, interest rates and other internal and external factors existing
at the time.
Management's judgment in determining the adequacy of the allowance for
loan losses is based on an evaluation of certain individual loans, the risk
characteristics and size of the loan portfolio, an assessment of current
economic and real estate market conditions, estimates of the current value of
underlying collateral, past loan loss experience, review of regulatory authority
examination reports and guidance and other relevant factors. See also "Critical
Accounting Policies - Allowance for Loan Losses."
NON-INTEREST INCOME. Total non-interest income for the quarter ended
December 31, 2004 decreased $374,000, or 23.7%, to $1.2 million, compared to
$1.6 million for the prior year period. Loan fees and service charges decreased
$571,000, to $466,000 for the three months ended December 31, 2004, compared to
$1.0 million for the prior year period primarily as a result of a decline in
mortgage prepayment penalty income. Partially offsetting the quarterly decline
was an
21
increase in depository fees and charges of $121,000 and an increase in other
non-interest income of $103,000. The increase in depository fees and charges
resulted from increased ATM and debit card fees as well as income from the sale
of annuities and life insurance. The increase in other non-interest income was
primarily the result of $82,000 of income earned from an $8.0 million investment
in the BOLI. Total non-interest income for the nine months ended December 31,
2004 decreased $1.1 million, or 26.1%, to $3.2 million compared to $4.3 million
for the prior year period. Loan fees and service charges declined largely as the
result of a reduction in mortgage prepayment penalty income in the first nine
months of fiscal 2005 in the amount of $821,000. Other non-interest income
during the nine-month period ended December 31, 2003 contained an additional
$558,000 that was established for the recognition of previously unrecognized
mortgage loan income. Further contributing to the decrease in non-interest
income was an impairment charge deemed other than temporary of $1.5 million,
resulting from the decline in the market price of 150,000 shares of common stock
of IFSB that the Holding Company owns. Partially offsetting the decreases in
non-interest income were the receipt of a net $1.1 million Community Development
Financial Institutions grant from the Department of the Treasury, additional
deposit fees and service charges of $201,000 and an increase of $82,000 from
gains on the sale of securities and fixed rate loans. The additional deposit
fees and services charges resulted from increases in ATM and debit card fees
arising from greater transaction volume. The addition of three new ATM centers
and two new branches contributed to the increased ATM transaction volume.
Non-interest income represented 14.3% of revenue (interest income plus
non-interest income) for the third quarter of fiscal 2005 compared to 19.6% for
the corresponding prior year period. Similarly, non-interest income represented
13.2% of revenue for the nine months ended December 31, 2004 compared to 18.0%
for the corresponding prior year period.
NON-INTEREST EXPENSE. For the quarter ended December 31, 2004, total
non-interest expense increased $535,000, or 13.5%, to $4.5 million compared to
$4.0 million for the prior year period. The increase in non-interest expense for
the quarter was primarily due to higher employee compensation and benefits
expense which rose $376,000 as a result of new hires, including staffing for the
new branches, annual/merit increases that were effective as of September 1, 2004
and increases in the costs to provide employee benefits. Net occupancy expense
increased $141,000 primarily as a result of additional expenses incurred for the
new Jamaica Center and Atlantic Terminal branches. In the nine-month period
ended December 31, 2004, total non-interest expense increased $1.9 million, or
16.1%, to $13.5 million compared to $11.6 million for the prior year period. The
increase in non-interest expense over the first nine months of fiscal 2005 was
primarily due to an $847,000 charge resulting from expensing previously
capitalized costs following termination of the merger with IFSB. In addition,
employee compensation and benefit expense rose $843,000 resulting from salary
increases that were effective as of September 1, 2004, new hires, including
staffing for the new branches and increases in costs to provide employee
benefits. Net occupancy expense increased $349,000, primarily as a result of
additional expenses incurred for the new Jamaica Center and Atlantic Terminal
branches. The increases in non-interest expense were partially offset by
$238,000 lower consulting fees and a decrease in loan expenses of $112,000,
primarily due to a decline in collection expenses, compared to the prior year
period.
INCOME TAX EXPENSE. For the three-month period ended December 31, 2004,
income before taxes decreased $438,000, or 23.4%, to $1.4 million compared to
$1.9 million for the prior year period. Income tax expense decreased $122,000,
or 19.2%, to $514,000 compared to $636,000 for the prior year period. Similarly,
for the nine-month period ended December 31, 2004, income before taxes decreased
$2.1 million, or 37.1%, to $3.6 million compared to $5.7 million for the prior
year period. Income tax expense for the nine-month period decreased $618,000, or
31.8%, to $1.3 million compared to $1.9 million for the prior year period.
Income tax expense for both the three and nine months ended December 31, 2004
declined primarily as a result of the reduction in income before taxes.
Additionally, for the three- and nine-month periods ended December 31, 2004, the
Company accrued federal, New York State and New York City income tax expense at
a combined total tax rate of 38%. For the three and nine-month periods ended
December 31, 2003, the Company's combined tax rate was 34%, or 4% lower than the
current year, which at the time enabled the Company to reduce its tax provision
to reflect anticipated income tax liabilities. Included in the results for the
three and nine-months ended December 31, 2004 is a tax benefit pertaining to the
Bank's real estate investment trust ("REIT"). The proposed New York State budget
for fiscal 2005-06 includes a proposal which would prohibit banks from claiming
tax deductions for dividends received from REIT's that are owned over 50 percent
by the taxpayer or members of an affiliated group. If the legislation were to
pass, this tax benefit may not continue for periods beyond December 31, 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented
at March 31, 2004 in Item 7A of the Company's 2004 10-K and is incorporated
herein by reference. The Company believes that there have been no material
changes in the Company's market risk at December 31, 2004 compared to March 31,
2004.
22
ITEM 4. 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 Securities Exchange Act of 1934 ("Exchange Act") is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC. As of December 31, 2004, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer (the Company's principal executive officer and principal financial
officer, respectively), 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 were effective to ensure
that information required to be disclosed in the reports we file and submit
under the Exchange Act is recorded, processed, summarized and reported as and
when required and that such information is accumulated and communicated to our
management as appropriate to allow timely decisions regarding required
disclosure.
There were no changes in our internal control over financial reporting
that occurred during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Disclosure regarding legal proceedings that the Company is a party to
is presented in Note 13 to our audited Consolidated Financial Statements in the
2004 10-K and is incorporated herein by reference. Except as set forth below,
there have been no material changes with regard to such legal proceedings since
the filing of the 2004 10-K.
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 opposes the appeal as
untimely. Michael Lee opposed Carver Federal's application and requested
additional time to cure any defects or omissions with respect to the service or
filing of the appeal. The matter has been referred to the Office of Referees for
an evidentiary hearing to resolve the issue and a hearing was held on January
13, 2005. Carver Federal awaits the referee's decision. If Michael Lee's appeal
is granted 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended December 31, 2004, the Holding Company
purchased 26,400 additional shares of its common stock under its stock
repurchase program announced on August 6, 2002 at an average price of $18.99 per
share. As a part of its repurchase program, the Board of Directors of the
Holding Company approved the purchase of up to 231,635 shares of its Common
Stock. To date, Carver has purchased 61,550 shares of its common stock in the
open market or through privately negotiated transactions at an average price of
$16.55 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 of Directors of the Holding Company deems advisable in compliance with
applicable law. The following table sets forth the Holding Company's purchases
of its equity securities during the third quarter of fiscal 2005.
23
ISSUER PURCHASES OF EQUITY SECURITIES
- -------------------------------------------------------------------------------------------------------------------------------
Total number of Maximum number
shares as part of of shares that may
Total number of Average price publicly yet be purchased
Period shares purchased paid per share announced plan under the plan
- -------------------------------------------------------------------------------------------------------------------------------
October 1, 2004 to October 31, 2004 - - - 196,485
November 1, 2004 to November 30, 2004 6,000 18.99 6,000 190,485
December 1, 2004 to December 31, 2004 20,400 18.99 20,400 170,085
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS
The following exhibits are submitted with this report:
Exhibit 11. Computation of Net Income Per Share.
Exhibit 31.1 Certification of Chief Executive Officer.
Exhibit 31.2 Certification of Chief Financial Officer.
Exhibit 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.
Exhibit 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.
* Pursuant to SEC rules, this exhibit will not be deemed filed for
purposes of Section 18 of the Exchange Act or be otherwise subject to
the liability of that section.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARVER BANCORP, INC.
Date: February 14, 2005 /s/ Deborah C. Wright
-------------------------------------------------
Deborah C. Wright
Chairman, President and Chief Executive Officer
Date: February 14, 2005 /s/ William C. Gray
-------------------------------------------------
William C. Gray
Senior Vice President and Chief Financial Officer